In figures provided exclusively to Accountancy Age, PwC said its ratio of audit to non-audit fees from FTSE-100 clients has fallen significantly to just one to 1.4. This is down from one to 3.5 last year.
The marked fall in the ratio will be used by PwC and the industry as ammunition in the battle to convince shareholders and the public that audit objectivity is no longer under threat.
The issue of objectivity was one of the main drivers for calls to impose mandatory audit firm rotation or mandatory retendering. It was also a significant concern of the Co-ordinating Group on Audit and Accounting Issues which published its final report last week.
Rodger Hughes, PwC’s managing partner, clients and markets, argued the drop in ratio was caused solely by the October 2002 spin-off of the firm’s consultancy arm to IBM, which included lucrative IT contracts. ‘It is not because clients have stopped buying non-audit services,’ he stressed. Taking into account an expected industry growth of 9%, PwC’s audit fees will amount to some £118m, while the firm estimates its non-audit fees total £164m.
Hughes argued non-audit fees do not influence auditor independence because their higher margins are normal and necessary because, unlike audit, it is non-recurring work.
An ICAEW survey published yesterday backs Hughes’ argument of continued faith in UK audit. It found that 60% of UK and 75% of US fund managers express a ‘great deal’ or ‘a lot’ of confidence in UK audited financial information.
John Connolly, chief executive of Deloitte & Touche, said his firm’s non-audit ratio will also shrink following the spin-off of its consultancy arm in February 2002. Nevertheless, he argued that Deloitte, apart from a few exceptions, had ‘never generated significant non-audit fees from audit clients’.
Ernst & Young sold its consultancy in 2000 and saw its non-audit ratio drop significantly. In 2002 it reported a 1.5 ratio, compared to 2.3 in 1999, the last full year of its attachment to its management consultancy arm.
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