The Competition Commission has published its findings on how FTSE 350 companies choose an auditor and the triggers that may cause them to switch.
The working paper, which forms part of its probe into the UK audit market, found that in the majority of cases, audit firms secured FTSE 350 contracts by participating in competitive tenders.
But tenders were infrequent with just 4% of FTSE 350 companies - both FTSE 100 and FTSE 250 - doing so each year.
It also found that the Big Four audit firms are twice as likely to be invited to tender as mid-tier competitors. Meantime, the cost of participating in competitive tenders is high and on average represents 20 to 60% of the first year's audit fee.
However, it found that a minority of companies switch every year with 3.3% of FTSE 350 companies doing so between 2000 and 2011. The average tenure was 11 years, some two years shorter than that of FTSE 100 company tenures, where just 2.4% swap auditor each year.
The CC discovered that the Big Four often approach FTSE companies in pursuit of new audit business with PwC and KPMG more active than Deloitte. Their smaller rivals rarely did so other than when asked to participate in a formal tender.
Grant Thornton, PKF and Mazars all said that they did not submit unsolicited statutory audit bids due to the low chance of success.
When analysing the information from audit firms, the CC estimated that on average, some 4% of FTSE 350 companies - 14 businesses - went out to tender each year. However, the report's analysis of invitations to tender between 2007 and 2011 was completely redacted.
When asked why firms had lost a tender, the most popular answer at 21% was a perceived 'lack of experience', followed by 'the winner had a strong relationship with the client' at 12% and 'the company was not positively impressed' at 10%. A 'lack of international strength in one country or globally' also chalked up 10%.
On renegotiation of audit fees, firms said it was generally down to the previous year's fee or external factors such as regulatory changes.
Other reasons were client-specific factors, market and economic trends such as the economic climate, inflation and exchange rates, and client relationships.
Bench-marking exercises were carried out in a quarter of cases while a fee as a percentage of turnover was the most commonly used metric.
PwC, KPMG, EY, Deloitte, BDO, GT, PKF and Mazars all said the level of audit fees was never linked to the provision of non-audit services (NAS).
BDO said tax compliance fees may be quoted at the same time, but were separated from audit services fees. PwC and KPMG stated that recurring audit-related services, as specified in the ISA Ethical Standard 5, were often negotiated when the statutory audit fee was negotiated where they were closely-related services and could be foreseen in advance.
KPMG, meanwhile, said the scope and fee of other audit-related services that 'were not necessarily recurring or predictable' would not be negotiated in conjunction with the scope and fee of the audit, but would be subject to a separate agreement, and not conditional upon the audit fee. The CC also found that when it came to switching behaviour, just 0.1% of FTSE 350 and FTSE 250 companies migrated their audit from a Big Four player to a smaller firm, while none did so in the FTSE 100.
Companies most likely to switch were in the consumer goods and technology sectors.
The report found that fees were likely to rise the longer the tenure of the audit with the average audit fee of £1.2m being billed for relationships up to five years old, rising to more than twice that, at £2.8m for 20-plus year tenures.