THE Big Four accountancy giants have maintained their stranglehold on the biggest audits according to a report which will likely stoke calls for the Government to do more to boost competition in the sector.

The regulator found the four members of the grouping – Deloitte, EY, KPMG and PwC – audited all the members of the FTSE 100 elite for the third year running in 2020.

The Financial Reporting Council found that so-called challenger audit firms increased their share of FTSE 250 audits, to 7.6 per cent, from 4.8%.

Chief executive Sir Jon Thompson said it was encouraging that challenger firms had increased their share of the audit market covering the biggest 350 FTSE members.

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However, noting that increase came from a low base, he observed: “It is clear the Big Four continue to dominate the FTSE audit market.”

The report comes after the failure of giants such as BHS and Carillion led some people to question the value of audits and provoked calls for a shake-up of the market.

Sir Jon noted: “Improving competition across the audit market and ensuring audit firms focus, above all else, on delivering high-quality audit is essential to improving trust in audit and corporate governance and remains a key priority for the FRC.”

The Government unveiled proposals to shake up the financial reporting and audit regimes in a White Paper published in March, which it said would help boost confidence in audits and in big business generally.

However, critics said the proposed reforms did not go far enough. The Government has yet to introduce legislation to implement the proposals.

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In the White Paper ministers resisted calls for compulsory joint audits of FTSE 350 firms but proposed that smaller players be given some of the work involved under a “managed shared audit” requirement. The Big Four could also face a cap on their market share of FTSE 350 audits if competition in the sector failed to improve.

HeraldScotland: Financial Reporting Council chief executive Sir Jon ThompsonFinancial Reporting Council chief executive Sir Jon Thompson

Auditors will also be required to take account of a much wider range of information in reaching their judgements. A new regulator, the Audit, Reporting and Governance Authority, will have power to look at the actions of auditors and directors and be able to require that corrective action is taken relatively quickly.

The report by the FRC underlines how lucrative the audit market covering big firms classed as public interest entities has been for big accountancy firms amid the challenges posed for businesses by the fallout from the coronavirus crisis.

Big Four firms audited 1,267 public interest entities last year, and billed around £2.5bn related fees.

The FRC found audit fee income for the Big Four firms increased by 7.9% from 2019 to 2020 compared with 6.9% from 2018 to 2019. Total fee income, which includes work in areas such as corporate finance, increased by only 2.7% in the latest year, compared with 7.1% in the preceding period.

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Audit fee income for audit firms outside of the Big Four increased by 20.3% from 2019 to 2020 against 2.2% from 2018 to 2019. Total fee income increased by 13.1% in the latest year, after falling by 0.1% in the preceding period.

PwC was the biggest player in the market in the latest year. It audited 424 public interest entities and earned £754 million related fees.

BDO led the ranking of firms outside the Big Four. It audited 171 public interest entities and earned £246m fees in the process.

Among firms with headquarters in Scotland Johnston Carmichael had the biggest share of the market. It earned £9m fees in respect of the audit of five public interest entities.

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Former Standard Life chief executive Keith Skeoch became interim chairman of the FRC in October 2020. He is due to step down this October. A replacement has not been announced. The preceding chairman, Simon Dingemans, stepped down in May last year.

The report findings indicate accountancy firms have much to do to ensure there is greater diversity in their workplaces.

It found: “Partners were the least diverse among the senior management levels for gender, BAME, and disability, with managers having the lowest percentage for LGBTQ+.”

The report said an average of 1.9% of all senior managers disclosed that they identified as LGBTQ+, adding: “Firms with under 200 employees told us that either they had no LGBTQ+ senior managers or did not collect this information.”

The Scottish institute of chartered accountants, ICAS, increased worldwide member numbers to 23,062 last year, from 22,495.

Member numbers at the Institute of Chartered Accountants in England and Wales rose to 157,812 from 154,531.

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In 2018 a study by the CMA identified serious competition issues in the market for large company audits. It said legislation should be introduced to require the Big Four to share audits with smaller firms.

The following year Sir Donald Brydon, a Scottish chartered accountant who chaired the London Stock Exchange, raised big questions about the purpose of audits that are limited to the checking of historic accounting information, and which may not consider bigger picture issues.