The ratio of non-audit fees to statutory audit fees that FTSE 100 clients pay their Big Four auditors may well be steadily declining, but investor groups are not relaxing yet.

Although the Big Four have almost halved the non-audit fee income they rake in from FTSE 100 audit clients in the last two years (down from 636m in 2001 to 348m in 2003), it is still nearly one and a third times that from statutory audit work (263m). The decline is more than welcome, but investor groups fear that these consultancy work levels still have the potential to compromise auditor independence.

Multiple concerns

The real worry is not so much the average figures for non-audit revenues, which are heading in the right direction as far as investors are concerned, but certain specific companies which pay their auditors several times more for their non-audit services than the actual statutory audit.

BP, for instance, paid its auditor Ernst & Young 9.9m for its statutory audit last year but 20.9m for non-audit work, plus another 9.9m for audit-related work. In fact, the oil company accounted for almost half E&Y's total non-statutory audit income from its 16 FTSE 100 audit clients (69.7m).

In addition, British Sky Broadcasting's non-statutory audit fees (7m) to Deloitte were nearly nine times that for its statutory audit (0.8m).

For more examples, see the table on p32.

Concerned about the potential threat to auditor independence, investor group Pensions Investment Research Consultants starts from the very black-and-white position that auditors should do no more than audit work for audit clients.

'The question is how do you define statutory audit?' asks PIRC's corporate governance policy manager, David Somerlinck. 'The problem is that in the notes to the accounts, shareholders tend not to get enough information about what work is actually being done.'

Transparency is key

Transparency certainly seems to be the key concern of the investor bodies.

The National Association of Pension Funds (NAPF) says if non-audit fees comprise more than 20% of the audit fees (as they do for virtually all the FTSE 100), company annual reports should include an analysis of the principal areas of non-audit fees.

NAPF director David Gould admits: 'There are often perfectly good reasons why accountancy firms may earn higher fees for non-audit work than for audit work.

'The important thing is that those costs are properly and clearly set out in companies' annual reports and accounts, allowing share-holders proper scrutiny.'

The Association of British Insurers (ABI) emphasises the responsibility of audit committees to monitor the relation between audit fees and consultancy work.

'We believe that audit committees have been paying closer attention to this and it is good to see the volume of consultancy work going to auditors dropping,' says ABI's head of investment affairs Peter Montagnon. 'But consultancy fees are still high and this indicates a need for continuing vigilance.'

Indeed, the ABI is opposed to the introduction of an audit liability cap, much longed for by the Big Four, partly because it believes this would make it easier for large firms to underprice audit in order to gain access to consultancy work.

'That in turn would reduce the incentive for smaller and medium firms to develop their audit services, thereby compounding the shortage of competition in this market,' says Montagnon.

The investor bodies point out that the Big Four can still of course pitch for lucrative consultancy work from non-audit clients. Pricewaterhouse-Coopers may have the lion's share of FTSE 100 audit clients with 43.5 in all, but this still leaves a substantial 56.