By Jessica Tasman-Jones
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards
Audit fees are on the up. Last month chief financial officers at many FTSE 100 companies wrote a letter, seen by the Financial Times, to Big Four firms complaining about the rising costs of audits.
“At this time of increasing cost pressure on big business we should not be expected to pick up the escalating costs within service company supply chains through further price increases,” it said.
The implementation of new international auditing standards is one of the main factors affecting UK fees this year, says Alex Russell, head of audit and assurance strategy at the Institute of Chartered Accountants in England and Wales, a professional body.
But other factors – such as talent shortages and inflation – are also playing a part. And future reforms, including proposed shared audits, could push costs even further.
The average UK audit fee was 0.18 per cent of revenues for listed companies with incomes greater than €10m in 2020, according to a survey published last year by the International Federation of Accountants. That is up from 0.14 per cent of revenues in 2019.
“The accounting industry is facing a number of additional upward cost drivers in markets globally, and there is an expectation that fees will rise because of this," says Catherine Burnet, head of UK audit at KPMG.
Inflationary pressures around staffing costs and recruitment are driving some of the increases, she explains. Revised guidance from The International Audit and Assurance Standards Board will also add between five and 20 per cent to base costs, Burnet estimates.
In the UK, the Department of Business, Energy and Industrial Strategy is also working on its audit and corporate governance reforms. As part of these, the UK audit industry is preparing for a new regulator, more scrutiny of internal controls, a wider definition of public interest entities and managed shared audits for FTSE 350 companies scrutinised by Big Four firms.
Many large companies that operate internationally are likely to already meet some of the requirements of impending UK audit reform. But companies which do not yet have sufficiently sophisticated controls will face higher fees as these audits require more work and present greater risks, says BDO managing partner Paul Eagland.
Managed shared audits are also likely to drive up fees, adds Eagland. Indeed BEIS estimates suggest the cost of shared audits could reach about £1bn over 10 years – although previous predictions put this figure at £210m.
Various fee arrangements and services offered make it difficult to determine how this will feed through to fees for corporates. And it is too early to tell what impact most audit reforms will have on fees as legislation is still being drafted, says Russell.
While quality is more important than cost, audit committees should probe fee increases so they understand what is driving them – including the unique factors associated with their business and wider trends.
Audit committees can push back against the reasons auditors give for rising costs; professional services firms are very profitable even as they complain about the price of compliance. The Big Four's total global revenues grew to $190bn in their most recent statements, up from $167bn in 2021. Average PwC partner pay in the UK hit £1m for the first time in 2021.
Audit committees should also be clear about which services are required to meet regulatory requirements when examining fees. The amount of information in the front-end of reports is increasing, often under the advice of professional services firms, but is not always necessary, experts say.
This article is based on a story written for Agenda by Frederic Lee