Big four control directly linked to higher audit fees

Research commissioned by BDO Stoy Hayward and conducted by London School of Economics reveals audit fees are certain to escalate should one of the big four firms exit the audit market, leaving only the big three in control.

The report demonstrates the reduction from big five to big four firms in 2002, following the collapse of Arthur Andersen, fuelled a 2.4% jump in the average audit fees paid by listed companies, excluding other factors such as changes in regulation. Audit fee growth has continued every year since then.

The research also shows that a drop of just 10 percentage points in the market share the big four hold at present could lead to the annual audit fees paid by UK’s listed and private companies easing by 7%.

Currently, all FTSE-100 companies are audited by one of the big four and 3% of FTSE-350 companies are audited by other firms.

‘This research reveals there is a real cost of high market concentration among auditors, and that the current market structure needs to change,’ Jeremy Newman, BDO Stoy Hayward LLP managing partner, said. ‘It also highlights the potential impact of another firm leaving the marketplace and the need to act now to mitigate this.

‘At present, the audit market is not adequately prepared to cope with the departure of another major firm from the marketplace and this must be a cause for concern for all those involved in this industry – the accountancy profession, investors, regulators and listed companies alike.’

Newman suspected that, if data were available, a similar issue would emerge relating to the non-audit services.

Dr Mariano Selvaggi, researcher at LSE, said previous studies had looked at the relationship between market concentration and audit fees, but the latest research raised new concerns about the current structure of auditing services.

‘Our findings have important implications for the future evolution of the UK audit market,’ he said.

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