Audit: The Top 50 +50

by Richard Crump

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06 Aug 2012

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CAN AUDITORS keep up fee levels despite tough market conditions? The answer is yes, according to the Accountancy Age Top 50 +50 2012. But with a likely increase in client numbers to make up for falling tender values, the next question is: will quality will be sacrificed for quantity?

Audit firms posted a robust performance over the last 12 months, despite coping with a competitive environment for winning and retaining tenders, according to the Accountancy Age Top50 +50.

The fee environment, which has been described as 'brutal' and ‘the most challenging' some partners have ever seen, has resulted in up to a 40% reduction in fees when audits have been put out to tender.

There have been accusations of price-cutting, lowballing – the act of offering work below cost – and the dumping of unattractive clients. One audit partner in a top-ten firm said clients were telling them not to expect to retender their business unless they were willing to come back with price cuts of up to two-thirds of the original cost. Despite the harsh market conditions, data collected by Accountancy Age has revealed a relatively buoyant market.

Out of the 38 firms that provided figures for audit/accounting income, 30 recorded an increase in fees compared to the previous year, with seven posting a decline and Grant Thornton estimating no change.

The seeming contradiction between severe price competition and rising fee incomes may be a result of auditors taking on more complex audits for increasing numbers of audit clients. However, the rise in fees may be misleading as to the profitability of the market. It has been suggested that, while there has been an increase in absolute fees, audit fees calculated on an hourly basis – a far better metric for profitability – have not improved.

Audit hours have become a contentious point with the FRC warning that firms have been cutting costs by off-shoring certain audit procedures, delegating work to junior staff and using more checklists, as well as other efficiency measures.

In its annual report into the profession's performance, the FRC warned competition between firms could damage audit quality as practices try to increase the volume of audits they can perform.

An example in PwC's report said it had launched its Audit Transformation programme to improve audit quality. However, the guides issued appeared to focus on improving efficiency by reducing audit hours. The FRC's Audit Inspection Unit warned it should "ensure that there is no adverse impact on audit quality as a result of its initiatives to improve audit efficiency in the light of competitive pressures".

Such action has had no adverse impact on PwC's ability to pick up business, posting a 6% increase in fee income and topping the Top50 +50 in terms of operating profit and audit/accounting income.

Accountancy Age's data reflects a report issued earlier this year by the FRC's Professional Oversight Board, which found the Big Four have outperformed their smaller counterparts in the audit market.

The POB report found that the Big Four firms booked a 0.9% increase in audit fee income, compared to a decrease of 2.2% for the rest of the market. Total fee income rose by 5.7% and fell by 0.5% for the Big Four and their smaller rivals, respectively.

Overall, the Big Four's reliance on audit fee income was found to have been reduced. Audit fees now comprise 23% of total income, down from 26% last year, while income from non-audit work increased to 63% from 55%.

While the Big Four may have outperformed the market as a whole, smaller firms, such as MHA MacIntyre Hudson, have also been improving on their own fee income. Steve Moore, audit partner at MacIntyre, which increased audit fees by 9% to £11m, says the firm has targeted larger clients.

"The past couple of years have seen us push upstream and get into the SME and mid-market business. We have less clients, but we have got bigger clients with bigger fees," he says. "We have benefited from picking up business from firms higher than us."

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