The cost of the annual audit for UK listed companies has risen by 75% over the past five years due to a lack of competition in the audit market and a push for improved audit quality, new research finds.

The increase in audit fees sees the average fee jumping from £397,243 in 2017/18 to £694,083 in 2022/23,according to research by the Quoted Companies Alliance (QCA), an organisation that represents small and medium-sized London-listed companies.

In its report, It Doesn’t Add Up: The Crisis of Unaffordable Audit, the QCA says the true extent of change in audit fees is a rise of as much as 127%. It attributes the leap in audit fees to the decreasing availability of auditors, increased financial reporting requirements and auditing standards, audit firms chasing profits, and fewer auditors entering the profession.

“Quality counts, undoubtedly, and the FRC has made driving up audit quality one of its key focuses for several years now – with notable success. But that focus comes at a cost if it has inadvertently compromised many companies’ ability to invest, recruit, export and, broadly, compete,” says James Ashton, CEO of the QCA.

The report highlights the availability of auditors as a particular concern. The QCA says moves by some audit firms to de-risk in recent years, as they “no longer want to take on companies that have a high level of risk or are particularly challenging to audit” has resulted in some listed companies struggling to find an auditor during audit tender processes.

The QCA also warns that audit firms are struggling to hire and retain newly qualified auditors because of competition from private equity and the technology industry, which typically pay much larger salaries and are more attractive propositions, particularly for newly qualified individuals. The knock-on effect of this talent competition is that audit firms have to pay higher salaries to compete with these industries, which pushes up the cost of audits.

The decreasing availability of auditors is also attributed to the updated regime of auditing of Public Interest Entities (PIEs) and the PIE Auditor Registration process, effective from December 2022, which is seen as onerous by many audit firms.

“The inability to secure an auditor can have serious knock-on effects for companies, and may lead to delays in financial reporting, raising concerns among investors about the transparency and reliability of a company’s financial information,” the report says.

The QCA recommends several measures to improve the current situation, including streamlining audits, enhancing the attractiveness of the industry, evaluating the liability regime and considering a shift from individual to collective accountability; and promoting fee transparency and benchmarking.

Nigel Sleigh-Johnson, Director, Audit and Corporate Reporting, ICAEW, says: “The difficulties some companies now experience in finding suitable auditors is unprecedented – what’s important is understanding the causes, and what needs to be done to improve the situation.” 

The consequences for small and medium sized publicly listed companies, according to the report, is that they are “forced to divert crucial resources away from investment into the business, such as towards research and development (R&D), hindering their growth and innovation”, which has an impact on the wider UK economy.

The QCA found that the average percentage change in audit fees across all markets during the five year period was 127%, with London Stock Exchange Main Market companies seeing an average increase of 149% in audit fees, while AIM companies experienced an average increase of 110% in audit fees.

Companies on the Main Market with a market capitalisation under £500m, on average, are paying more than half a million – £547,000, or 75%, extra – in audit fees, according to the study. However, the report acknowledges that the FTSE 350 are “typically well resourced, have international reach and have the cash available to deal with these increases”.

Sleigh-Johnson says: “It’s good to note that ICAEW’s own investigations, recently published FRC research and the QCA’s report all acknowledge that the regulator has a role to play in making PIE audits more attractive, as well as the firms, professional bodies and government.”