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FRC market snapshot: audit fees up, consultancy fees down

19 October 2020: The Big Four’s audit fee income rose at a record pace in 2019 but fees made consulting for audit clients dropped, according to new statistics released by the regulator on Friday.

The Financial Reporting Council’s (FRC) 2020 Key Facts and Trends in the Accountancy Profession (KFAT) revealed fees for audit work at the largest UK companies increased by 7.1% to £2.3bn.

The rise outstrips the 1.7% increase from the previous year, coming as the Big Four navigate a tougher regulatory environment.

Deloitte, KPMG, EY and PwC must split their consulting and audit arms by 2024 to strengthen competition, improve the quality of audits and reduce conflicts of interest. In what it called a “positive market shift”, the FRC found that the forced separation is already having an impact, with a 20.8% drop in the amount of fees the firms made consulting for audit clients. 

The regulator said the fall reflects the application of a non-audit services fee cap for public interest entities for the first time.

“The latest data across the firms reveals some welcome market developments as the FRC continues to drive audit quality improvements,” said the FRC’s executive director of supervision, David Rule. “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.”

Further shifts outside the FTSE 100

From a competition perspective, the Big Four continued to audit the entire FTSE 100 in 2019. 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.

Evidence of further shifts in the competition landscape are being observed, as challenger firm BDO, the UK’s fifth-largest accounting firm, now audits the highest number of listed UK companies.

BDO audits 310 listed firms, up from 274 last year. PwC is in second place with 307 London-listed clients, a drop of 46 from the previous year.

The FRC trailed sections from its findings earlier in the week, with a reminder to the profession that it must do more to increase diversity in top roles.

For the first time in five years, women now make up 50% of all students at the professional bodies and 37% of members, the FRC said. But at the largest firms, less than a fifth of partners are women, unchanged from 2018.

The FRC said it was encouraged to observe women now make up 56% of manager roles at smaller firms.

The statistics showed Black, Asian and Minority Ethnic (BAME) individuals only made up 6.7% of partner roles at the largest firms. However, no firms with under 200 employees reported that they had BAME managers.

In comparison, the data for the previous year found over 3% of the smallest firms had BAME employees at this level.

Fire up the ARGA

The document may be the final such look at trends and statistics carried out by the FRC as it is set to be replaced by a new watchdog, the Audit, Reporting and Governance Authority (ARGA), although no date has been set for the switch. 

Overseeing the final operations of the regulator will be interim chairman Keith Skeoch, the former chief executive of asset manager Standard Life Aberdeen, who was confirmed in the role by the government last week.

Skeoch replaces former chairman, Simon Dingemans, who quit the role in August.

[CTA] You can watch the Financial Reporting Council’s Jon Thompson in conversation with ICAEW Chief Executive Michael Izza, where they discuss the drivers for and progress in audit reform, the attractiveness of the profession and the challenges of COVID-19.