Major British audit firms and their large corporate clients have faced a torrent of criticism about the volume of non-audit fees that they continue to generate.
A year ago, firms, clients and government alike were predicting that the ratio of non-audit to audit fees would scale down rapidly. However, the latest figures show that, although fees have fallen slightly, firms continue to reap a major consultancy harvest from their clients in the U.K.'s leading stock market index, the FTSE 100.
Since the corporate scandals at Enron, WorldCom and Parmalat, U.K.-listed companies have experienced increased pressure to conform to ever-more exacting corporate governance standards.
Their auditors have come under pressure - especially from investors and major institutions - to stop providing advisory services to audit clients. Yet, according to a survey of FTSE 100 companies, audit fees are now $471 million, but non-audit fees paid by these companies to their auditors have reached $624 million.
The company with the highest non-audit-to-audit ratio is Rupert Murdoch's BSkyB, a satellite television company. The non-audit fees paid by BSkyB to its auditor, Deloitte, are nearly nine times greater than the audit fees it pays.
Morrison, the supermarket group that recently won a merger battle for the U.K. Safeway, and retailer Kingfisher were second and third in the non-audit-to-audit comparison roster, respectively, as each paid roughly more than five times the price of its audit in advisory/consulting fees. As a further example, petroleum giant BP paid Ernst & Young $17.7 million for its audit and $37.5 million for non-audit work.
But it did not stop there.
In the last year, PricewaterhouseCoopers - the U.K.'s largest auditor - earned $206 million in audit fees from FTSE 100 clients. It also pocketed $253 million in non-audit income. Second on the league table of auditors is KPMG. Audit fees came in at $118 million, while non-audit income peaked at $124 million. Deloitte came third with $86 million for audit fees and $122 million for advisory fees. Taking up the rear, E&Y took home $63 million for FTSE 100 audits and $125 million for non-audit services to the same clients.
The picture is upsetting investors. Most vocal is Pensions Investment Research Consultants, which adopts the unequivocal position that auditors should not do non-audit work.
"The proportion of fees earned by auditors for other work from audit clients remains too high," said David Somerlinck, who is PIRC's corporate governance policy manager. "Disclosure of the nature of non-audit work still needs improvement to allow shareholders to assess the services provided. Audit committee reports need to demonstrate that the committee is fulfilling its responsibilities diligently."
"How do you define statutory audit work?" he asked. "The problem is that in the notes to the accounts, shareholders tend to get little real information about what work is actually being done.'
He is not alone in his concern. Another major lobbyist on potential conflicts of interest is the National Association of Pension Funds. NAPF director David Gould said, "If non-audit fees comprise more than 20 percent of the audit fees [as they do for most FTSE 100 companies], company annual reports should include a comprehensive breakdown of what that non-audit work entails. The important thing is that those costs are set out properly and clearly in companies' annual reports and accounts."
Transparency is also a major concern. This theme is supported by the Association of British Insurers - long the auditors' principal enemy. "Consultancy fees are still high and this indicates the need for continuing vigilance," said the ABI's head of investment affairs, Peter Montagnon.
The auditors, meanwhile, regard the whole debate as a red herring. Rodger Hughes, PwC's head of audit, said that the audit/non-audit argument is a fundamental misconception that has been whipped up by adverse media comment. "Being independent as an auditor is not at all the same as only providing audit services," he remarked. "We have never provided services which would compromise our independence as auditors. Nor will we."
"To this day," he continued, "no one has provided any evidence to demonstrate that providing non-audit services creates any problem in terms of audit quality. Indeed, academic studies have actually proved otherwise. And there is a very good argument that providing non-audit services improves audit quality."
He added, "The idea that it is wrong to provide other services is complete and utter nonsense. There's no doubt that there are certain services that make absolute common sense for auditors to do and couldn't in any sense be regarded as compromising auditor independence."
KPMG's global head of regulation, Neil Lerner, is equally strident in his conviction. "If you start to believe that paying money to auditors will result in a loss of objectivity, then you move quickly to a state auditing profession. That's the logical endgame of that argument."
"It should be up to each client to decide where and from whom audit and non-audit services are purchased," he added. "There does not need to be someone laying down prescriptive rules about how much money can be spent on services provided by the auditor."
More important, said Deloitte managing partner Steve Almond, is what the money is spent on. "There are some organizations, the complexity and nature of which just mean that they do require a broad range and depth of work from their auditors or someone very like their auditors. Highly regulated industries are a good example of what I mean," he said. "It would not be in any stakeholder's interests, frankly, for there to be an automatic presumption that the auditors should not do that work. In fact, it's in the stakeholder's interest that it is the other way around."
PwC's Hughes denied that the level of non-audit fees received by Big Four firms from their audit clients is a problem. But he does believe that greater transparency is the way forward. "PwC has consistently encouraged greater transparency in public reporting. And, personally, I believe the more disclosures, the better."
