briefing
n FTSE 250 auditors survey
‘‘
It will definitely
get busier, with
peaks in 2020 and
2023 driven by the transition
rules, and then we might
get to a “business as
usual” base level
Gilly Lord, regulation and
public policy partner, PwC
may 2015 accountancy
‘‘
Given that the
detail of how
this legislation
will be adopted in the
UK is not yet determined
in full, we have decided
to defer the tender until
such time as this is clear
Ian McHoul, audit
committee chairman,
Britvic
‘‘
It is a teenage market
that is growing up
awkwardly, but is
thirsty for knowledge. We are
developing a lot of relationships
with a lot of people we have
not spoken to before
James Roberts, audit and public
policy partner, BDO
14
Big Four
domination
across the
FTSE 250
continues as
audit income
rises and
audit tenders
increase,
reports
Philip Smith
S
slow off
enior auditors are bracing themselves
for an exceptionally busy year pitching
for new business while trying to retain
existing audit clients. The FTSE 100
market is already in the throes of its biggestever shake-up in audit work and the constituent
members of the FTSE 250 are wasting no time in
reviewing their current audit arrangements.
According to Accountancy’s latest survey of
auditors in the FTSE 250, the total FTSE 250
audit market was valued at £170m in total audit
fees in 2014, up 4% from £163m in last year’s
survey based on the most recent annual reports
of all the FTSE 250 constituent members (as of
23 March 2015).
The top 20 FTSE 250 companies spent £59.7m
on audit, up from £56.5m on the previous year
based on the changing constituent members year
on year. This is equivalent to 34% of total audit
expenditure spent across the total 250.
While total audit fees are up year on year,
there are little signs that potential caps on nonaudit fees are affecting companies as yet. In
2014, total non-audit fees were £102m, up from
£92m in the previous year.
The issue of a cap on non-audit fees could
force changes as well. If a cap of 70% were to be
introduced today, some 74 (30%) of the FTSE 250
could potentially be caught out.
However, some of these non-audit fees
include one-off situations such as an IPO (there
were 11 new entrants into the FTSE 250 via this
route during the year under review). For instance,
Pets at Home, which joined the index after its
IPO in March 2014, recorded £1.8m in non-audit
fees, compared with an audit fee of £157,000.
www.accountancylive.com
Despite efforts to increase competition and
reform the audit market, the Big Four audit firms
– PwC, Deloitte, KPMG and EY – still dominate
with only 10 mid-tier firm audit contracts
currently in place across the FTSE 250. Stripping
out the audit revenue earned by the Big Four,
the mid-tier duo of Grant Thornton and BDO
accounted for £2.3m in annual audit fee income,
a mere 1.3% of the total market, down from
£2.73m (1.6%) on the previous year.
But the market is not standing still. Some 24
listed companies have announced a switch in
auditor for either their 2014 or 2015 year ends.
A further eight companies have put their audit
out to tender but ultimately they decided to
retain the services of their existing auditor. That
is nearly 13% of the market and is a figure that
is set to increase in the coming year as more
companies indicate when they will be testing
the audit market.
This unprecedented activity, of course, all
stems from the EU’s push to open up the market
for audit services at the highest corporate levels,
supported by the UK’s Competition and Markets
Authority’s (CMA) earlier investigation.
However, there are still legislative issues
that need to be settled, such as transition
measures and the so-called ‘whitelist/blacklist’
of non-audit services that can be provided by a
company’s auditor.
Following a consultation period, further details
from the Financial Reporting Council (FRC) and
Department for Business, Innovation and Skills
(BIS) are expected in the autumn. This has
allowed many audit committees in the FTSE 250
to sit on their hands.
briefing
accountancy may 2015
‘‘
This is a market
that is becoming
more conventional
as a professional service
bidding process and it is
going to continue to put
downward pressure on fees
Guy Strafford, chief client
officer, Proxima
FTSE 250 auditors survey n
‘‘
We don’t think
the FTSE 250
companies
are responding in the
same way as the FTSE
100 at the moment. The
100 are more aware
of the legislation that
is coming and are just
getting on with it
Hywel Ball, head of
audit, EY
‘‘
What they don’t
want to find is
that they have to
go through an audit tender
process when they’ve
just fired their CFO or are
putting in a new IT system
Tony Cates, head of audit,
KPMG
15
the mark
Wait-and-see approach
Even some companies that had previously
planned to put their audit out to tender are now
adopting a wait-and-see policy. For instance,
last year drinks company Britvic said its audit
would go out to tender this year.
But as Ian McHoul, Britvic’s audit committee
chairman, says: ‘Given that the detail of how this
legislation will be adopted in the UK is not yet
determined in full, we have decided to defer the
tender until such time as this is clear, to ensure
that we are in the best place to fully comply with
the new requirements.’
