Special Reports - FTSE 100 auditors survey - Big Four hit by 14% fall in FTSE 100 audit client fees

Two years after Enron, non-audit fees from audit clients still outstrip audit fees, but not by as much as they did. Liz Fisher reveals Accountancy's annual survey findings.

The Big Four firms have seen another significant fall in non-audit income earned from their FTSE 100 audit clients. In last year's survey, 65% of total fees earned came from non-audit services. In this year's FTSE 100 auditors survey, the percentage has fallen to 57%.

This fall in non-audit fees could suggest that an increased awareness of corporate governance requirements in the post-Enron era has hit accountancy firms hard. The survey shows that while statutory audit fees earned by the auditors of the companies edged up by 6.5% over the year, the total fees earned by the auditors fell by 103m, or 14%, during the same period.

Additional consultancy and other non-audit services have traditionally been the cash cow for the auditors of large companies. This year's survey shows that while the Big Four earned a total of 263m from statutory audits for the FTSE 100 during the year, fees for non-audit services amounted to just 348m. This compares with 467m shown in last year's survey, a drop of 25%.

Non-audit fees have been falling steadily for a number of years and a number of explanations have been put forward. The decision by most firms to separate off or sell their consultancy arms in recent years has undoubtedly contributed to the fall in disclosed non-audit income, since companies are not required to disclose payments that are made to firms other than their auditor.

This is illustrated by the fact that relatively few companies declare consultancy as a significant non-audit service in their accounts. The majority of non-audit fees now come through tax advice and due diligence work. In a number of cases, non-audit fees are connected to specific, one-off projects. BSkyB, for instance, paid Deloitte 5.1m for development work on its contact centre during the year. Intercontinental Hotels paid its auditor, E&Y, 6.3m for work connected with the company's separation from Six Continents, which was charged to exceptional items. William Morrison's non-audit fee charges of 1m from KPMG relate to its acquisition of Safeway, and Royal & Sun Alliance paid PwC 2.7m in connection with a rights issue.

Corporate governance policies

Even so, there are strong signs that companies are becoming more aware of the requirements of auditor independence in the post-Enron era. Corporate governance standards require audit committees to monitor and assess the independence of the company's audit firm, and while the FTSE 100 companies have embraced the concept with varying degrees of enthusiasm, it is clear that many are thinking carefully before automatically throwing work in the way of their auditor, and the decline in non-audit fees can therefore be said to be market-driven.

A comment in Scottish & Southern Energy's annual report, for example, shows that auditor independence is a concern for many companies. Its corporate governance statement details the company's policy for appointing auditors to non-audit services but adds that 'there remains significant concern in the UK about the extent of non-audit work carried out for audit clients by leading accountancy firms.' It goes on to point out that the annual FTSE 100 audit fees survey had shown Scottish & Southern to have the lowest payment of non-audit fees to auditor of any of the FTSE 100.

An analysis of the accounts of the FTSE 100 shows that almost all of the companies make some kind of statement as to the independence of their auditors, most commonly in the audit committee report, directors' report or corporate governance statement. A significant percentage, though (HSBC, Lloyds and Prudential, for example), make the point clearly as part of the financial statement note that discloses auditor remuneration.

Safeguarding independence

A number of companies detail their processes for appointing accountancy firms for non-audit work. Emap says in its report that it has undertaken 'a thorough review of the company's procedures for maintaining and safeguarding the independence of the external audit', identifying three categories of accounting services: those that the auditors (PwC) can continue to provide, such as interim accounts reporting; those that the auditors are prohibited from providing, such as acquisition due diligence; and those that the auditors can provide in particular circumstances. Following the review, Emap put a number of projects out to tender and E&Y is now its preferred provider of due diligence services, internal audit, forensic accounting and investigation services. Deloitte provides the company with executive remuneration advice. Similarly, Aviva states that its auditor, E&Y, no longer advises the company on directors' remuneration, work that is now undertaken by KPMG.

Imperial Tobacco says that it has introduced a 'formal auditor independence policy document', which 'provides clear definitions of services that the external auditors may and may not provide'. The company also carries out six-monthly reviews of the fees paid to PwC for non-audit work.

