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.