Despite little movement in audit fees between the last year of the outgoing auditor and the first year of an incoming auditor, firms are hiking their fees in the second year of engagement, research conducted by Accountancy shows
More than £48m worth of audit contracts either changed hands in 2016 or will do so over the next two years among the FTSE 250 group of companies. That amounts to approximately a quarter of the total value of audit fees in this second tier of corporate UK, which was worth £193.6m (2015: £181.3m) to the largest audit firms.
Some 26% of accounting firms hiked their fees in the second year of a new audit engagement, the FTSE 250 Auditors Survey 2017 found.
Part of that can be explained by an increase in the scope of the audit or the size of the company, but the trend serves to illustrate what Dominos Pizza Group audit committee chairman Steve Barber identified as the ‘inherent conflict’ between competitive pricing and the desire, on all sides, for audit firms to carry out a high quality audit.
Of the 18 FTSE 250 companies whose latest annual report represented the second year under a new auditor, only two said the fees had remained the same: student accommodation group Unite and high street retailer WH Smith. Five companies reported increases of more than 25%.
Building supplies group Travis Perkins revealed that its audit fee had risen more than 70% between 2015 and 2016. However, the accounts confirmed that £175,000 of the £900,000 paid to KPMG related to the 2015 audit of its subsidiaries.
Security group G4S paid £2m more for its 2016 audit than in 2015, a 33% jump from £6m to £8m. Like Travis Perkins, the 2016 accounts reveal the latest fees were bumped up by £1m for work carried out at G4S’s subsidiaries ‘in respect of prior years’. This still meant the net fee was up by £1m after the move to PwC from KPMG.
Among those reporting increases, Dechra Phamaceauticals saw its fee increase 90% when it switched from KPMG, which had been in situ since 1997, to PwC (£265,000 in 2015, £503,000 in 2016).
Guy Strafford, chief client officer at Proxima, a procurement consultancy, says increases in year two raise questions about how effective tender processes are, and how well the audit has been managed. ‘Normally, you might expect costs to come down by the second year as the auditor has by then been able to gain an understanding of the company.’
Subscribers can read more FTSE 250 Auditor Survey 2017 findings here.
