Big Four’s non-audit fees for clients fall 20%

Audit income at the Big Four firms rose sharply last year, but was accompanied by a marked drop in fees from non-audit work for audit clients, ahead of the requirement for formal separation of activities, according to the latest Financial Reporting Council (FRC) analysis

The regulator’s annual key facts and trends survey shows PwC, KPMG, Deloitte and EY saw total fees for audit work increase by 6.9% from 2018 to 2019, compared with a 1.7% increase from 2017 to 2018.

Audit fee income for audit firms outside the Big Four increased by 2.2% compared to a 6.3% decrease the previous year.

From a competition perspective, the Big Four continued to audit all of the FTSE 100 in 2019. However, the two largest firms outside the Big Four audited 10 FTSE 250 companies, increasing their share of the FTSE 250 market from 3.2% in 2017 to 4.8% in 2019.   

The Big Four’s fees for non-audit work for audited entities declined 20.8% in 2019, compared with an 8.4% drop the previous year.

The FRC said this revealed a positive market shift ahead of operational separation by 2024, as well as the application of the non-audit services fee cap for public interest entities for the first time.  Firms outside the Big Four saw fees for non-audit work to audit clients increase by 3.4%. The Big Four firms continued to see an increase in their total fee income up 7.1%. Firms outside the Big Four saw a smaller decline in their total fee income in 2018/19, with a drop of 0.1%, compared to an 8.1% decline in 2017/18.

The analysis shows the number of audit firms registered with the recognised supervisory bodies (RSBs) continues to decline, down to 5,127 as at 31 December 2019, compared to 5,394 in 2018 and 5,660 in 2017.

The total number of members of the seven accountancy bodies in the UK and ROI has continued to grow steadily at a compound annual growth rate of 2% for the period 2015 to 2019.

Growth rates of membership vary considerably at each of the individual accountancy bodies in the UK and ROI. ICAEW continues to have the largest number of members in this jurisdiction; however, ACCA and CAI showed the strongest growth at a compound annual rate of 4% between 2015 and 2019.

David Rule, FRC executive director of supervision, said: ‘The latest data across the firms reveals some welcome market developments as the FRC continues to drive audit quality improvements. New ethical standards introduced by the FRC have also sought to reduce possible conflicts of interests between audit and non-audit work.

‘Improving choice and resilience in the market also remains a major focus ahead of wider government reform and planned operational separation of the audit practices of the Big Four.’

This may be the last report on the sector from the FRC, which  is in the process of transforming into a new regulatory body, the Audit, Reporting and Governance Authority (ARGA), although no date has been set for the changeover, which requires legislation for its full implementation.

Key Facts and Trends in the Accountancy Profession 2020

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