The Future of Audit Contents


142.Fees matter for two reasons. First, high-quality audits can only be achieved if they are properly resourced. In turn, audits can only be properly resourced if the audit fees cover these costs. A few audits every now and again might be allowed to be loss-making, but a firm that does not charge sufficient fees to deliver high-quality audits would very quickly have to either sacrifice quality or go out of business. In Sir John Kingman’s words, a properly priced and resourced audit “is the only way of getting quality”.224

143.Second, underbidding (charging lower than cost) can undermine competition. To the extent that dominant participants in a market are more able to undercharge than other players, they can all but eliminate competition from those other players. In the world of FTSE 350 audit, the Big Four auditors enjoy subsidies from their non-audit arms225 on a much greater scale than the challengers. If that was the case, the Big Four would be able to bid at prices lower than the challengers could sustain.

144.In oral evidence, Sir John Kingman stated that the new regulator “needs to understand the economics of audit, and needs to be on top of whether audit fees are sufficient and consistent to deliver quality.”226 He also referred to the longstanding question of whether audits are under-priced in his letter to the Secretary of State, which accompanied the publication of his Review.227 In light of this debate, Sir John recommended giving the new regulator the right to approve audit fees in the interests of quality. The letter also notes that “the audit fee [ … ] need[s] to be set in the light of actual work done”.228 We are concerned that is often not the case.

145.Fees are largely negotiated and agreed upon before the audit. To an extent, therefore, audit firms have to choose between sacrificing quality or profits when the audit discovers problems that require extra work. In evidence, firms have all said that they prioritise quality over profit whenever extra work is needed.229 We were also told that auditors negotiate additional fees to cover the extra work.230

146.In private, though, we were told that companies can refuse to pay; and audit partners can also be reluctant to ask for more fees in order to preserve a good relationship. We were surprised to find out that half of audits in the last five years at Deloitte and PwC ended up costing over 10 per cent more than originally budgeted. Of these audits incurring significant cost overruns, the Big Four negotiated an increased fee in between 60 per cent and 83 per cent of cases. Deloitte also clarified that in only 24 per cent of cases did the increase fully cover the overrun.231


Deloitte (sample)

PwC (sample)


>10 per cent cost overrun





Of those, negotiated increased fee





Source: letters from the Big Four to BEIS Committee Chair in answer to the questions posed in the Chair’s letter dated 13th February 2019

Note: where yearly breakdown was provided, the average percentage was calculated

147.These figures do not fill us with confidence, and we are not alone in this view. The Chartered Financial Analyst (CFA) Institute expressed concern about audit committees advertising their ability to reduce audit fees:

We worry when audit committee members laud their ability to reduce audit fees as if to engender [sic] themselves to management or flex their muscle on auditors who seek to retain their “clients”. Investors—those who pay the bill—are less price sensitive to audit fees than one might expect. While the cost of an audit is important, pressuring auditors to reduce fees to the point where they are not allowed to make reasonable profits on the audit alone is not a model investors support, as it reduces audit quality.232

148.The FRC’s Audit Culture Thematic Review (May 2018) found that auditing is under financial pressures, “with the demands on auditors growing but firms not being successful at increasing or in some cases, maintaining their fees”.233 The FRC reported views from investors “that the way auditors are remunerated may not promote scepticism, as good auditing may incur additional costs that management are unhappy to pay.”234 The FRC thought that audit committees should be informed about “the cost of any audit work performed over and above the original audit plan, so the audit committee can decide how this additional cost should be reflected in the final audit fee.”235

149.The CFA Institute recommended publishing much more information about fees, skills mix and hours spent in audits in order to move from competition based on price to competition based on quality:

[Audit fees] are generally large lump sums with very high-level qualitative explanations. This fee reporting, and the tendering process create perverse incentives. [ … ] Investors need greater reporting on audit hours, staff mix of hours, and rate per hour to be able to be well informed participants in the market place.236

150.We recommend that the FRC and its successor require greater reporting on audit fees, potentially including the disclosure of audit hours, staff mix, and rate per hour. Auditors should also report instances where they have performed additional procedures but have been unsuccessful at increasing their fee.

151.That said, transparency alone does not fully assuage our concerns in this area. We remain concerned about incentives that work against quality. In the FRC’s words, “[c]ost and budget pressures may act as a disincentive to auditors doing the right thing.”237 We are not confident in relying solely on the integrity of auditors to do the right thing in the face of conflicting interests. We agree with Sir John Kingman that “economics shapes behaviour”,238 and auditors are no exception. The regulator should aim to align as much as possible the incentives that govern auditors’ behaviour with the delivery of quality.

152.Audit must be properly resourced to deliver quality. We have argued that the audit product must improve too. We recognise that many of our recommendations in this report are likely to lead to higher audit prices. This is an acceptable consequence of securing better, more trusted audits.

153.We recommend that the FRC and its successor be given more powers over audit fees. We support Sir John Kingman’s proposal that the regulator be given powers to intervene in the interests of quality. To do that well, the regulator needs to better understand the economics of audit. The regulator should also investigate whether the structure of fees is fit for purpose, with the aim of reducing or eliminating economic incentives that work against quality.

225 We discuss these subsidies in the Chapter on separating audit from non-audit.

227 Sir John Kingman, Operation of the audit market: letter to Rt Hon Greg Clark, (December 2018), p 3.

228 Sir John Kingman, Operation of the audit market: letter to Rt Hon Greg Clark, (December 2018), p 7.

231 The other three firms did not provide this detail.

232 CFA Institute, Response to CMA’s Audit update paper, (5 February 2019), p 6.

233 FRC, Audit Culture Thematic Review, (May 2018), p 28.

234 FRC, Audit Culture Thematic Review, (May 2018), p 29.

235 FRC, Audit Culture Thematic Review, (May 2018), p 29.

236 CFA Institute, Response to CMA’s Audit update paper, (5 February 2019), p 6.

237 FRC, Audit Culture Thematic Review, (May 2018), p 4.

Published: 2 April 2019