A couple of companies are even more explicit, placing pre-set limits on the type of work undertaken by the company auditor, or a monetary limit on the fees paid. HBOS says that 'in 2003, the audit committee established a 2.5m limit for accounting, advisory and consultancy work undertaken by KPMG Audit plc'.

There are also signs that the companies are feeling the need to justify the amount they spend on non-audit services to their shareholders. Reuters states in the notes to its financial statements that while its audit fee rose by 30% during the year, the fees paid for non-audit work fell by 30% during the same period.

Merry-go-round

It is important to remember, of course, that any FSTE 100 company looking for an alternative firm to provide non-audit advice may not look any further than the remainder of the Big Four. The fact that the companies are not required to declare payments made to firms other than their auditor means that we cannot know whether the Big Four firms are struggling to maintain their income from the UK's largest companies. Is the non-audit work simply moving from one big firm to another, or is it leaking out of the firms down to the mid-tier, or out of the profession into the hands of lawyers, investment bankers and smaller niche specialists? This will become clearer as the big firms release their results over the next year or so.

Even so, this year's survey confirms the trend set last year of flattish audit fees and sharply declining non-audit fees. What is clear is that the tradition of taking on an audit in the hope of winning lucrative extra work is coming to an end.

FTSE 100 COMPANIES WITH 10 HIGHEST NON-AUDIT TO AUDIT FEE RATIOS Company Auditor Audit Non-audit Ratio fee (m) fees (m) British Sky Broadcasting Deloitte 0.8 7 8.8 Morrison (Wm) Supermarkets KPMG 0.2 1.1 5.5 Kingfisher PwC 1.1 5.9 5.4 Sainsbury PwC 0.6 2.8 4.7 Xstrata E&Y 1.8 8.2 4.6 Shire Pharmaceuticals Deloitte 0.6 2.4 4 Smith & Nephew E&Y 1.3 4.7 3.6 Hays Deloitte 1.5 4.9 3.3 BP E&Y 9.9 30.8 3.1 InterContinental Hotels Group E&Y 2.8 8.4 3 Company Auditor Statutory Audit Other Total audit fee related services fees (m) services (m) (m) (m) 3i Group E&Y 0.8 0.1 0.8 1.7 Abbey Deloitte 4.1 0.9 5 10 Alliance & Leicester Deloitte 0.5 1.1 1.6 Alliance Unichem1 Deloitte 0.9 1.1 2 Allied Domecq KPMG 3 1 4 Amvescap E&Y 1.7 0.2 0.9 2.8 Anglo American* Deloitte 6 7.1 13.1 Antofagasta* Deloitte 0.2 0.1 0.3 Associated British Foods KPMG 2.8 3.6 6.4 AstraZeneca* KPMG 3 2.1 5.1 Aviva2 E&Y 6.4 3.3 3.6 13.3 BAA PwC 0.6 0.1 0.3 1 BAE Systems KPMG 3.7 0.3 4.9 8.9 BG Group PwC 1.7 0.1 0.6 2.4 BHP Billiton*3 KPMG/PwC 4.1 1.3 2.5 7.9 BOC Group PwC 2 0.5 3 5.5 BP*4 E&Y 9.9 9.9 20.9 40.7 BT Group PwC 3.8 1.9 3.3 9 Barclays PwC 6 3 12 21 Boots Group KPMG 0.9 1.9 2.8 Bradford & Bingley KPMG 0.6 0.1 0.6 1.3 British Airways E&Y 1.6 0.5 