However, once these issues have been
ironed out, then all companies in the FTSE 250,
as well as their peers in the FTSE 100, will be
forced to review their audit contracts if they
have been in place for more than the ten-year
limit imposed by the CMA and EU regulations.
There are a few minor exceptions to this rule
such as in the event of a major merger and
acquisition or IT overhaul, but otherwise there
will be no room for manoeuvre.
This is why audit firms are expecting the
number of audit tenders to continue to rise over
the coming years. Hywel Ball, EY’s head of audit,
says: ‘We don’t think the FTSE 250 companies
are responding in the same way as the FTSE 100
at the moment. The 100 are more aware of the
legislation that is coming, and are just getting
on with it. Those FTSE 250 companies that
say they will be tendering in the coming years
are probably lining themselves up for the next
partner rotation.
‘But we will probably have the new legislation
16
in the autumn, enacted next year, so I’m
auditor
who is switching?
In the last year, 24 companies have either changed or
confirmed plans to change their audit firms:
Company
New
auditor
Old
auditor
Bankers Investment Trust
Berkeley Group
Centamin
Computacenter
Crest Nicholson
Derwent London
Dignity
Dunelm
Electrocomponents
Euromoney
Grainger
Henderson Group
Interserve
IP Group
Kier
Ladbrokes
LondonMetric Property
Man Group
Pennon Group
Rotork
Spirax-Sarco Engineering
Telecom Plus
WH Smith
Worldwide Healthcare Trust
GT
KPMG
PwC
KPMG
PwC
PwC
Deloitte
EY
KPMG
BDO
PwC
KPMG
KPMG
Deloitte
PwC
EY
Deloitte
BDO
KPMG
EY
BDO
PwC
PwC
KPMG
KPMG
BDO
Deloitte
EY
www.accountancylive.com
PwC
PwC
EY
PwC
PwC
PwC
KPMG
PwC
GT
KPMG
PwC
PwC
Deloitte
Deloitte
EY
Deloitte
Deloitte
KPMG
PwC
PwC
Year of
change
2014
2014
2014
2014
2015
2015
2014
2014
2015
2015
2015
2014
2014
2014
2015
2014
2014
2014
2015
2014
2014
2015
2015
2015
briefing
n FTSE 250 auditors survey
market share
top 20 audits
audit clients per firm 2012/13/14
80
71 71
70
74
67
60
may 2015 accountancy
56
59 57
63
66
50
45 43
42
Big four fee income 2012/13/14 (£m)
KEY
35 £m
 BDO
 Deloitte
 EY
 Grant Thornton
 KPMG
 PwC
30
35
40
25
20
15
10
5
0
2012
30
30
2014
2012
2013
2014
 Audit fee  Total
25 £m
20
20
15
10 9
7
10
5
10
2 3
0
5
0
2012
Note: figures relate to year of survey, reflecting different FTSE 250 constituents
16
2013
 Audit fee  Total
2013
2014
2012
 Audit fee  Total
2013
2014
 Audit fee  Total
performance
Annual audit fee income 2012/13/14 (£m)
48.4
2012
2013
43.6
2014
45.1
36.9
36.1
42.4
29.9
41.8
45.3
2.33 0.99
32.6
42.9
34.3
2.68 0.05
2.22 0.07
£m
0
10
20
30
40
50
60
70
80
90
100
110
fee
who is tendering?
The following companies plan to re-tender their audit:
2015
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
Balfour Beatty
BlackRock World
Mining Trust
BRIT
Brown (N.) Group
(formal review)
Cable & Wireless
Communications
Cobham
Direct Line Insurance
Group
Domino Printing Sciences
Genus
Go-Ahead Group
HICL Infrastructure
Hiscox
Laird
Lonmin
Northgate
Paragon Group of
Companies
RPC Group
Virgin Money
2016
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
QQ
Aveva Group
Electra Private Equity
(by Sep)
Elementis (by 2016)
Greene King
(no later than 2016)
Hays
Home Retail Group
Marstons
(2016/17, PwC not invited)
Merlin Entertainments
Perpetual Income&Growth
Investment Trust
(before 2016)
Shaftesbury
Spectris
(no later than 2016)
Stagecoach Group
(review 2016)
Temple Bar Investment Trust
Ultra Electronics Holdings
Unite Group
Vesuvius
www.accountancylive.com
120
130
140
150
160
170
180
expecting the FTSE 250 to really pick up as we
go through to 2016 and 2017, as they will be
hit by both the non-audit legislation and audit
rotation legislation.’
Audit tenders
So far this financial year, at least 18 companies
have already declared they will be putting their
audit out to tender during 2015, and a further
16 have pencilled in 2016 as the year they will
go to tender.
