Audit firm concentration is the subject of significant discussion in the United Kingdom. Currently, the Big Four dominate the FTSE 350 by market share. Regulatory attempts to increase competition and decrease concentration, such as mandatory firm rotation, may not achieve those desired results. In part, because changing audit firms often comes with costs and the choice of firms may be limited.

Just one company in the FTSE 100 has a non-Big 4 audit firm. Endeavour Mining [EDV] retains BDO as their statutory auditor. The Big 4 have between 22 and 27 clients. PricewaterhouseCoopers and KPMG led with 27 clients each.
The Big 4 also dominate the FTSE 250. Nearly 90% of FTSE 250 companies retain a Big 4 audit firm.

Mandatory audit firm rotation was meant to promote competition. But 2021 auditor changes show mandatory rotation may just cause companies to switch from one Big 4 firm to another Big 4 firm.
FTSE 100 audit firm changes between 2020 and 2021 were all from one Big 4 firm to another Big 4 firm. Twelve FTSE 250 audit firm changes were from one Big 4 firm to another Big 4 firm, one was from a non-Big 4 firm to a Big 4 firm, two were from Big 4 firms to non-Big 4 firms, and one was from a non-Big 4 firm to another non-Big 4 firm.
Regulatory Response
The U.K. government recently proposed plans to overhaul the corporate reporting and audit environment.
“To curtail the unhealthy dominance of the ‘Big Four’ audit firms, FTSE 350 companies will be required to conduct part of their audit with a challenger firm. [T]he new regulator, ARGA, will also be given the power to make big audit firms keep their audit and non-audit functions operationally separate and to enforce a market cap if the state of the market doesn’t improve.”
Audit regime overhaul to help restore trust in big business, May 2022
Additionally, the U.K.’s Financial and Reporting Council (FRC) set a deadline of June 2024 for the Big Four firms to separate their audit practices from the rest of their operations. Recently, EY made headlines when they announced the firm was discussing a possible global spinoff of its audit practice.
Costs of Market Representation
Changing audit firms can result in higher costs for a company. Companies that change their audit firm often see larger increases in audit fees compared to companies that retain the same audit firm. New audit firms are often required to perform more work to understand their clients’ operations, controls, and systems.
FTSE 250 companies with a new auditor saw a 33% increase in audit fees year-over-year. In comparison, FTSE 250 companies with the same auditor saw a smaller 19% increase. For companies subject to mandatory audit firm rotations, this cost increase may be unavoidable.

Creating a more competitive market is laudable. But it is important to consider the costs passed on to companies when an auditor change occurs.
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