PwC merger sparks price hike

The 1998 merger between Price Waterhouse and Coopers & Lybrand drove
audit prices up by 12% in a year, and further market concentration has meant
continuing double digit year-on-year growth in audit fees, according to the
government’s report into audit competition among the Big Four.

Whether the merger was responsible for driving up audit fees has emerged as a
point of contention from last week’s report into perceptions of audit choice,
jointly commissioned by the DTI and the Financial Reporting Council.

Audit fee growth has been in double figures (on average) each year since
1995. Since Andersen collapsed, the growth of audit fees has accelerated,
according to the study from consulting firm Oxera.

Gerald Russell, E&Y partner and head of the Audit Quality Forum, said he
did not believe that having fewer firms had increased fees: ‘I don’t believe any
concentration has led to pricing increases per se.’

Among other findings was that competition is not working as well as it would
with a greater number of audit competitors within the FTSE 350.

Alongside this, the present situation with the Big Four dominating the audits
of practically all the FTSE 350 is not regarded by those asked in the study as
healthy for competition or choice.

Tighter auditor independence regulation has also reduced the competitive
pressure on the audit market, it was claimed.

This belief is enhanced by the fact that so few companies change their
auditor in a year. Switching rates are calculated at around 4% a year on
average, but within the FTSE 350 this figure dips below 3%.

Oxera concluded that choice within the market is limited for many UK listed
companies. In certain sectors, such as financial services, some companies
effectively have no choice over who their auditor is in the short term, due to
the various conflicts of interest that can arise.

The chance of greater choice being available in the short term seems quite
limited, unless changes can be enacted quickly. Oxera argued that the chance of
a mid-tier firm making a challenge to the Big Four’s market was at the moment
limited, as the economics for the firms were not right and there was a
perception among the larger companies that the firms were not equipped for the
task.

The loss of another large accounting firm would exacerbate the current
problems around audit choice, and is likely to result in the loss of investor
confidence in the audit process.

A Big Three is also unlikely to encourage the mid-tier to mount a challenge
against those that remain. Currently BDO is the only non-Big Four firm to have a
FTSE 100 audit, that of PartyGaming.

Key Findings

• The current market is not regarded as healthy for competition and choice

• Expansion by mid-tier firms may not be economical unless there is change to
perceptions and market conditions
• Lack of choice has resulted in audit firms gaining bargaining power, and
higher audit fees
• Some companies have an inability to change auditor in the short term