A cursory glance at this year's Accountancy survey of fees paid to auditors by the FTSE 100 might suggest that the audit market had undergone a seismic shift.
Gone are the days when firms could hope to earn millions in fees from non-audit work, often at the expense of a loss-leading audit. For the past few years the fees earned from the statutory audit of the FTSE 100 companies have been steadily rising, while the growth of non-audit fees has stalled.
This year, the distinction between the two is startling - the Big Four firms saw an overall increase in fees earned from statutory audit of the FTSE 100 of 18%, while total fees earned by the firms increased by just 7%. Fees for non-audit work fell slightly. Figures can be seen in the table below.
The source of this year's huge increase in statutory audit fees is tricky to identify. The report into competition in the UK audit market by the consultancy Oxera in 2006 suggested that there was evidence that lack of competition in large company audits has led to higher audit fees.
The real picture, however, is more complex. There is no doubt that statutory audit fees have increased steadily in recent years, but this is due to many factors including increased regulation, greater demands on auditors and in the case of this year's survey, a change in the way companies disclose the fees paid to their auditors.
Note: 'Other fees' include fees described as audit-related – 2007 audit-related fees are £114.2m (2006: £117m)
The results of our survey have been complicated by the introduction of new statutory guidelines covering the disclosure of auditor remuneration in company accounts. The new guidelines (see box) require separate disclosure of statutory audit fees, of fees earned from the audit of subsidiaries, of non-audit fees and most importantly in terms of our survey, of fees earned from work 'pursuant to legislation'. Companies' different interpretations of the work that falls into this category means that the exact nature of audit-related services is not always clear.
Aside from the presentational change, it is clear that companies have seen an increase in fees paid to their auditors thanks to the requirements of the US Sarbanes-Oxley Act and, to a lesser extent, the introduction of International Financial Reporting Standards (IFRS). Again, the precise details of the costs associated with each are difficult to pinpoint, although a number of companies do disclose a breakdown of the fees paid.
AstraZeneca, for example, says in its accounts that it paid $3.2m (£1.6m) in Sarbox-related fees to its auditor during the 2006 financial year, compared with $1.8m in 2005. The large multinational companies, of course, are seeing even more significant costs. Of Barclays' £28m in audit fees, £10m were, according to the bank, due to Sarbox-related costs.
Elsewhere, Lloyds TSB said that Sarbox and its 20-F filing in the US accounted for £4.7m of audit-related fees, while ICI said that £3.1m of its £3.5m in audit-related fees were due to the Act. Pearson and United Utilities paid out £4m and £4.6m on Sarbox-related advice respectively during the year.
Costs related to IFRS transition advice from company auditors, on the other hand, seem to be less significant this year, as all of the FTSE 100 are now required to produce IFRS accounts. Of the few companies that disclose details of their IFRS-related costs, Compass Group and DSG International both say that their costs amounted to £200,000 each, while Invesco says that it spent $600,000 on IFRS transition advice from its auditor.Tighter controls on non-audit work
The tighter controls on non-audit work carried out by auditors mean that significant fee revenue from other work is appearing less frequently in our audit fees survey. Where companies disclose the details, much of the non-audit work carried out by audit firms relates to tax advice, although there is the odd oasis of fees earned from specific transactions, such as mergers and acquisitions. Experian Group, for instance, paid out $19m in fees to PwC during its demerger from GUS.
This apparent decrease in non-audit fee revenue will not be a cause for concern for the Big Four since in all likelihood the FTSE 100 are simply choosing one of the remaining three large firms to advise them on particular transactions. The same (or probably larger) pot of money, in other words, is simply being spread among the Big Four in a different way. And as long as companies are only required to disclose non-audit fees paid to their auditor, we will never know exactly how much the Big Four earns from the FTSE 100. Overall, this year's survey is unlikely to do much to stop the debate about competition in the UK's accountancy profession.
Last month (see p8) we reported that the US Securities and Exchange Commission's proposals for dropping the reconciliation requirement for accounts prepared under IFRS would not apply to any company that prepares its accounts under EU-modified IFRS (that takes advantage of the carve-out of financial instruments standard).The SEC intends to recognise only IFRS as prepared by the International Accounting Standards Board (IASB), and not modified by any other state or body. This year's survey illustrates how many companies would be affected by the SEC's decision, if it goes ahead.The audit reports of just 11 of the FTSE 100 companies specify that as well as complying with IFRS as issued in the EU, the accounts also comply with IFRS as issued by the IASB. The companies are:
Daily Mail & General Trust
Legal & General
Royal Bank of Scotland
1 Barclays (PwC) £28m
2 Royal Dutch Shell (PwC) £25.7m
3 BP (E&Y) £22.8m
4 HSBC Holdings (KPMG) £21.3m
5 Unilever (PwC) £17.6m
Changes in the constituents of the FTSE 100, as well as a small number of rare auditor changes among larger companies, mean that in terms of numbers of audit contracts, although not fees (see p6), PricewaterhouseCoopers appears to be losing its stranglehold on the FTSE 100 audit market. Its 41 audit clients in this year's survey have since been reduced to 39. Royal & SunAlliance announced a rotation of its auditor earlier this year and is now audited by Deloitte & Touche.The company said it had 'enjoyed a long-standing and constructive relationship' with PwC but that it was part of its policy 'to periodically review all major contracts'. PwC lost a further audit client when Segro (previously Slough Estates) also switched its audit to Deloitte as part of its own periodic review.
