n FTSE 2 s survey may 1 accountancy will definitely get busier, with peaks in and 23 driven by the transition rules, and then we might get to a business as usual base level It Gilly Lord, regulation and public policy partner, PwC 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 14 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 It James Roberts, audit and public policy partner, BDO slow off Big Four domination across the FTSE 2 continues as audit income rises and audit tenders increase, reports Philip Smith Senior s are bracing themselves for an exceptionally busy year pitching for new business while trying to retain existing audit clients. The FTSE market is already in the throes of its biggestever shake-up in audit work and the constituent members of the FTSE 2 are wasting no time in reviewing their current audit arrangements. According to Accountancy s latest survey of s in the FTSE 2, the total FTSE 2 audit market was valued at 17m in total audit in 14, up 4% from 163m in last year s survey based on the most recent annual reports of all the FTSE 2 constituent members (as of 23 March 1). The top FTSE 2 companies spent 9.7m on audit, up from 6.m 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 2. While total audit are up year on year, there are little signs that potential caps on nonaudit are affecting companies as yet. In 14, total non-audit were 2m, up from 92m in the previous year. The issue of a cap on non-audit could force changes as well. If a cap of 7% were to be introduced today, some 74 (%) of the FTSE 2 could potentially be caught out. However, some of these non-audit include one-off situations such as an IPO (there were 11 new entrants into the FTSE 2 via this route during the year under review). For instance, Pets at Home, which joined the index after its IPO in March 14, recorded 1.m in non-audit, compared with an audit fee of 17,. Despite efforts to increase competition and reform the audit market, the Big Four audit firms PwC, Deloitte, KPMG and EY still dominate with only mid-tier firm audit contracts currently in place across the FTSE 2. 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 for either their 14 or 1 year ends. A further eight companies have put their audit out to tender but ultimately they decided to retain the services of their existing. 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. 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 2 to sit on their hands.
accountancy may 1 FTSE 2 s survey n 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 This Guy Strafford, chief client officer, Proxima don t think the FTSE 2 companies are responding in the same way as the FTSE at the moment. The are more aware We of the legislation that is coming and are just getting on with it Hywel Ball, head of audit, EY 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 What Tony Cates, head of audit, KPMG 1 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 2, as well as their peers in the FTSE, 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 2 companies are responding in the same way as the FTSE at the moment. The are more aware of the legislation that is coming, and are just getting on with it. Those FTSE 2 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 in the autumn, enacted next year, so I m 16 In the last year, 24 companies have either changed or confirmed plans to change their audit firms: Company who is switching? New Old Year of change Bankers Investment Trust GT PwC 14 Berkeley Group KPMG PwC 14 Centamin PwC Deloitte 14 Computacenter KPMG EY 14 Crest Nicholson PwC KPMG 1 Derwent London PwC BDO 1 Dignity EY PwC 14 Dunelm PwC KPMG 14 Electrocomponents PwC KPMG 1 Euromoney PwC Deloitte 1 Grainger KPMG PwC 1 Henderson Group PwC EY 14 Interserve GT Deloitte 14 IP Group KPMG BDO 14 Kier PwC KPMG 1 Ladbrokes PwC EY 14 LondonMetric Property Deloitte BDO 14 Man Group Deloitte PwC 14 Pennon Group EY PwC 1 Rotork Deloitte KPMG 14 Spirax-Sarco Engineering Deloitte KPMG 14 Telecom Plus KPMG BDO 1 WH Smith PwC Deloitte 1 Worldwide Healthcare Trust PwC EY 1
