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Challenger firms struggle to dent Big Four’s audit dominance

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The Big Four’s domination of the audit market has left little room for challenger firms to break through and make a dent in the accounting powerhouses’ 98% market share.  

14th Dec 2023
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The accounting watchdog’s annual review of competition in the audit market for public interest entities (PIEs) has emphasised the domination the Big Four has over audit. 

The report by the Financial Reporting Council (FRC) found that despite some growth from challenger firms in 2022, the Big Four audit firms still commanded 98% of FTSE 350 audit fees, in addition to 90% of PIE audit fees. 

The report highlights that any inroads made by the challenger firms have been minimal, with the Big Four’s market share only falling by 1% compared to 2021.

PwC still leads the audit league table. In 2022, the Big Four firm had 26% of the share of PIE audit fees, although that number fell from 29% in 2021. Deloitte was on the silver podium with 24% of market share, which was unchanged from the previous year. KPMG’s share dipped from 22% in 2021 to 20% in 2022, while EY was the only Big Four firm to grow its share, moving from 17% to 20%. 

Audit firms' share of PIE audit fees in 2021 and 2022
KFAT Reports 2021, 2022 | FRC annual review of competition in the audit market

While some of the Big Four firms saw a small erosion in their market share, the gulf between the audit haves and have nots remained as vast as ever. The closest challengers to Big Four’s audit dominance were BDO and Mazars with 4% of the market share each, while all the others were left to scrap over 2% of the remaining PIEs. 

The value of the pie that the Big Four is mostly consuming also increased in 2022 compared to the previous year, with UK audit firms earning £1.1bn - up 8% against 2021’s total. This increase was mostly driven by FTSE 350 audit fees, which accounted for over two thirds of the PIE audit fees. 

The FRC raised concern in the report that the highly concentrated market has resulted in limited choices for businesses and further underlines concerns about resilience. 

“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," said Mark Babington, FRC’s executive director of regulatory standards.

Glacial audit overhaul

The Big Four’s dominance of the audit market has been a point of contention ever since the high-profile collapses of Carillion, BHS and Thomas Cook. 

The Big Four has recently been at the wrong end of some large fines. Last year, the regulator dished out £40m in audit fines, with KPMG taking the lionshare of these. KPMG was also the recipient of a record £20m fine for providing false and misleading information and documents during the two audits of Regenersis and Carillion.  

Efforts to reform audit have moved at a glacial pace. The government set out plans to shake-up the sector in 2022 and promised to tackle the Big Four’s dominance. However, this overhaul has been further delayed after it was omitted from the King’s Speech in November, pushing any further movement until after the General Election.  

As a result, the long-awaited replacement of the FRC, the Audit Reporting and Governance Authority (ARGA), is kicked again into the long grass.

After being criticised as “toothless”, the FRC pointed out in the report that it has started to address the concerns of smaller firms, and has pursued a range of initiatives to promote competitiveness in the audit market. 

These include publishing a standard for audit committees, exploring developments in the market for the assurance of sustainability and undertaking research into smaller views on the PIE and non-PIE audit market. 

The FRC also highlighted its new audit firm scalebox initiative which assists smaller firms’ entry and expansion in the PIE audit market and exploring their barriers to growth. In the year ahead, the accounting watchdog said it intends to investigate the way the market functions with better choice and resilience through market studies. 

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By FactChecker
14th Dec 2023 19:57

Whatever happened to the (old) claim from the big 4 that Audits were loss-leaders ... in which they weren't particularly interested as all the profitable income comes from 'consultancy'?

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