‘At the end of 2014, we felt that it had been
an incredibly busy year,’ says Gilly Lord, PwC’s
regulation and public policy partner, ‘but looking
forward to 2015, 2016 and 2017, it will definitely
get busier, with peaks in 2020 and 2023 driven
by the transition rules, and then we might get to
a “business as usual” base level.’
But there will still be companies that want
to go out to tender earlier rather than later for
a variety of reasons, as there could be sound
business reasons not to delay.
‘We have seen people going out to tender
earlier than they need to, just to get it out of the
way,’ observes Tony Cates, KPMG’s head of
audit, ‘so I would say that the next 18 months
will be pretty busy, and then after that we might
see the market spacing out a bit more.
‘Companies are realising that they have
briefing
accountancy may 2015
audits
FTSE 250 auditors survey n
fee trends
companies ranked by audit value (£000s)
top 20 v rest 2013/14 (£m)
2013
Audit
fees
2013
(£000)
Total
fees
2013
(£000)
Auditor
Audit
fees
2014
(£000)
Total
fees
2014
(£000)
7,366
8,386
8,264 10,235
4,605
5,263
4,605
5,263
4,500
6,900
5,100
7,900
4,000
5,000
3,000
7,000
3,600
4,300
3,600
4,500
3,300
3,500
3,000
3,500
3,200
7,600
3,600
7,600
2,800
5,300
3,200
6,100
2,700
4,100
2,800
5,900
2,500
3,300
2,500
3,600
2,368
3,553
2,829
4,145
2,266
3,951
2,185
2,733
2,200
5,400
2,100
3,800
2,108
2,586
1,968
2,411
2,100
3,100
2,000
3,300
2,100
2,400
2,100
2,400
2,100
2,000
2,900
2,100
1,900
1,900
2,800
2,200
19 (-)
20 (17)
EY
Evraz
EY
Balfour Beatty
Deloitte
Thomas Cook Grp PwC
ICAP
PwC
IMI
EY
Phoenix Group
EY
Holdings
Melrose Industries Deloitte
Rexam
PwC
Rentokil Initial
KPMG
Cable & Wireless
KPMG
Communications
Catlin Group Ltd
PwC
Cobham
PwC
Jardine Lloyd
PwC
Thompson Group
Inchcape
PwC
Morgan Advanced
KPMG
Materials
Serco Group
Deloitte
Tate & Lyle
PwC
Petrofac
EY
Deloitte
Tullet Prebon
 Figures
relate to this year’s survey. Ranks relate to 2015 and 2014 surveys
Rank
2014
(2013)
1 (1)
2 (3)
3 (2)
4 (7)
5 (4)
6 (-)
7 (5)
8 (-)
9 (-)
10 (9)
11 (8)
12 (14)
13 (11)
14 (10)
15 (16)
16 (12)
17 (20)
18 (18)
Company
Investec
56.5
Audit
fees
Role of ACs
Audit committees (ACs) are also flexing their
muscles in a bid to demonstrate they are good
corporate citizens and this is also affecting when
companies call for audit proposals.
Ball says: ‘We are seeing non-executives
pushing for a tender when the CFO would
rather wait to the end of the [audit partner]
tenure. So there is a tension there, as the
Share of FTSE
250 companies
who have
retendered their
audit for 2014 or
2015 year ends
Audit
fees
110.2
83.7
Total
fees
85.9
Total
fees
184.8
KEY
 Top 20
199.4
 Rest of FTSE 250
performance
17
Big Four v mid tier 2013/14 (£m)
2014
2013
167.6
160.5
Audit
fees
2,632 1,316 1,974
1,908 2,677 1,974 2,324
59,695 85,948 59,941 89,685
16%
59.7
106.7
1,974
got to do this at some point and can see a
change in [audit] partner coming, so are saying
they might as well tender now, particularly if
business is going well.
‘What they don’t want to find is that they
have to go through an audit tender process
when they’ve just fired their CFO or are putting
in a new IT system.’
Some companies aren’t even letting the minor
issue of a flotation get in the way of reviewing
their auditor. For instance, Virgin Money, which
launched its IPO last year, has said that it will
tender the audit in 2015, even though a new audit
partner has just been rotated on to the account.
This is because KPMG, which has been in place
since 2004, took over the audit of the enlarged
group following its acquisition of Northern
Rock in 2012 without a formal tender. PwC had
previously been auditor of Northern Rock.
2014
Audit
fees
2.7
KEY
2.3
 Big Four  Other auditors
audit committee wants to demonstrate good
governance, while the CFO wants to minimise
disruption to the business.’
But whether pushed or pulled, companies
and their auditors are now trying to look for
the positive aspects of the upsurge in activity.
