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Australia: Big four earn 99.3pc of top companies’ audit fees

Sep 5, 2023

The big four accounting firms earned 99.3 per cent of audit fees paid by Australia’s 200 largest listed companies last year, a proportion described as “to be expected” in any competitive market.

PwC, Deloitte, KPMG and EY audited 96.5 per cent, or 193, of the top 200 companies in Australia in 2022, up from 94.5 per cent in 2019, the University of New South Wales research found.

Although one academic said the concentration of fees and clients in the ASX 200 showed that the market was an oligopoly, a representative of professional body Chartered Accountants ANZ played down the dominance of the big four at the top end of town.

Amir Ghandar, CA ANZ’s assurance and reporting leader, also played down the big four’s market share of ASX 200 firms, instead emphasising the reduction of the firms’ audit market share across medium and small companies.

He said the concentration of the big four firms in the auditing market for major listed companies was similar to that of other major jurisdictions.

“The overall market share of the big four audit firms is not nearly so concentrated, and these preliminary findings indicate that share has continued to decrease in line with the trend over the last 10 years or so,” Mr Ghandar said.

Chartered Accountants ANZ, which co-funded the research with CPA Australia, is the main professional body for big four partners.

Elinor Kasapidis, head of policy and advocacy at CPA Australia, said the concentration at the top end of the audit market was “the nature of any competitive market and to be expected.”

“The reality is that you need big auditing firms with the resources and competencies capable of fulfilling the auditing requirements of big businesses,” Ms Kasapidis said.

Professor Gary Monroe, a co-author of the report, said although the audit market for the top 200 listed companies was highly concentrated, “market forces have probably resulted in a fairly optimal level [of competition].”

‘It’s an oligopoly’
“The market is always going to be dominated by a group of large audit firms,” he said. “It needs to be because without those large audit firms, you don’t have organisations with the resources to audit large, complex entities.”

His research also found that while the big four’s market share had increased over time for the 200 largest listed firms, their share of audits of the medium and small companies had decreased.

Large firms BDO and Grant Thornton increased their share of audit clients in the top 201 to 500 bracket significantly during the research period.

The decline in market share of the big four outside the largest companies demonstrates a level of competitiveness in the market, and “puts more pressure on the [big four] to maintain their quality levels,” Professor Monroe said.

Professor James Guthrie, who has previously called for the big four to be broken up, said the figures show “there is no competition in the market, it’s an oligopoly”.

The four big accounting firms all grew their individual market share of ASX-listed clients.

Fees up
EY was the largest of the big four, auditing 12 per cent of ASX-listed companies, up from 11.4 per cent. PwC had the biggest gain, capturing 10.2 per cent of company audits, up from 7.6 per cent in 2019.

KPMG increased its market share of listed companies to 11.3 per cent, up from 10.8 per cent. Deloitte remains the smallest of the big four with an overall market share of 9.5 per cent, up from 7.5 per cent.

The report also found that fees charged for audit work by the big four firms rose by an average of 21 per cent between 2019 and 2022.

PwC’s average fee per audit client rose by 50 per cent in three years, to more than $1.2 million, solidifying its position as the most expensive of the big four.

Other members of the big four charged less and increased fees less, with Deloitte’s average billing sitting at $494,002 – less than half that of PwC’s.

EY’s average fee rose by 20 per cent, to $798,000, while KPMG’s average fee rose by only 8 per cent, to $620,000, over the same period.

Professor Monroe said increased labour costs from a shortage of skilled accountants during the pandemic was the main cause of fee increases.

Audit quality in spotlight
The figures come after the corporate watchdog axed its annual report card on accounting firms’ audit quality.

Last year, ASIC found that Deloitte and KPMG failed to do enough work on about half of surveyed audits, prompting a warning to take “continued deliberate and concerted action” to improve standards.

Ms Kasapidis said her organisation was “surprised and concerned” by the reduction in scope of the audit inspection program.

“There is always room to improve audit quality and recent regulatory inspection findings have highlighted this.”

“All auditing firms, including the large firms, need to respond to regulatory findings to ensure audit quality meets market expectations.”

Despite ASIC’s recent findings, and ongoing concerns about conflicts of interest in the industry, Professor Monroe said the audit quality in the Australian market was “pretty good.”

“Could it be better? Sure. But companies have to be willing to pay more, and that increase in quality is going to cost money,” he said.

But “that argument’s a furphy”, said Professor Guthrie, who argued that “ASIC have gone very light [on audit quality] … we’re not seeing enough legal action against the auditors for poor financial reporting.”

[Financial Review]

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