2.1 British American Tobacco5 PwC 6.3 0.2 4 10.5 British Land Co6 Deloitte 0.9 2.4 3.3 British Sky Broadcasting Deloitte 0.8 0.6 6.4 7.8 Bunzl KPMG 1.5 2.4 3.9 Cable & Wireless KPMG 3.2 3.1 6.3 Cadbury Schweppes7 Deloitte 3.8 2.1 5.9 Capita Group8 E&Y 0.5 0.3 0.8 Carnival*9 PwC 0.3 0.3 Centrica PwC 2.3 0.3 1.3 3.9 Compass Group Deloitte 2 3 5 Daily Mail & General Trust Deloitte 1.6 0.8 2.4 Diageo10 KPMG 4.3 0.9 11.5 16.7 Dixons Group Deloitte 0.8 0.1 1.6 2.5 Emap PwC 0.9 1 1.9 Enterprise Inns E&Y 0.1 0.2 0.3 Exel11 E&Y 1.1 1.1 2.2 Friends Provident PwC 0.6 0.1 1 1.7 GUS PwC 2 5 7 Gallaher Group PwC 1.1 1.6 2.7 GlaxoSmithKline PwC 6.9 2.6 5 14.5 HBOS KPMG 4.3 2.6 2.6 9.5 HSBC Holdings* KPMG 16.6 3.4 6.9 26.9 Hanson E&Y 2.7 0.3 1.5 4.5 Hays Deloitte 1.5 4.9 6.4 Hilton Group12 E&Y 2.1 1.2 3.3 ITV (Granada plc)13 KPMG 0.7 2.1 2.8 Imperical Chemical Industries KPMG 3.1 0.9 0.9 4.9 Imperial Tobacco Group PwC 2.1 0.4 1.9 4.4 InterContinental Hotels Group14 E&Y 2.8 7.2 1.2 11.2 Johnson Matthey KPMG 0.9 0.1 0.6 1.6 Kingfisher15 PwC 1.1 5.9 7 Land Securities Group PwC 0.5 0.7 1.2 Legal & General Group PwC 1 0.2 0.7 1.9 Liberty International PwC 0.4 0.1 0.5 Lloyds TSB Group PwC 5.5 4.2 2.5 12.2 Man Group PwC 1.4 0.4 1.5 3.3 Marks & Spencer Group PwC 1.2 1.4 2.6 Morrison (Wm) Supermarkets KPMG 0.2 1.1 1.3 National Grid Transco PwC 4 3 3 10 Next E&Y 0.3 0.1 0.4 Northern Rock PwC 0.9 0.4 1.3 Old Mutual KPMG 4.5 3.5 2.5 10.5 Pearson PwC 3 2 5 Prudential KPMG 3.6 1.3 1.9 6.8 Reckitt Benckiser PwC 2 0.1 0.9 3 Reed Elsevier Deloitte 2.5 2.1 4.6 Rentokil Initial PwC 2.5 0.4 2.9 Reuters Group PwC 3 1.8 1.6 6.4 Rexam PwC 2 1.7 3.7 Rio Tinto*16 PwC 2.8 0.3 2.4 5.5 Rolls-Royce Group KPMG 3.2 2 5.2 Royal & Sun Alliance Insurance Group17 PwC 2.7 1.2 6.2 10.1 Royal Bank of Scotland Group Deloitte 7.2 0.6 7 14.8 SABMiller*18 PwC 2.7 3.3 6 Sage Group PwC 0.5 1 1.5 Sainsbury J PwC 0.6 2.8 3.4 Schroders PwC 1.2 1.5 2.7 Scottish & Newcastle19 E&Y 1.4 3.3 4.7 Scottish & Southern Energy KPMG 0.4 0.1 0.5 Scottish Power PwC 1.5 0.4 3.1 5 Severn Trent PwC 0.7 0.2 0.9 1.8 Shell Transport & Trading* PwC 18 6 7 31 Shire Pharmaceuticals Deloitte 0.6 1 1.4 3 Smith & Nephew E&Y 1.3 0.1 4.6 6 Smiths Group PwC 3.9 1.2 5.1 Standard Chartered* KPMG 3 1 1.3 5.3 Tesco PwC 1.2 1 0.6 2.8 Tomkins Deloitte 2.1 0.1 2.7 4.9 Unilever** PwC 8.6 1.3 11.9 21.8 United Utilities Deloitte 0.6 0.8 0.3 1.8 Vodafone Group Deloitte 4 3 5 12 WPP Group20 Deloitte 7.3 2.8 3.7 13.8 Whitbread E&Y 0.7 0.1 0.1 0.9 William Hill Deloitte 0.3 0.5 0.8 Wolseley PwC 1.8 2.7 4.5 Xstrata*21 E&Y 1.8 8.2 10 Yell Group22 PwC 0.6 0.2 1.3 2.1 mmo2 PwC 1 0.8 1.8 Totals 263.4 76 271.9 611.4 Company Previous Previous Days to Year end audit fees total fee sign off (m) (m) 3i Group 0.7 1.4 42 31.03.04 Abbey 4.2 9.9 56 31.12.03 Alliance & Leicester 0.5 3.3 50 31.12.03 Alliance Unichem1 0.7 0.9 