‘Initially everyone was saying that it was a
regulatory burden, but I believe clients have now
changed and have found the process has given
a freshness to the audit,’ says Cates.
‘You get a fresh pair of eyes when the
audit partner rotates, but when the entire firm
changes you get someone looking at the audit
completely from scratch. They are asking
different people different questions.’
Mid-tier perspective
Even the mid-tier firms of Grant Thornton and
BDO can see the positives, despite having only
won two audits during the period under review
(Interserve and Bankers Investment Trust,
both GT wins) and actually losing three (BDO’s
Derwent London, IP Group and Telecom Plus).
‘Lots of people are having conversations
leading up to tenders, even though we will
not pursue every opportunity,’ says Paul
Etherington, quality and professional affairs
partner at Grant Thornton.
‘We are even having conversations about
www.accountancylive.com
18
briefing
n FTSE 250 auditors survey
may 2015 accountancy
longevity
audit tenure (YEARS)
20
No of new
auditors
20
22
36
15
32
20
No of years
30
No of
companies
45
10
1-3
16-20
4-6
21-30
7-9
> 30
5
0
18
8
7
4
2
5
4
13
12
10
10
10-15
65
2
14
11
9
8
8
5
2
07 49 58 59 63 64 65 68 70 72 75 76 78 79 80 83 84 85 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
Change of auditor (year)
shared audits, where one firm might take on
some subsidiaries or a division while another
firm works at a group level. It allows a group to
get to know another firm, and get a sense of
the quality and people.’
There are also signs that some companies
want to put external and internal audit out to
tender, alongside tax work, at the same time.
This is as a result of making sure the external
auditor in particular is clean and uncompromised
by any potentially blacklisted services.
James Roberts, audit and public policy
partner at BDO, adds: ‘It is a teenage market
that is growing up awkwardly, but is thirsty
for knowledge. We are developing a lot of
relationships with a lot of people we have not
spoken to before. And we can also say to some
that if we are unlikely to win the audit, we can
do other things for you.
‘If we get to 5% or 10% of the market in five
years, that would be fantastic.’
no
change
The following
companies put
their audit out to
tender but retained the
incumbent firm:
Edinburgh Investment
Trust KPMG
Galliford Try PwC
Greggs KPMG
Keller KPMG
Murray International
Trust EY
Rightmove KPMG
Smith (DS) Deloitte
Tullett Prebon Deloitte
Fee levels
But what effect is tendering activity having on
fee levels? The audit market is valued at more
than £170m, up by £2m on current constituents’
previous year’s audit fees. When non-audit
services are taken into account, the market is
worth £285m, up 4% year on year.
But this overall increase masks diverging
trends. There are conflicting pressures on both
auditors and audit committees. Both want
to ensure a high level of quality but they are
operating in a commercial environment.
Proxima, a procurement consultancy involved
in a number of audit tenders, says audit fees are
currently dropping an average of 10% following
a tender process.
Dunelm, the homeware retailer, saw its audit
fee fall 9% when it switched from KPMG to PwC,
while listed hedge fund Man Group cut its audit
fee by 26% when Deloitte took over from PwC.
‘This is a market that is becoming more
www.accountancylive.com
conventional as a professional service bidding
process,’ says Proxima’s chief client officer
Guy Strafford, ‘and it is going to continue to
put downward pressure on fees. It is the only
service where the price of the incumbent is
known to all the other bidders.
‘So a simple strategy would be to bid a
bit less than the incumbent but also propose
something that is radically different. It would be a
bold strategy to come in at twice the cost.’
However, audit committees are aware of
the need to ensure audit quality is maintained,
particularly in light of comments made by the
FRC, which highlighted concerns over audit fees
in its 2014 Audit Quality Review annual report.
‘Now that responsibility has really shifted to
the audit committee, you can see them thinking
that they want to get the best audit they can get
because, if it goes wrong in the future, that will be
their personal reputation on the line,’ says Lord.
‘Audit committee chairs are playing very close
attention to the FRC’s inspection results. But,
of course, people care about fees – they are
commercial businesses, but the importance of
the fee decision has gone a few notches down.’
The tender process is becoming shorter and
companies are looking to complete within two
to three months. At the same time, the bidding
process is being carried out well in advance of
the date a new auditor would take over.
‘This gives everyone plenty of time to get to
know each other,’ Lord says. It also allows the
company time to change other professional
service suppliers. ‘With changes in the nonaudit services that your auditor can provide, it
is likely that if you change your auditor, you are
going to have to change who your non-audit
suppliers are as well. This has to be planned
quite carefully,’ Lord says.
So although the seismic shift in FTSE 250
auditors is set to continue, companies will have
to change their mind sets. The Big Four party
could well end up with a bad hangover.