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Audit market continuing to open up, says FRC

Author: ICAEW Insights

Published: 09 Aug 2022

Five largest challengers outside the Big Four are pushing ever further into the FTSE segment, says regulator’s latest roundup of trends in the accounting profession.

Competition between the Big Four auditors and their challenger rivals is intensifying, according to new figures from the Financial Reporting Council (FRC).

In the latest edition of its annual Key Facts and Trends in the Accounting Profession report, the watchdog notes that, in 2021, the five largest audit firms outside the Big Four – Grant Thornton, BDO, PKF Littlejohn, RSM and Crowe UK – audited a total of 23 companies on the FTSE 350, compared to 19 in 2020 and just 10 in 2019.

Published on 5 August, the report shows that, in percentage terms, those five challengers audited 10% of FTSE 350 companies last year, compared to 7.6% in 2020. Meanwhile, away from both the Big Four and the five largest challengers, MHA MacIntyre Hudson audited two clients on the FTSE 250 in 2021.

Income boost

Of arguably even greater significance for illustrating the challengers’ progress were the figures on fees. Last year, the Big Four saw a rise in total fee income of 4.6%, compared to 2.7% in 2020. But outside the Big Four, auditors enjoyed a 5.9% rise in total fee income, building on 2020’s jump of 13.1%.

In the specific field of fee income for audit, excluding other types of services, the Big Four reported a rise of 6.5% for 2021, building on 7.9% for the previous year. Outside the Big Four, though, firms boosted their audit earnings by 12.5% – maintaining a strong growth trend following 2020’s surge of almost 21%.

However, news was rather less positive for challengers in the field of non-audit work. While 2021 fee income for non-audit tasks rose by 10.3% among the Big Four – a welcome bounce from a 2.2% reduction in 2020 – non-Big Four firms saw a decline of 6.8% last year, wiping out a 6.1% rise of the year before.

Quality and choice

On a big-picture level, the report showcases a number of encouraging signs on the overall health of the accounting profession – particularly in terms of growth and intake. Based on data from the six chartered accountancy bodies of the UK and Ireland – together with the Association of Accounting Technicians and Association of International Accountants – the FRC notes that their combined worldwide membership grew by 2.8% between 2020 and 2021, and at a compound annual growth rate of 2.7% from 2017 to last year.

In the half-decade up to the end of 2021, ICAEW’s member and student numbers have experienced consistent year-on-year growth, and the organisation has by far the largest total membership of the eight professional bodies.

Across the associations, global student numbers grew by 1.6% from 2020 to 2021, improving on a 2.7% decrease between 2019 and 2020. Between 2017 and 2021, the bodies increased their student numbers at a compound annual growth rate of 0.3%. In the UK and Republic of Ireland, total student numbers bounced back from a 2.1% decrease for 2019 to 2020 to a 0.3% rise up to the end of 2021.

Commenting on the report, ICAEW Managing Director, Reputation and Influence, Iain Wright said: “We’re pleased to see that the audit market is shifting and opening up, but the focus must remain on improving quality, while assuring investors and other stakeholders that the UK is still the best place in the world to do business.”

Wright noted: “While it’s desirable that more firms enter the market for larger and complex audits – and are supported to do so – it is equally important that firms are not discouraged from retaining or taking on high-risk audits.”

He added: “At a time of economic uncertainty, the accountancy profession is an asset for the UK economy, and our solid membership growth, more competition and choice in the audit market and strong UK student pipeline are positive signs.

“We hope the regulator will continue to work with the profession to support the improvements needed to drive up quality, choice and resilience in the market.”

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