n FTSE 2 s survey may 1 accountancy market share audit clients per firm 12/13/14 7 6 4 71 71 67 9 6 7 66 63 74 4 43 42 9 Note: figures relate to year of survey, reflecting different FTSE 2 constituents 7 2 3 top audits Big four fee income 12/13/14 ( m) 3 m BDO Deloitte EY Grant Thornton KPMG PwC 2 1 3 12 13 14 12 13 14 2 1 fee m fee 12 13 14 12 13 14 fee fee 16 performance Annual audit fee income 12/13/14 ( m) 12 4.4 36.9 36.1 29.9 2.33.99 13 43.6 42.4 41. 32.6 2.6. 14 4.1 4.3 42.9 34.3 2.22.7 m 4 6 7 9 1 1 1 14 1 16 17 1 fee who is tendering? The following companies plan to re-tender their audit: 1 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 16 Aveva Group Electra Private Equity (by Sep) Elementis (by 16) Greene King (no later than 16) Hays Home Retail Group Marstons (16/17, PwC not invited) Merlin Entertainments Perpetual Income&Growth Investment Trust (before 16) Shaftesbury Spectris (no later than 16) Stagecoach Group (review 16) Temple Bar Investment Trust Ultra Electronics Holdings Unite Group Vesuvius expecting the FTSE 2 to really pick up as we go through to 16 and 17, as they will be hit by both the non-audit legislation and audit rotation legislation. tenders So far this financial year, at least 1 companies have already declared they will be putting their audit out to tender during 1, and a further 16 have pencilled in 16 as the year they will go to tender. At the end of 14, we felt that it had been an incredibly busy year, says Gilly Lord, PwC s regulation and public policy partner, but looking forward to 1, 16 and 17, it will definitely get busier, with peaks in and 23 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 1 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
accountancy may 1 FTSE 2 s survey n audits companies ranked by audit value ( s) Rank 14 (13) Company or 14 ( ) 14 ( ) 13 ( ) 13 ( ) 1 (1) Investec EY 7,366,36,264,23 2 (3) Evraz EY 4,6,263 4,6,263 3 (2) Balfour Beatty Deloitte 4, 6,9, 7,9 4 (7) Thomas Cook Grp PwC 4,, 3, 7, (4) ICAP PwC 3,6 4, 3,6 4, 6 (-) IMI EY 3, 3, 3, 3, 7 () Phoenix Group Holdings EY 3, 7,6 3,6 7,6 (-) Melrose Industries Deloitte 2,, 3, 6, 9 (-) Rexam PwC 2,7 4, 2,,9 (9) Rentokil Initial KPMG 2, 3, 2, 3,6 11 () Cable & Wireless Communications KPMG 2,36 3,3 2,29 4,14 12 (14) Catlin Group Ltd PwC 2,266 3,91 2,1 2,733 13 (11) Cobham PwC 2,,4 2, 3, 14 () Jardine Lloyd Thompson Group PwC 2, 2,6 1,96 2,411 1 (16) Inchcape PwC 2, 3, 2, 3, 16 (12) Morgan Advanced Materials KPMG 2, 2,4 2, 2,4 17 () Serco Group Deloitte 2, 2,9 1,9 2, 1 (1) Tate & Lyle PwC 2, 2, 1,9 2, 19 (-) Petrofac EY 1,974 2,632 1,316 1,974 (17) Tullet Prebon Deloitte 1,9 2,677 1,974 2,324 9,69,94 9,941 9,6 Figures relate to this year s survey. Ranks relate to 1 and 14 surveys fee trends top v rest 13/14 ( m) 13 14 6. 6.7 3.7 14. Top Rest of FTSE 2 performance Big Four v mid tier 13/14 ( m) 13 14 16. 2.7 Big Four Other s 9.7 1.2.9 199.4 167.6 2.3 17 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. For instance, Virgin Money, which launched its IPO last year, has said that it will tender the audit in 1, even though a new audit partner has just been rotated on to the account. This is because KPMG, which has been in place since 4, took over the audit of the enlarged group following its acquisition of Northern Rock in 12 without a formal tender. PwC had previously been of Northern Rock. Role of ACs 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 16% Share of FTSE 2 companies who have retendered their audit for 14 or 1 year ends 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 s 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 1
n FTSE 2 s survey may 1 accountancy 1 longevity audit tenure (YEARS) No of new s 32 36 22 No of companies 6 4 No of years 1-3 4-6 7-9 -1 7 4 16-21- > 4 14 13 12 9 11 2 2 2 197 1949 19 199 1963 1964 196 196 197 1972 197 1976 197 1979 19 193 194 19 197 19 199 199 1991 1992 1993 1994 199 Change of (year) 1996 1997 199 1999 1 2 3 4 6 7 9 11 12 13 14 1 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 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 % or % of the market in five years, that would be fantastic. Fee levels But what effect is tendering activity having on fee levels? The audit market is valued at more than 17m, up by 2m on current constituents previous year s audit. When non-audit services are taken into account, the market is worth 2m, up 4% year on year. But this overall increase masks diverging trends. There are conflicting pressures on both s 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 are currently dropping an average of % 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 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 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. 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 in its 14 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. committee chairs are playing very close attention to the FRC s inspection results. But, of course, people care about 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 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 can provide, it is likely that if you change your, 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 2 s is set to continue, companies will have to change their mind sets. The Big Four party could well end up with a bad hangover.