Is Big 4 dominance a risk to market?

The Financial Reporting Council has once again raised concerns around the dominance of the Big Four in the accountancy space, making financial markets vulnerable if one of these companies failed, writes Chris Biggs (pictured), a partner at Theta Global Advisers. 

He pointed to a recent story in The Times, which revealed the FRC had requested detailed information from firms including Deloitte, KPMG, EY and PWC on their responses to the pandemic and financial resilience.

“The concentration of the FTSE 350 audit market, the limited choice available for these companies to obtain a high-quality audit, and the market’s vulnerability to the failure of one of the Big 4 firms remain risks to market resilience,” the regulator said.

The FRC has also released its 2020 Key Facts and Trends in the Accountancy Profession, in which it has revealed that fees for audit work at the largest UK companies increased in 2019 as audit quality improvements continue to be a major focus. In 2019, the Big 4 audited all of the FTSE 100 companies.  Across the FTSE 350 companies, the Big 4 audited 96 per cent of these firms. They accounted for 99.3 per cent of the £970 million audit fees paid by FTSE 350 companies last year.

However, non-audit work for audit clients declined by 20.8%, the two largest firms outside of the Big 4 audited 10 FTSE 250 companies, increasing their market share from 2017 at 3.2% to 4.8% last year. 

Biggs Said: “There is a huge amount of heightened scrutiny on auditing services, especially of the Big 4, looking at the overall quality of the audit, the role auditors play in terms of legislation and their public perception, and the independence of auditing services. For example, how this is impacted as firms also deliver more lucrative non-auditing consulting services to their audit clients. These new concerns from the FRC once again shine the spotlight on the actions of the Big 4 and it is not inconceivable that further and tougher regulation, particularly in a global economy with President-elect Biden working more closely with the European Union, could be imposed in the near future.”

He suggests clients should minimise the use of their auditors for non-audit consulting services as much as possible. This will reduce actual conflicts of interest, reduce perceived conflicts of interest and increase public confidence both into auditing firms and their clients. 

Although the auditors seem to be reducing non-audit work to their audit clients and are therefore seeing a reduction in non-audit fees received from their audit clients, Biggs stressed much much more needs to be done. He explained: “If this doesn’t change, drastic measures may be taken by supervisors and Governments. We could see audits moving to be the responsibility of government-led bodies. Furthermore, public confidence will not improve and the image will decline.” 

This has led to a situation that could leave the market open to mid-tier and boutique firms challenging the Big 4 for non-auditing services. Many companies are aware of this perceived lack of independence, thus may look beyond the Big 4’s offering, he hoped.