The Financial Reporting Council (FRC) is hoping a series of market studies will generate information and proposals for improvement to help increase competition in the UK’s audit market for public interest entities (PIE).
A new report providing an updated overview of competition in the space showed that while there was a small increase in market share for challenger audit firms, the audit market remains highly concentrated.
The Big Four accounting firms – Deloitte, EY, KPMG and PwC – continue to dominate, earning 98% of FTSE 350 audit fees in 2022.
This results in “limited choices for businesses and ongoing concerns about resilience”, the FRC said.
The market studies, essentially in-depth investigations, will be a key focus for the FRC in 2024. The aim will be to “generate proposals to improve the way the market functions with particular regard to better choice and resilience”, the FRC said.
This will allow the body to explore issues relating to the audit market in more detail, “generating more granular information about areas of concern and suggested actions to address them”.
The FRC also stressed the importance of continuing to collaborate across the whole system to improve conditions in the audit market.
The FRC’s report, which was published yesterday (13 December), also showed that audit fees increased between 2021 and 2022. Total PIE audit fees increased by 8% to £1.1bn and total FTSE 350 audit fees increased by 13%.
While some FTSE 350 companies switched from a Big Four audit firm to a challenger audit firm, the proportion of FTSE 350 companies making such a switch was lower in 2022 than in 2021.
The largest audit firms continued to earn a greater proportion of their income from non-audit clients than from audit clients in 2022, although growth in audit income at the largest challenger firms outpaced growth in non-audit income.
Last week, the FRC criticised the ‘completely unacceptable’ audit backlog in local government in a separate report, stating that the backlog was restricting the effectiveness of local audit quality monitoring.
Over the past year, and with a focus on addressing concerns in the quality of PIE audits among smaller firms, the FRC said it had pursued a range of initiatives targeting different aspects of market competition.
These include publishing a standard for audit committees in relation to their role on the external audit; launching the FRC’s audit firm ‘scalebox’ to assist smaller firms’ entry and expansion in the PIE audit market; and exploring barriers to growth for smaller audit firms.
The FRC also explored developments in the market for the assurance of sustainability (ESG) reporting; undertook a sandbox initiative on component audit firms’ role in tendering and delivering large audits; and conducted in-depth research on smaller audit firms’ views on the PIE and non-PIE audit markets.
Another strand of work included monitoring the large firms’ implementation of operational separation of their audit and non-audit practice.
Mark Babington, the FRC’s executive director of regulatory standards, said: “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 true choice.”
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