DICEY is one way to describe the current environment for audit fees and engagements for much of the profession, apart from the few firms able to operate the top of the Accountancy Age Top 50+50. The market has become more stratified than ever as firms adapt to the new regulatory environment.
At the top end of the profession, new competition and audit reporting rules imposed by regulators and politicians in the UK and Europe have helped stabilise fees. For those lower down the rankings, the inexorable hikes to audit thresholds have only served to make doing business even more difficult.
According to the latest figures, audit fees for the top 50 firms – based on 39 submissions – increased to £3.65bn from £3.47bn in 2013, and £3.38bn in 2012. The Big Four firms of PwC, Deloitte, KPMG and EY improved fee income by 4.9% to £2.7bn, while the top six firms including BDO and Grant Thornton posted a 5.9% rise to £2.97bn.
A fair price
The largest firms are now operating in an environment of increased tendering – EU rules dictate that large-listed companies must change the firms that vet their accounts on a regular basis – and one that requires enhanced reporting by auditors and audit committees.
Tony Cates, head of audit at KPMG, says the onus on audit committee chairs to take more responsibility for audit tendering is having a “big impact” on fees. “It is now about a better quality audit, price is a long way down,” Cates explains. “No one is going to come back and say they picked the cheapest firm.”
Nevertheless, competition is fierce with a flurry of high profile, lucrative audits changing hands in recent months. While all of the Big Four would point to successes – the audits of Barclays, Vodafone, Smith & Nephew and Marks & Spencer have all changed hands among the top four firms – Cates says he is “delighted” with how KPMG is doing at the top end of the market.
“Our strategy is to focus on the top half of the FTSE 100,” he says. “Fees are holding firm under tendering. Three years ago you were seeing fee reductions.”
Deloitte posted the biggest rise in fees out of the Big Four – rising 11.9% – while PwC remains the by far the largest auditor in the profession, raking in fees just shy of £1bn. It is perhaps fitting that PwC picked up the audit of HSBC, the most lucrative audit in the FTSE 100. HSBC, Europe’s largest bank by market capitalisation, paid KPMG, which has been the bank’s auditors since 1991, £31.5m in audit fees in 2012/13.
Challenger firms outside of the Big Four hoping to pick up a mixture of audit and non-audit work from the new tendering environment, such as Mazars, are optimistic about the pricing and engagement environment as a result of the regulatory pressure. Companies are realising that a cut in fees is no longer possible,” explains Mazars’ audit partner David Herbinet.
“Audit committees will remove the highest and lowest outliers. The market is moving to a fair price,” he says. “The market is very dynamic and there is a lot of opportunity but more than ever we need to stop focusing on size. There is a need for the market to better understand and the quality and capabilities of smaller firms.”
Herbinet’s firm posted a healthy 11.9% in fees, only to be trumped by a 25.5% rise BDO, the UK’s sixth-largest auditor. However, it was Grant Thornton, BDO’s close rival, that won the most striking audit of the last 12 months, picking up the audit of FTSE 250 support services business Interseve from Deloitte – the first time that a FTSE 350 company has swapped its Big Four auditor in favour of a firm outside of the leading quartet.
Reaching their threshold
Outside of the top six, firms also recorded a rise in fees – to £687.2m from £664.4, though lower than the £690.8m recorded in 2012. The figures point to an improvement in performance but the mood among audit partners is one dominated by pressure on fees.
“It’s still really difficult, firms are under pressure to secure work” says Tom McMorrow, partner at Baker Tilly, the top ten firm which claimed that “low-balling” price competition was one of the factors behind a £8.6m fall in pre-tax profits for the year ended 31 March 2013.
McMorrow labels the practice, which involves offering work below cost – uncommercial, though it appears the practice has receded since the firm published its 2013 report. Since then, and post-merger with RSM Tenon, he says “audit is stacking up pretty well in terms of engagement and fee income” for the firm with fees rising 35% to £107m.
Changes to audit thresholds are also putting a strain on the market. McMorrow says there is a “danger of over-dramatizing” the impact of a further hike in thresholds, but the reality remains that many firms are feeling the pinch of last year’s changes, not to mention the further hikes that loom on the horizon.
Introduced in 2012 for accounting periods ending on or after 1 October that year, companies are now eligible for audit exemption if they meet certain small company criteria. Under the old rules SMEs must both have a maximum balance sheet total of £3.26m and less than £6.5m turnover to qualify for an exemption. The new regulations mean SMEs can obtain an exemption if they meet two out of three criteria relating to balance sheet total, turnover and employing no more than 50 staff.
Thresholds are set to rise again. As part of changes to the EU’s Accounting Directive, voted through European Parliament earlier this year, member states have the option to significantly increase the size of businesses that will no longer require audited financial statements for those with a turnover below €12m (£10.3m) and a balance sheet below €6m.
“The uplift in limits removed a lot of property firms from audit regulation. We lost a lot of audit from that change,” says Richard Churchill, audit partner at Shelley Stock Hutter. “The audits that remain tend to be larger-to-medium-sized. Most of these fees do have pressures.”
However, the firm still generated £2.58m in audit fees in the last year and is taking steps to make the process more efficient by moving towards “more audit automation” software. “One thing that has been developed in last few months is a package with a remote accounts feature and control function. People are now working on the move; audit is catching up.”
Internal auditors are earn more than external consulting auditors, analysis by salary-bench marking site Emolument.com has found
ICAS and the FRC have called for action to prevent a potential audit skills gap in the future, with the launch of a new report
BDO has announced two key international appointments as the firm continues to expand in its private client business across the BDO global network
Online accountancy firm, My Accountant Friend (MAF), has opened its latest office in Birmingham and recruited new partner, Richard Ingledew