FTSE 350 audit market remains highly concentrated, FRC finds

THE FRC has raised concerns that the FTSE 350 audit market remains highly concentrated among the Big Four despite high levels of tendering and rotation.

In the FRC’s first ‘state of the nation’ report as the UK’s competent authority for audit, the accounting watchdog raised concerns that the Big Four continue to dominate the large-listed audit market.

The 68-page report found that since the introduction of new tendering provisions, there have been in excess of 150 tenders in the FTSE 350, compared with around 14 tenders per year in the period from 2007 and 2011.

But despite the high levels of tendering and rotation, the Big Four’s share of the FTSE 350 market has risen from 96.7% to 97.4%, although more firms now audit the largest banks.

“There are initial indications that there may be further concentration to come in the PIE audit market,” the FRC said, but added that it is encouraged by “enhanced contingency planning to respond to the potential failure of one of the firms”.

Its analysis found that the increase in tendering activity has not put undue pressure on audit fees. Aggregate audit fee income for the Big Four increased by 4.6% in 2014/15, it said.

However, the FRC believes there is a justifiably higher level of confidence in audit as a result of changes to independence requirements and the promotion of quality as a driver for competition in the audit market. However, it also notes some remaining concerns around confidence.

Melanie McLaren, FRC’s executive director for audit, said: “Our vision for audit is that it is trusted to provide reliable assurance on the public reporting of financial information, and in doing so, promotes good governance and facilitates the effective allocation of capital.

“The FRC’s strategy is to promote continuous improvement in audit quality. One of the key factors in achieving this is to engage with other regulatory professional bodies, auditors, audit committees and investors to communicate good practice.”