Jessica Fino 10 Sep 2018 11:21am

Regulation forces up FTSE 100 audit fees

FTSE 100 audit fees have risen to almost $1bn in the last 12 months, with PwC gaining most

The 10% increase to $935m (£723m) has been caused, in part, by the introduction of new regulation, such as mandatory rotation, according to research from Source Global Research. However, the regulation has failed in its aim of reducing the dominance of the Big Four.

PwC achieved the highest average audit fee per client for the FTSE 100 at £10.7m and globally $14m (£10.8m).

The Big Four firm also has the most audit clients out of the 405 global companies analysed in the report. It audits 34 FTSE 100 companies, collectively charging fees of £363m.

Despite efforts to increase competition at the top of the UK market by introducing mandatory rotation, the research found competition continues to sit almost exclusively with the Big Four.

While clients and auditors agreed that the market is becoming more competitive, one third of UK respondents said there is not enough choice in the audit market. However, eight out of 10 global respondents said there was enough choice.

Respondents also said audit quality has improved since mandatory rotation was introduced, as it forced them to take a fresh look at their needs.

Edward Haigh, director of Source Global Research, said, “Given that competition is increasing, one would expect fees to fall. But average fees are actually moving up at this very high end of the market.”

“Regulation isn’t really achieving what it is set out to achieve. Competition remains between the Big Four, and this is having the unintended consequence of pushing up fees—in part because these firms are spending much more time pitching for work.”

Haigh predicts companies like Google or Amazon could enter the audit market.

“It’s not difficult to imagine that, with their vast resources and deep data & analytics know-how, these new market entrants could deliver high-quality real-time auditing that would force all players to up their game,” he added.

Source Global Research interviewed a total of 405 listed companies from the US, UK, France, Germany, South Africa, Australia, China and Singapore.

According to Adviser Rankings’ latest quarterly market auditor client rankings released last week, the reshuffle of FTSE 100 clients has reduced PwC from outright leader of the pack to joint first place with KPMG and Deloitte.

In the past three months, PwC has won the audit of Johnson Matthey but lost BT, Legal & General, and GlaxoSmithKline, while KPMG has acquired BT, Legal & General, Smurfit Kappa and Reckitt Benckiser and lost Johnson Matthey, BAE Systems and Rolls Royce Holdings.

Deloitte meanwhile has added Old Mutual, BP, BAE Systems and GlaxoSmithKline to its client list and lost none.

However, PwC still has a comfortable overall lead by total client market capitalisation (£1,812.1bn compared to second-placed KPMG at £1,205.6bn). It also retains its grip on FTSE 250 audits with 73 clients, compared to KPMG’s 64, Deloitte’s 62 and EY’s 43, and leads the small cap/fledgling market with 94 clients.