August 20, 2020
Fees Paid to Auditors by FTSE 100 Companies Reach £911m as Audit Firms Respond to FRC’s Calls to Raise Prices, shows Thomson Reuters study
Decision to separate audit practices of the Big 4 expected to accelerate investment in audit technology.
LONDON, August 24, 2020 – Fees paid to auditors by FTSE 100 companies reached £911m in 2019, up from £892m in 2018*, as audit firms and corporates respond to calls from regulators to invest more in audits, shows new research by Thomson Reuters.
The Financial Reporting Council (FRC) has urged audit firms to raise prices and invest more time and money into core audit work, to ensure that this is carried out to the highest possible standard.
The FRC call for the separation of audit practices, within the Big 4, is expected to add to upward pressure on audit fees as audit practices seek to become self-supporting business units. The FRC has instructed the Big 4 to separate their audit functions from their other practice areas by 2024. The firms must outline to the FRC how they plan to do this by October 2020.
The FRC, has been concerned that accounting firms may be using audit work as a loss leader**, deliberately undercharging clients. By offering audit services at low prices, firms were able to win contracts by undercutting competitors and then cross-selling more lucrative tax and consulting services.
The value of non-audit fees paid by FTSE 100 companies to their audit firm dropped 12% last year from £107m in 2019 to £94m in 2018 as audit firms sought to reduce cross-selling to audit clients.
The regulator has placed a cap on non-audit fees to force auditors to devote greater resources into core audit work and reduce the perception of possible conflicts of interest.
Audit firms have been ramping up their investment in technology
To improve the quality of audit work, audit firms have significantly increased their investment in technology. This technology has enabled auditors to analyse much larger data sets, more quickly identify informational outliers and enhance their ability to identify risks.
The Big Four last year announced that they would be investing billions of dollars into AI and data analytics products to improve the quality of the services it offers, including audit work. This investment will also facilitate audits whilst social distancing remains in place following the coronavirus pandemic.
Brian Peccarelli, chief operating officer, Customer Markets at Thomson Reuters says: “Audit firms have responded to regulatory pressure by making substantial investments in new technologies to ensure that audits are carried out to the highest standard. Rising audit fees show that FTSE 100 companies and their shareholders clearly believe it’s worth paying extra for quality work.
“This enables accounting firms to dedicate more time and attention into auditing companies’ accounts, reducing the risk of errors.
“The separation of Big 4 audit practices is going to accelerate that adoption of audit technology as firms look to lower their cost base whilst improving performance.
“However, a natural desire by corporates to reduce their costs during the current coronavirus economic slowdown may create a challenge to deliver higher quality audits without fees rising too quickly.
“With ARGA set to replace the FRC auditors will be further seeking to improve the rigour of their audit work. ARGA will have greater powers than its predecessor, including the ability to make direct changes to companies’ accounts and investigate directors. Firms are keen to show they’ve learnt from previous mistakes.”
*Based on an analysis of FTSE 100 companies’ annual reports
** December 17, 2019 FRC’s revision of its Ethical Standard and Revised Auditing Standard, https://bit.ly/2RzWr5I
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