We are delighted to introduce Jeremy Newman, of accountants and business advisors BDO Stoy Hayward, who gives his expert view on the UK audit market

Concentration in the audit market is directly linked to higher audit fees, according to a new report that we commissioned from the London School of Economics.

The research 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’.

The report reveals that the reduction from the ‘Big Five’ to ‘Big Four’ firms in 2002 prompted an increase of 2.4% in the average audit fees paid by listed companies when other factors, such as changes in regulation, were 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 during the period 1998 to 2006.

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 about 7% in the annual audit fees paid by UK companies.

At present, all FTSE 100 companies are audited by one of the ‘Big Four’ and only 3% 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 from further concentration in the market.

The research reveals that there is a real cost of high market concentration among auditors, and that the current market structure needs to change. 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. This must be a cause for concern for all those involved in this industry – the accountancy profession, investors, regulators and listed companies alike.

I 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, says: “While previous studies have looked at the relationship between market concentration and audit fees, we believe 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.”

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