55 31.12.03 Allied Domecq 6 10 50 31.08.03 Amvescap 1.6 2.4 58 31.12.03 Anglo American* 5.5 9.9 55 31.12.03 Antofagasta* 0.1 0.2 126 31.12.03 Associated British Foods 2.5 4.8 52 13.09.03 AstraZeneca* 1.9 3.9 29 31.12.03 Aviva2 4 13.9 55 31.12.03 BAA 0.5 1.4 47 31.03.04 BAE Systems 3.5 10.4 56 31.12.02 BG Group 1.4 6.3 64 31.12.03 BHP Billiton*3 3.3 13.7 71 30.06.03 BOC Group 1.9 7 52 30.09.03 BP*4 8.2 43.4 40 31.12.03 BT Group 2.9 12.5 49 31.03.04 Barclays 5 22 42 31.12.03 Boots Group 1 2.3 56 31.03.04 Bradford & Bingley 0.5 1.9 47 31.12.03 British Airways 1.5 2.5 47 31.03.04 British American Tobacco5 6.5 13.7 55 31.12.03 British Land Co6 0.8 3.3 54 31.03.04 British Sky Broadcasting 0.7 6.7 42 30.06.03 Bunzl 2.6 3.5 54 31.12.03 Cable & Wireless 4.9 9.9 61 31.03.04 Cadbury Schweppes7 2.9 5.1 76 28.12.03 Capita Group8 0.5 1.1 56 31.12.03 Carnival*9 0.5 3.7 56 30.11.03 Centrica 1.7 9.2 43 31.12.03 Compass Group 2 5 63 30.09.03 Daily Mail & General Trust 1.8 2.8 59 28.09.03 Diageo10 3.9 22.2 65 30.06.03 Dixons Group 0.7 1.8 53 01.05.04 Emap 0.7 2.9 54 31.03.04 Enterprise Inns 0.2 0.4 56 30.09.03 Exel11 0.3 1.8 58 31.12.03 Friends Provident 0.5 1.7 61 31.12.03 GUS 2 13 54 31.03.04 Gallaher Group 0.9 5.6 61 31.12.03 GlaxoSmithKline 6.1 20.9 62 31.12.03 HBOS 3.7 11.7 55 31.12.03 HSBC Holdings* 12.9 20.5 59 31.12.03 Hanson 2.9 4.5 50 31.12.03 Hays 1.2 1.9 70 30.06.03 Hilton Group12 1.6 2.9 57 31.12.03 ITV (Granada plc)13 0.4 1.3 62 31.12.03 Imperical Chemical Industries 2.8 6.1 42 31.12.03 Imperial Tobacco Group 2.3 7.1 48 30.09.03 InterContinental Hotels Group14 1.9 6.7 69 31.12.03 Johnson Matthey 1 1.9 63 31.03.04 Kingfisher15 1.9 9.5 44 31.01.04 Land Securities Group 0.5 2.2 48 31.03.04 Legal & General Group 1 2.6 56 31.12.03 Liberty International 0.4 0.8 42 31.12.03 Lloyds TSB Group 4.8 9.7 64 31.12.03 Man Group 1.2 2.8 50 31.03.04 Marks & Spencer Group 0.9 2.3 50 03.04.04 Morrison (Wm) Supermarkets 0.2 1.2 45 01.02.04 National Grid Transco 3 13 49 31.03.04 Next 0.3 0.9 53 31.12.04 Northern Rock 0.8 1.2 55 31.12.03 Old Mutual 3.5 9.5 76 31.12.03 Pearson 3 6 58 31.12.03 Prudential 3.3 9.2 78 31.12.03 Reckitt Benckiser 1.8 3 71 31.12.03 Reed Elsevier 2.3 5.9 49 31.12.03 Rentokil Initial 2.3 3.5 83 31.12.03 Reuters Group 2.3 9.1 62 31.12.03 Rexam 1.8 4.7 63 31.12.03 Rio Tinto*16 2.3 4.8 51 31.12.03 Rolls-Royce Group 3.2 4.8 42 31.12.03 Royal & Sun Alliance Insurance Group17 3.4 8.3 69 31.12.03 Royal Bank of Scotland Group 5.8 12.8 49 31.12.03 SABMiller*18 2.7 6.6 68 31.03.04 Sage Group 0.5 0.9 83 30.09.03 Sainsbury J 0.6 2 52 27.03.04 Schroders 1.1 2.8 70 31.12.03 Scottish & Newcastle19 1.2 4.8 54 31.12.03 Scottish & Southern Energy 0.3 0.3 48 31.03.04 Scottish Power 1.5 7.9 55 31.03.04 Severn Trent 0.7 1.6 68 31.03.04 Shell Transport & Trading* 15 34 144 31.12.03 Shire Pharmaceuticals 0.6 1.8 69 31.12.03 Smith & Nephew 0.9 4 75 31.12 03 Smiths Group 3.8 5.1 55 31.07.03 Standard Chartered* 2.9 8 49 31.12.03 Tesco 0.9 2.7 50 22.02.04 Tomkins 2.1 3.3 53 03.01.04 Unilever** 10 33.1 61 31.12.03 United Utilities 0.5 1 49 31.03.04 Vodafone Group 5 20 55 31.03.04 WPP Group20 5.4 11.2 130 31.12.03 Whitbread 0.6 0.9 61 04.03.04 William Hill 0.2 2.2 64 30.12.03 Wolseley 1.6 4.9 53 31.07.03 Xstrata*21 0.7 9.4 54 31.12.03 Yell Group22 0.6 1.9 56 31.03.04 mmo2 1 2.2 48 31.03.04 Totals 238.7 683.3 * converted from US$ at a rate of 1=$1.82 **converted from euros at a rate of 1=d1.51 NOTES TO TABLE 1. 0.4m in audit fees and 0.2m in non-audit fees paid to other auditors 2. An additional 2.2m in audit fees were paid to another firm. 3. $4.1m of audit fees and $3m of other fees were paid to PwC. Other audit firms received $1m in audit fees and $1.4m in non-audit fees during the year. 4. A further $33m paid to other firms. 5. 5.4m of statutory audit fee was paid to PwC. 6. 0.3m of audit fee was paid to other auditors. An additional 0.9m of non-audit fees were paid to other firms. 7. Amounts paid to other firms amounted to 2.3m. 8. An additional 0.2m was paid to other firms. 9. Company has dual listing and audit fees for Carnival plc are based on allocation of total fees for all entities. 10. 2m of audit fees and 7.6m of total fees earned overseas 11. An additional 0.1m was paid to other auditors. 12. An additional 0.2m was paid to other firms. 13. Pro forma for 15 months to 12 December. Figures are for Granada plc only, not Carlton Communications, which merged with Granada to form ITV in February 2004. 14. For 15 months to 31 Dec 2003. 15. 0.1m of audit fees were paid to other auditors. 16. A further $0.4m of audit fees and $11.7m of non-audit fees were paid to other firms. 17. An additional 0.3m was paid to other firms for audit. 18. A further $1m of audit fees and $5m of non-audit fees were paid to other firms. 19. Fees are for eight months to 12 December 2003. 20. An additional 0.5m was paid to other auditors. 21. An additional $0.4m of audit fees were paid to other auditors. 22. An additional 3.6m in fees paid for the postponed IPO. NOTE ON COMPILATION OF TABLE The survey is based on the latest available annual reports of FTSE 100 companies. The constituents of the FTSE 100 are correct as at 2 August 2004. ITV plc was formed in February 2004 through the merger of Granada plc and Carlton Communications and the new company is yet to produce results, or announce an auditor. We have used the latest available figures for Granada, which was previously a FTSE 100 company. For the 15 months to 31 December 2003, PwC, as auditor of Carlton Communications, received 0.8m in audit fees, 0.2m in audit-related fees and 1.8m in non-audit fees. Survey research and reporting by Liz Fisher.
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