Top 50+50: Audit market fee growth continues upward trajectory

QUALITY, rather than a race for a reduction in fees and the blatant ‘low-balling’ of recent years appears to be winning through as the dominant trend in the UK audit market, according to the latest Accountancy Age Top 50+50 Survey, supported by Wolters Kluwer.

The upper tier of the market continues its ride on the audit merry-go-round as a direct result of changes wrought by the mandatory audit of listed companies, while the upward spiral in audit thresholds – liberating smaller companies from the shackles of an audit, but reducing potential fee income for firms – also deepened its impact.

According to the latest figures, audit fees for the top 50 firms, based on 37 submissions, increased slightly to £3.8bn from £3.7bn in 2013 and £3.4bn in 2012. The Big Four firms of PwC, Deloitte, KPMG and EY nudged up their fee income to £2.78bn from £2.7bn, while the top six firms including BDO and Grant Thornton reported a 3% to hit £3.06bn from £2.97bn in the previous year.

Andrew Walton, head of assurance markets in the UK & Ireland at EY, and previously ran the Big Four firm’s London audit practice, said its 8.5% growth in audit and related accounting services fees was largely down to an impressive run of recent FTSE 100 wins.

Among them is the Associated British Foods (ABF) account, wrestled with some aplomb from rival KPMG, which had reigned as the company’s auditor for over 70 years. The £9.1m account, of which £3.2m is derived from non-audit work, had been monopolised by KPMG since 1935.

Other key wins, include Reed Elsevier, Royal Dutch Shell, RBS, Sainsbury’s and the BBC, all helping it amass £550m in fees. While still some distance below the out-and-out leader PwC with a triumphant £1.03bn, and Deloitte at £706m, it still delivered the highest percentile growth of its Big Four rivals, trumping KPMG, whose fee income came in at £495m.

Additional drivers of growth include the firm’s fraud investigation and dispute services as well as its financial accounting advisory services.

The uncomfortable truth

New EU audit reforms have increased the number of audits coming up for tender in 2015, says Walton, a trend which will continue into 2016, before slowing down in 2018/19 and then picking up the pace again in 2020.

But Walton is somewhat circumspect about certain issues. “The uncomfortable truth of regulatory change is that at the top end it is not bringing in firms from outside the top four.”

One of the firms directly below the Big Four, sixth-placed BDO, has seen its audit and accounting fees grow by a healthy 6% to £148m, some £14m more than Grant Thornton, one place above it in the fifth slot.

And it is these two firms in particular who are perhaps best poised to take advantage of any account migration away from the elite quartet. Scott Knight, head of audit and assuarance at BDO, agrees with Walton’s uncomfortable truth.

“I think we will see the FTSE 250 change before the FTSE 100. We have found the FTSE 250 has been a slower market to change than we were expecting, but the amount of non-audit services that the whole FTSE 350 are buying from us now, has gone up significantly.”

He puts that partly down to the fact that in blue chip audit “everybody wants to keep themselves clean from conflicts” which has “opened up the market for ourselves and GT” with the effect that “both of us are seeing significant growth in non-audit services for that part of the market”.

Much of that expansion has been generated in the South East, with the rest of the country still proving to be “quiet a tough market”.

“Some of our offices such as Gatwick and Reading have done really well and the closer you get to London, the hotter the market is,” says Knight.

Knight singles out BDO’s financial services practices, and its London audit offering as delivering especially sterling performances, while the technology and financial services sectors were shone brightest in the growth delivery stakes.

“We are making some big investments in data analytics and another area where we are seeing big growth is in the outsourced accounting area. With BDO InTouch, where people are using the cloud for outsourcing their accounting function, we are building quite big factories – or hubs – in Liverpool and Ipswich, to support that.”

Intelligent marketing

At the lower end of the Top 50+50, 90th placed Raffingers Stewart, recorded a dramatic 46.2% hike in audit and accountancy fee income, swelling its treasure chest to £3.51m.

Managing partner, Gary Inglis, says part of that seismic growth – but “less than 50%” can be put down to the September 2014 merger with Alexander Ash, which upped the total number of partners at the firm to seven, while simultaneously expanding its accounts, tax, business advisory and corporate finance teams.

Most of the growth has been driven by “intelligent marketing to specific niche sectors such as recruitment”, where the firm has been “very successful” and “added substantially” to its headcount, boosting its audit staff numbers to 50 as well as winning new business through referrals from existing clients.

The long-term trend in the lower echelons of the market, look less rosy, with almost one in 20 firms registered to audit company accounts in the UK exiting the line of work in the past year.

The FRC’s latest annual assessment of the profession found that the number of registered audit firms fell 4.9% between 31 December 2013 and 2014, compared to 3.8% during 2013.

The decrease coincides with an increase with the proportion from companies filing annual accounts at Companies House that are audit exempt, from 70.2% in 2009/10 to 73.5% un 2012/13. As at 31 December 2014, the number of registered audit was 6,635, a double-digit fall of 11% over the previous four years.

It follows increases in the audit exemption in 2004 and 2008, while earlier this year a new EU accounting directive slipped into force under which member states had the option to significantly raise the thresholds of businesses not required to file full, audited financial statements for those with a turnover below €12m (£10.3m) and a balance sheet below €6m.

BIS, after consulting on the proposed new regime for small companies in 2014, has now ratified the raised accounting threshold to its maximum amount, while limiting the information that can be required in small company accounts.


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