The Financial Reporting Council (FRC) has claimed, once again, that it could take “considerable time” for the UK to build a more balanced, well-functioning audit market, reflecting its views in 2022.

In the latest edition of its annual Audit Market and Competition Developments Update, the watchdog notes that challenger firms have increased their share of FTSE 350 audit engagements between 2022 and 2023, from 11% to 13%.

Total public interest entity (PIE) audit fees earned by UK firms last year came to £1.4bn – a 27% increase compared with 2022. Growth in audit fees was in fact higher than the growth in non-audit fees, bucking the trend in recent years. Some 94% of that revenue came from FTSE 350 audits. The Big Four – Deloitte, EY, KPMG and PwC – earned 98% of FTSE 350 audit fees in 2023, and 90% of fees across the broader PIEs’ spectrum. 

In the course of last year, 23 FTSE 350 corporates changed their auditor, with 20 of them switching from one Big Four firm to another. The report shows a marginal increase in companies switching from a Big Four to a non-Big Four firm from 2022 and 2023. 

Notably, the market share of non-Big Four firms has increased across the five years from 2019 to 2023, albeit from an initially low base, building from 4% of the market to a much more substantial 13%. The absolute number of listed and PIE audits conducted by challenger firms has also increased significantly. For example, BDO has conducted more audits across the main listed and AIM markets than any other UK audit firm since 2020. 

The report notes that its publication marks five years since the landmark statutory audit market study conducted by the Competition and Markets Authority. As such, it suggests, it provides a good opportunity to consider “what has happened in the audit market in recent years, and the FRC’s approach to competition”.

Diversification within the market

Of the various types of PIE audits, the market for audits of ‘other listed equity’ entities has diversified significantly compared with other PIE segments. The number of firms providing audits to other listed equity companies has steadily increased since 2019, while other segments have remained steady.

In its report, the FRC expressed concerns over firms’ capacity to deliver audits, a widening gap in audit quality between the largest firms and the rest, and concerns among some companies about rising fees and difficulties with finding an auditor. In the FRC’s view: “We need a pragmatic and responsive approach to these issues that adapts to these new challenges.”

The FRC believes that smaller audit firms must grow their capacity and capability to deliver good-quality audits, and has promised to continue to work with audit firms – including smaller ones – through its Scalebox initiative to help them improve. “We want to see sufficient choice of audit firm across the whole audit market,” it says.

Heavily entrenched

The FRC’s focus on the whole market means that the primary aim of its competition policy is not to grow another firm to rival the Big Four, outlining how difficult it would be to achieve. “Forming a firm with a size, by PIE audit fee income, to that of the smallest of the Big Four (EY) is the equivalent to combining the next eight largest audit firms.”

It is the FRC’s view that it will take time to realise significant changes in the audit market, particularly at its top end. “The existing issues are deep-seated and the market structure is heavily entrenched. It will take time – perhaps some considerable time – to realise a well-functioning audit market. Large audit firms operate internationally and their focus will vary in line with wider developments.”

The regulator is encouraging a cross-system approach to ensure greater choice for corporate clients, opportunities for auditors entering the workforce and resilience for the market as a whole. 

Nigel Sleigh-Johnson, ICAEW’s Director, Audit and Corporate Reporting, says: “Encouraging as it is to see the continued growth of challenger firms in the PIE audit market, more needs to be done, including by the FRC itself, to make that market less unattractive to new entrants – especially in the light of the the likely increase in the number of PIEs.” 

In a statement, FRC CEO Richard Moriarty said: “Access to quality audit is a key enabler for economic growth. While the Big Four continue to dominate the market for the audits of the largest UK businesses, in the past 12 months other audit firms have successfully grown their businesses and they are now taking on more complex audits. This report underscores our commitment to ensuring the whole market works as effectively as it can.”