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.

Further reading

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