Challenger audit firms appear to be making headway against their Big Four rivals in the UK, a sign that the audit market may be slowly diversifying, following much public concern.

Figures from the Financial Reporting Council (FRC) show that the challengers’ share of the FTSE 350 audit market has grown from 11% in 2022 to 13% in 2023—not a vast increase, but enough to suggest the firms have gained a foothold.

The figures come at a time when audit committees and auditors await news of reforms which could introduce measures to increase competition in the audit market.

However, this week regulators declared they are not in the business of trying to expand the Big Four firms—PwC, KPMG, Deloitte and EY—to a “Big Five”.

Richard Moriarty, chief executive of the FRC, says: “Whilst the Big Four continue to dominate the market for the audits of the largest UK businesses, in the last 12 months other audit firms have successfully grown their businesses and they are now taking on more complex audits.”

Audit forms a critical component of corporate governance but there have been long-standing concerns that the audit market does not have enough major players to avoid conflicts of interest should another big firm go out of business.

There are also concerns that the small number of major audit firms could contribute to poor audit.

Rising fees

Accordinf to the latest FRC figures, audit fees have risen sharply too. The FRC says last year audit firms earned £1.7bn from ‘public interest entities’, or PIEs, up 27% on 2022. For the FTSE 350, total audit fees rose 14% to £1.3bn, accounting for 94% of all PIEs fees.

The regulator adds there have been complaints about the price of audit but costs are likely driven by dealing with accounting standards, wage inflation and the need to invest in new technology. “We have been exploring the extent of increases in audit fees and what is doing these increases, and we will continue to monitor closely,” the FRC says.

Competition remains a key issue, however. In 2019, the Competition and Markets Authority published a study of the UK audit market in which it advised the then government to introduce mandatory joint audit—two firms splitting audit field work and sharing work on “highly material” elements of audit.

The joint audit would, the CMA said, give challenger firms “greater opportunity” to win more audit work and diversify the market.

Even so, despite years of discussion, ‘joint’ audit has yet to be implemented, while the focus of reform shifted to the previous government’s preference for “managed shared audit”, an option which ostensibly remained undefined.

Reform on the agenda

The current government has pledged to push ahead with audit reform. In a recent House of Lords debate, government minister Lord Leong indicated work was underway on measures to strengthen the audit market as part of a forthcoming audit reform and governance bill.

“There are complex choices involved and we expect extensive engagement on these issues,” he said.

It remains unclear when the government will publish a draft bill.

The FRC says audit quality has been improving but concludes the market, though shifting in some ways, has seen “no significant changes since the CMA study”.

The FRC, in its latest report, says it is “not aiming to create a ‘Big Five’” group of audit firms. “Growing a firm to rival the Big Four would be very difficult to do,” the FRC says, noting that it would be the equivalent of combining the “next eight largest audit firms” outside the top four.

It adds that it will “take time” to change the audit market significantly. “The existing issues are deep-seated and the market structure is heavily entrenched.”