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The research, commissioned by accountants and business advisers BDO Stoy Hayward and conducted by the London School of Economics, assesses the consequences for investors, companies and auditors if another big audit firm were to leave the marketplace and the so-called ‘Big Four’ auditors were to become the ‘Big Three’.

It also highlights the potential benefits of increased choice of audit firms.

The report reveals that the reduction from the ‘Big Five’ to ‘Big Four’ firms in 2002 prompted an increase of 2.4 per cent in the average audit fees paid by listed companies when other factors such as changes in regulation are excluded.

The report uses parametric methods to analyse the impact of market concentration and auditor switching on annual audit fees paid by large (listed and private companies) in the UK from the period 1998 to 2006. Audit fee growth has continued every year since then.

The research also shows that a drop of just 10 percentage points in the market share currently held by the ‘Big Four’ could lead to a fall of around seven per cent in the annual audit fees paid by UK listed and private companies.

At present, all FTSE 100 companies are audited by one of the ‘Big Four’ and only three per cent of FTSE 350 companies are audited by another firm.

The Financial Reporting Council is continuing to monitor this issue and established the Market Participants Group (MPG) in October 2006 to provide advice on market-led actions to mitigate the risks that could arise in this event.

Jeremy Newman, managing partner at BDO Stoy Hayward, says that the research reveals there is a real cost of high market concentration among auditors, and that the current market structure needs to change.

He adds that it also highlights the potential impact of another firm leaving the marketplace and the need to act now to mitigate this.

“At present, the audit market is not adequately prepared to cope with the departure of another major firm from the marketplace and this must be a cause for concern for all those involved in this industry – the accountancy profession, investors, regulators and listed companies alike,” Newman says.

He says he suspect that if data were available, we would see a similar issue with regard to non audit services.

Dr Mariano Selvaggi, researcher at the LSE, added that previous studies looked at the relationship between market concentration and audit fees.

“We believe, however, that this research raises new concerns about the current market structure in auditing services. Our findings have important implications for the future evolution of the UK audit market,” he concluded.

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Related links 

• BDO Stoy Hayward