The growth in audit fees for Big Four firms has fallen back significantly to one of its lowest levels since 2010.
Audit fees grew by 1.7% for Big Four firms combined—PwC, EY, Deloitte and KPMG—in 2017–18, compared with 5.7% the previous year, its highest rate of growth in the current decade.
In 2009–10, the year following the financial crisis, Big Four audit income shrank by 2.2% on the previous year.
The latest audit report on key trends in the accountancy profession from the Financial Reporting Council revealed how the UK audit profession has fared over the past year.
Audit and the audit profession has been under close scrutiny since the collapse of construction and outsourcing giant Carillion in January 2018. The government has since ordered a number of reviews looking at the audit market and audit regulation.
The latest report shows that the Big Four rely slightly less now on audit fees from publicly listed companies, even though they now undertake the audits of members of the FTSE 100 index. In 2018 audit fees from listed companies accounted for 19.4% of overall revenues. In 2007, a year before the financial crisis, the share was a quarter of all income.
The figures suggest that the Big Four may be going through an adjustment. Income from non-audit clients has risen to 72.1% of total fees, compared with 68.7% in 2016. In 2007 that figure stood at less than 60%.
Audit in the spotlight
Auditors have been under greater scrutiny since the financial crisis when many observers asked why they had failed to sound the alarm over finances in stricken banks.
The European Union placed the profession under a microscope with a new audit directive implemented in 2016. The directive introduced new reporting responsibilities for audit committees; mandatory audit firm rotation; and restrictions on the non-audit services that could be supplied to audit clients. There was also a cap on the non-audit fees that could be charged to audit clients.
The new rules prompted a movement by clients to new audit providers but witnessed little progress in encouraging new entrants to the audit market for large cap companies.
Further examination of audit followed the collapse of Carillion. The Kingman Review recommended the replacement of the Financial Reporting Council with a new body, the Audit, Reporting and Governance Authority (ARGA) with new powers.
However, Sir John Kingman, author of the report, recently complained that central government seems to have made no progress in pushing the new powers through parliament. Those powers could include ordering an evaluation of an audit committee or even the removal of an auditor.
Elsewhere, the Competition and Markets Authority looked at the audit market, recommending that audit be operationally split from other services. Government is still to legislate on those proposals.
Meanwhile, a further review, by Sir Donald Brydon, is looking at the quality and effectiveness of the audit process itself. He is expected to report later this year.