The small number of auditor changes during the year,however, confirms the finding of Oxera's report on the state of the 2006 UK audit market that only 2% of the FTSE 100 are likely to change their auditor in any one year. The FTSE 100 remains a no-go area for any firm outside the Big Four. BDO Stoy Hayward made a welcome entrance into the market when its client PartyGaming floated in 2006, but the company has since dropped out of the FTSE 100.
Whether the absolute domination of the Big Four in the audit market for our largest companies could (or should) be addressed is, of course, an ongoing debate.The Financial Reporting Council's Market Participants Group interim report, Choice in the UK Audit Market, concentrated on a market-led set of reforms.The second-tier firms, though, are not giving up the fight.The merger of Grant Thornton and RSM Robson Rhodes was seen as an attempt to take on the Big Four at their own game.
David Herbinet, head of public interest markets at Mazars and a member of the Market Participants Group, said that the profession 'must not shy away from the word "competition"' as 'the bulk of available evidence points to a clear lack of it.When FTSE 100 auditors can expect to remain in place for 48 years and 70% of these audits are not put out to tender in at least a 15-year period, this does not suggest a healthily competitive market able to offer real choice to end-users'.
Mazars advocates in particular a greater exploration of the use of joint audits, particularly for FTSE 100 companies, and says that 'regulatory intervention may become necessary if the MPG's market-based initiative does not achieve results in a reasonable timeframe'.
|Firm||2007 survey||2006 survey||2005 survey||2004 survey|
|Company||Auditor||Statutory audit fee (£m)||Audit-related services (£m)||Other services (£m)||Total fees (£m)||Previous statutory audit fee (£m)||Previous total fee (£m)||Days to sign off||Year end|
|3i Group||Ernst & Young||1.3||0.1||1.1||2.5||1.3||2.4||39||31.03.07|
|Alliance & Leicester||Deloitte & Touche||0.7||2.8||3.5||0.8||1.4||51||31.12.06|
|Anglo American*1||Deloitte & Touche||6.6||3.7||2.4||12.7||6.7||10.6||51||31.12.06|
|Antofagasta*||Deloitte & Touche||0.3||0.1||0.4||0.2||0.4||95||31.12.06|
|Associated British Foods||KPMG||3.5||3.4||6.9||3.2||6.6||53||16.09.06|
|Aviva2||Ernst & Young||9||6.5||15.5||9||13.8||59||31.12.06|
|BP*||Ernst & Young||22.8||7.4||5.9||36.1||26.2||39.6||54||31.12.06|
|British Airways||Ernst & Young||2.3||1.3||0.7||4.3||2.2||3.2||47||31.03.07|
|British American Tobacco||PwC||7.4||0.2||5.1||12.7||6.6||10.7||59||31.12.06|
|British Energy Group||PwC||0.9||0.2||1.7||2.8||1.1||2.7||60||31.03.07|
|British Land Co||Deloitte & Touche||0.9||0.2||1.8||2.9||0.9||2.6||51||31.03.07|
|British Sky Broadcasting||Deloitte & Touche||1||1||4||6||1||9||27||30.06.06|
|Cable & Wireless||KPMG||3||0.7||1||4.7||3.9||5.9||53||31.03.07|
|Cadbury Schweppes||Deloitte & Touche||5||2.6||1.4||9||4.8||7.5||68||31.12.06|
|Capita Group||Ernst & Young||0.8||0.1||0.1||1||0.8||1.2||52||31.12.06|
|Compass Group||Deloitte & Touche||3.6||0.3||3.7||7.6||4.4||6.8||60||30.09.06|
|DSG International||Deloitte & Touche||0.9||0.4||0.4||1.7||0.8||1.6||68||29.04.06|
|Daily Mail & General Trust||Deloitte & Touche||2.3||7.6||9.9||1.9||3.9||53||01.10.06|
|Drax Group||Deloitte & Touche||0.2||0.2||0.4||0.3||0.7||66||31.12.06|
|Enterprise Inns||Ernst & Young||0.3||0.1||0.2||0.6||0.2||0.6||52||30.09.06|
|Hammerson4||Deloitte & Touche||0.5||0.1||0.1||0.7||0.6||0.8||68||31.12.06|
|Hanson||Ernst & Young||2.7||1.3||0.4||4.4||2.8||5.1||53||31.12.06|
|Home Retail Group5||PwC||0.9||0.4||1.3||0.6||1.9||60||03.03.07|
