FRC's competition efforts fall flat as Big Four continue to dominate

Despite a small increase in market share for challenger audit firms, the Big Four accounting firms – Deloitte, EY, KPMG, and PwC – continue to dominate the audit market, according to new data from the Financial Reporting Council (FRC).

On December 14,the FRC released its annual review of competition in the UK’s audit market for public interest entities (PIE) which highlighted the continued dominance of the Big Four accounting; they earned 98% of FTSE 350 audit fees in 2022.

“98 percent market share for the big four leaves little room for challengers to emerge while maintaining high standards of audit quality,” said Mark Babington, FRC Executive Director of Regulatory Standards.

Report key findings

• Audit fees increased between 2021 and 2022. Total PIE audit fees increased by 8% to £1.1bn and total FTSE 350 audit fees increased by 13%
• Challenger audit firms’ share of FTSE 350 audit engagements grew in 2022 but the Big Four firms (Deloitte, EY, KPMG and PwC) earned 98% of FTSE 350 audit fees (90% of PIE audit fees).
• Some FTSE 350 companies switched from a Big Four audit firm to a challenger audit firm but the proportion of FTSE 350 companies making such a switch was lower in 2022 than in 2021.
• The largest audit firms continued to earn a greater proportion of their income from non-audit clients than from audit clients in 2022, although growth in audit income at the largest challenger firms outpaced growth in non-audit income.

Audit market share

Over the last four years, there has been an increase in the number of audit firms auditing FTSE 350 companies as well as other listed equity (from 24 firms in 2019 to 33 firms in 2022. However, in 2022, the Big Four audit firms audited 90% of FTSE 350 companies (93% in 2021).

Since 2019, the number of FTSE 350 audit engagements undertaken by the challenger firms has grown from 13 to 36, and a few FTSE 100 companies are now audited by challenger firms.

In 2022, of the 17 FTSE 350 companies that changed auditor, two switched from a Big Four firm to a challenger firm, or around one in ten. In 2021, there were four such switches, or nearly two in ten. Over the last five years, the highest level of switching from Big Four audit firms to non-Big Four firms was in 2020.

Interestingly, the largest audit firms continued to earn a greater proportion of their income from non-audit clients than from audit clients in 2022, although growth in audit income at the largest challenger firms outpaced growth in non-audit income.

Fostering competition

While the Government’s plan for primary legislation to modernise the regulation of audit, corporate reporting and governance has not been prioritised for the next Parliamentary session, the FRC say it remains “committed” to improving the functioning of the audit market.

“Some of the competition policy proposals we can progress under our existing powers but some require legislation. Where legislation is necessary, we are seeking to identify and pursue non-legislative actions and activities that can help achieve the proposal’s aims such as market opening and improving choice of firm,” the FRC said.

Over the past year, the FRC has pursued a range of initiatives to improve competition in the audit market. The council has engaged with some providers of assurance of sustainability (ESG) reporting and some Audit Committee Chairs (ACCs) of FTSE 350 companies to see if developments in the market for assurance of sustainability (ESG) reporting could have implications for the supply of statutory audits.

“We found sustainability assurance is a fast-developing and growing market,” the FRC said.

The council has also published a standard for audit committees in relation to their role on the external audit, launched the FRC’s Scalebox to assist smaller firms’ entry into the PIE audit market, and explored barriers to growth for smaller audit firms.

“Our externally commissioned research on entry, growth and exit of firms in the PIE and non-PIE audit markets has provided detailed information on smaller audit firms’ views about these markets,” the council said. “The research may inform and lend weight to the FRC’s audit firm scalebox.”

The FRC’s future plans include conducting market studies to generate proposals to improve the way the market functions, particularly in terms of better choice and resilience.

Many sector regulators have powers to do market studies or they undertake market study type work. The CMA’s audit market study (2018/19) was an example of a large-scale Enterprise Act 2002 (EA02) market study but it is not the only approach to market studies.