The market for large company audits remains “highly concentrated”, according to watchdogs, who pledge to continue working for audit market “choice”.

The report comes just weeks after the government declined to include an audit reform bill in the King’s Speech that could have introduced “managed shared audit”, a process that would allow a small firm to work alongside a larger firm.

The Financial Reporting Council says its review of competition in the audit markets shows that 98% of FTSE 350 audit fees are earned by the Big Four audit firms —PwC, KPMG, EY and Deloitte.

Mark Babington, the FRC’s executive director of regulatory standards, says: “A resilient, competitive audit market focused on quality is essential to rebuild trust and confidence in corporate Britain.

“While there have been some positive steps, 98% market share for the Big Four leaves little room for challengers to emerge, while maintaining high standards of audit quality.

“The FRC will continue to collaborate across the whole system to develop the conditions for an audit market that balances, quality, innovation, resilience and trust choice.”

In contrast, the Financial Times recently reported the newly appointed FRC chief executive, Richard Moriarty, is “relaxed” about the Big Four’s dominance of the audit market.

The FT quoted Moriarty saying: “I certainly wouldn’t see it as failing. I would ask myself: are they good audits? Are they effective?” The FT added that Moriarty said competition was “desirable” but “a means to an end rather than an end in itself”.

A fairer share

Competition in the audit market was a key issue in the reform of audit following the collapse of Carillion in 2018. At the time, the government commissioned the Competition and Markets Authority (CMA) to examine audit. The CMA proposed “joint audits” but the government said in a 2021 white paper that it would push ahead with “managed shared audit” (a strict definition of which has never been offered).

However, managed shared audit would require primary legislation to mandate it—law that was absent from the King’s Speech.

That is not to say nothing has been done about audit competition. The FRC has finalised a new set of minimum standards, which call on audit committees to ensure they “must not preclude the participation of challenger” audit firms from pitching for audits “without good reason”.

It adds: “To support this, audit committees should ensure companies should have a sufficient number of potential auditors that are independent or capable of becoming so in order to allow for adequate competition and choice in subsequent tenders.”

However, to enforce the standards, the FRC requires new powers and they too were expected in legislation that is yet to materialise.

Audit competition is a long running issue. Investors and non-executives alike worry about the potential loss of one of the Big Four and the conflicts of interest that would proliferate in the audit market. At least one non-exec tells Board Agenda they were perturbed by Richard Moriarty’s recent comments. However, regardless of the FRC’s work so far, competition remains, at best, half finished.