|Imperial Chemical Industries||KPMG||3.3||3.5||1.3||8.1||3.3||5.5||53||31.12.06|
|Imperial Tobacco Group||PwC||2.1||1.6||1.2||4.9||2.1||4.9||31||30.09.06|
|InterContinental Hotels||Ernst & Young||2.3||1.3||1.6||5.2||3.1||7.2||50||31.12.06|
|Invesco*||Ernst & Young||2.5||0.6||0.2||3.3||2.2||3.3||82||31.12.06|
|Kazakhmys*||Ernst & Young||1.1||0.2||0.2||1.5||1.2||9.5||73||31.12.06|
|Kelda Group||Ernst & Young||0.5||0.5||1||0.5||1||75||31.03.07|
|Land Securities Group||PwC||1||0.1||0.2||1.3||0.9||1.8||46||31.03.07|
|Legal & General Group||PwC||2.4||0.5||2.2||5.1||2||3.4||72||31.12.06|
|Lloyds TSB Group||PwC||8.9||6.1||2||17||8||11.8||53||31.12.06|
|Marks & Spencer Group||PwC||1.1||0.1||0.4||1.6||1.1||1.6||51||31.03.07|
|Mitchells & Butlers||Ernst & Young||0.4||0.1||0.5||1||0.5||0.7||59||30.09.06|
|Next||Ernst & Young||0.5||0.1||0.6||0.5||0.6||54||27.01.07|
|Punch Taverns||Ernst & Young||0.6||0.6||0.3||0.3||88||19.08.06|
|Reed Elsevier||Deloitte & Touche||4.7||1.2||5.9||3.2||4.7||45||31.12.06|
|Resolution||Ernst & Young||3||2.4||4||9.4||2||2.9||106||31.12.06|
|Royal & SunAlliance Ins. Group7||PwC||6.2||0.5||0.8||7.5||3.3||7.5||66||31.12.06|
|Royal Bank of Scotland Group||Deloitte & Touche||11.6||5.9||5.2||22.7||9.9||24.3||59||31.12.06|
|Royal Dutch Shell*8||PwC||25.7||2.5||1||29.2||23.3||37.6||66||31.12.06|
|Scottish & Newcastle||Ernst & Young||1.8||0.7||2.5||1.6||3.7||51||31.12.06|
|Scottish & Southern Energy||KPMG||0.8||0.2||1||0.8||1.4||60||31.03.07|
|Severn Trent||Deloitte & Touche||0.7||0.1||0.3||1.1||1.1||2.1||66||31.03.07|
|Shire*||Deloitte & Touche||1.3||0.1||0.8||2.2||1.3||3.9||81||31.12.06|
|Smith & Nephew*||Ernst & Young||1.5||1.1||2.2||4.8||1.5||2.9||79||31.12.06|
|Tate & Lyle||PwC||2.1||0.1||0.1||2.3||2||2.2||52||31.03.07|
|United Utilities||Deloitte & Touche||1.1||2.5||1||4.6||0.9||2.5||65||31.03.07|
|Vedanta Resources*||Deloitte & Touche||0.5||0.2||0.5||1.2||0.5||1.1||45||31.03.07|
|Vodafone Group||Deloitte & Touche||5||2||3||10||4||8||59||31.03.07|
|WPP Group||Deloitte & Touche||12.5||4||7.2||23.7||11.9||21.5||135||31.12.06|
|Whitbread||Ernst & Young||0.8||0.3||0.1||1.2||0.8||1.3||53||01.03.07|
|Xstrata*||Ernst & Young||5||7.4||12.4||2.5||6.4||79||31.12.06|
Generally, we stick to the rule that fees qualify as audit-related when the company specifies that they are.This year, however, for the sake of consistency we have generally included under audit-related fees any amounts disclosed as being 'other fees pursuant to legislation'. It is not always clear what type of work falls into this category, but Cadbury Schweppes, one of the few to give clear details, says in its accounts that fees disclosed in this category 'primarily relate to assurance regarding controls as required by the Sarbanes-Oxley Act in the US, the halfyear review and shareholder/debt circular work'. Fees paid for the audit of any company pension schemes have been excluded from the survey.
All figures on the table, including for previous year, are taken from the latest report and accounts.Notes to table
1. An additional £1.3m in audit fees were paid to another auditor.
2. An additional £2.1m in audit fees were paid to other firms.
3. E&Y was auditor to F&C Asset Management until Oct 2006. £0.5m in audit fees and £5.7m in other services fees were paid to E&Y during the financial year.
4. An additional £0.1m in audit fees were paid to other auditors.
5. Reporting period is less than 12 months.Demerged from GUS in October 2006.
6. An additional £109,000 was paid to other auditors.
7.Now audited by Deloitte & Touche.
8. KPMG was joint auditor until November 2005 and was paid £5m in audit fees.
9.Now audited by Deloitte & Touche.