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April 14, 2008

Big Four question findings of UK audit fee report

By Nicholas Moody

A new report claiming concentration in the UK audit market is directly linked to higher audit fees has been challenged by all the Big Four firms.

‘Concentration, Auditor Switching & Fees in the UK Audit Market’ was commissioned by UK mid-tier firm BDO Stoy Hayward (BDO) and conducted by the London School of Economics (LSE) to study whether there was a direct relationship between high concentration among Big Four auditors and the level of audit fees being paid by clients.

According to the report, the collapse of Arthur Andersen and the subsequent reduction of the Big Five to the Big Four in 2002 led to a 2.4 percent increase in the average audit fee paid by listed companies when other factors such as changes in regulation were considered. The report noted that audit fees continued to grow in every subsequent year.

However, several Big Four UK accounting firms said the research revealed no new information with one firm suggesting the survey suffered from serious flaws. Deloitte UK national audit technical partner Martyn Jones described the report as simplistic and said the survey analysis appeared to be an inadequate reflection of the factors which would affect the audit fees of large companies.

Jones said some of the factors included the introduction of International Standards on Auditing, the adoption of IFRS, the impact of Sarbanes-Oxley and the introduction in the UK of new audit regulation following Enron. He said all these added considerably to the audit fees of larger entities.

Ernst & Young managing partner for regulatory and public policy Jan Babiak agreed with Jones. “There have been significant market changes for the profession since 2002, from systems changes to accounting regulations and new independence rules, which all impact the cost of an audit,” she said.

Richard Sexton, UK head of assurance at PricewaterhouseCoopers, said the report did not raise anything new and appeared inconsistent with his firm’s client experience in what was a fiercely competitive market.

KPMG UK head of audit Richard Bennison agreed competition was still fierce despite the fact only four firms carry out big-ticket audits. KPMG currently audits 26 out of the FTSE 100 and 21 percent of the FTSE 350. “Every time we come up in a proposal whether it is one firm we are competing against or whether there are four or five, including BDO, the price will be competitive, and whether BDO are in there or not does not make one iota of difference to the price that we would have to quote to win the work,” Bennison said. He said clients were choosing audit firms on the basis of price and quality.

The research also suggested a drop of just 10 percentage points in the market share currently held by the Big Four could lead to a fall of 7 percent in the annual audit fees paid by UK listed and private companies. All FTSE 100 companies  are audited by one of the Big Four and only 3 percent of FTSE 350 companies are audited by a mid-tier firm. BDO Stoy Hayward managing partner Jeremy Newman said the research revealed there was a real cost of high market concentration among auditors and that the current market structure needed to change. The LSE research involved the study of 1,279 listed and private companies between 1998 and 2006.

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