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Audit market and competition developments 2024 Update

Contents

The FRC does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.

© The Financial Reporting Council Limited 2024 The Financial Reporting Council Limited is a company limited by guarantee. Registered in England number 2486368. Registered Office: 8th Floor, 125 London Wall, London EC2Y 5AS

Executive summary

This update sets out recent developments in the audit market alongside our evolving approach to competition to help inform and support our ongoing engagement with stakeholders.

Our approach to competition and relevant work

  • Our approach to competition is evolving to factor in recent developments in the audit market and our stakeholders' key concerns.
  • Audit quality remains of primary importance, but we know a quality gap has emerged between the largest audit firms and other firms in recent years.
  • In recent months, we have heard concerns from some companies about rising audit fees. Audit fees will vary (from company to company and by audit firm), and any increases in audit fees may be due to various factors. For example, the 2023 financial year saw significant changes to IFRS accounting standards which created more work for auditors. Other factors driving higher fees may include growing costs for audit firms from wage inflation and investment in technology.
  • Our focus is on the whole audit market and we want to see every UK company - big or small - have access to a good audit.
  • In the past year, we have continued to pursue initiatives to enhance how the audit market functions. We look forward to ongoing engagement with our stakeholders on our existing initiatives and future work, including market studies, to continue to drive improvements in the audit market.

Recent developments in the audit market

  • Challenger audit firms' share of FTSE 350 audit engagements increased from 11% in 2022 to 13% in 2023. However, the Big Four audit firms (Deloitte, EY, KPMG and PwC) still dominate the market, earning 98% of FTSE 350 audit fees and 90% of all Public Interest Entity (PIE) audit fees in 2023.
  • In 2023, 23 FTSE 350 companies changed their auditor. Most of these (20) switched from one Big Four firm to another Big Four firm.
  • Total PIE audit fees earned by UK audit firms in 2023 was £1.4 billion, most of which (94%) were fees for audits of FTSE 350 companies.
  • All the largest audit firms had higher income growth from their audit work than from their non-audit work between 2022 and 2023. Among the largest audit firms, Deloitte had the largest income growth from audit work, with a 24% increase since 2022 and Grant Thornton had the lowest, with a 15% increase on the previous year.

Introduction

1Five years on from the Competition and Markets Authority's (CMA's) statutory audit market study (2018-19), this is a good time to consider what has happened in the audit market in recent years, and the FRC's approach to competition.

2We want our approach to reflect the current circumstances in the audit market and our stakeholders' key concerns. In recent years, issues have emerged that were not evident when the CMA reviewed the market. We need a pragmatic and responsive approach to these issues that adapts to these new challenges.

3Since the CMA's market study, we have been monitoring competition in the audit market and reporting on developments in annual publications. In 2022, our initial competition policy paper defined a well-functioning audit market and gave more details of our approach to competition. In 2023, our snapshot on audit market and competition developments included details of our work to help realise a well-functioning audit market.

4This 2024 update builds on our previous publications and provides information on recent developments and our evolving approach to competition in the audit market. It also highlights some of our existing initiatives to improve the functioning of the audit market and our proposed future work.

5We welcome any feedback on this update to help inform our ongoing and future work on the audit market.

1. Recent developments in the audit market

6In this section, we provide the latest available information for the key indicators relating to audit market dynamics and competition reported in our previous competition publications. We show any changes in these indicators for the FTSE 350 and wider PIE audit markets between 2022 and 2023, as well as longer-term trends (where data is available).

7This is only a brief account of recent developments for part of the audit market, and other FRC publications provide more detailed information. For example, our annual Audit Quality and Supervision reports give information on audit quality at audit firms and significant developments in the audit market that firms must consider in their delivery of high quality audit. Our annual Key Facts and Trends in the Accountancy Profession provides a wider range of data.

Summary

8Some of the main developments in the FTSE 350 and wider PIE¹ audit markets are set out below:

  • Challenger audit firms'² share of FTSE 350 audit engagements increased from 11% in 2022 to 13% in 2023. However, the Big Four audit firms (Deloitte, EY, KPMG and PwC) still dominate the market, earning 98% of FTSE 350 audit fees and 90% of all PIE audit fees in 2023.
  • In 2023, 23 FTSE 350 companies changed their auditor. Most of these (20) switched from one Big Four firms to another.
  • Total PIE audit fees earned by UK audit firms in 2023 was £1.4 billion,³ most of which (94%) were fees for audits of FTSE 350 companies.
  • All the largest audit firms had higher income growth from their audit work than their non-audit work between 2022 and 2023. Among the largest audit firms, Deloitte has seen the largest income growth from audit work, with a 24% increase since 2022 and Grant Thornton had the lowest, with a 15% increase on the previous year. The non-Big Four firms with the largest growth in audit income since 2022 were BDO, RSM and Forvis Mazars, with an average increase of 22%.⁴

Audit market shares

9In 2023, the Big Four continued to dominate the PIE market, earning around 90% of all PIE audit fees. This is similar to 2022. Figure 1 shows the audit firms' share of PIE audit fees in 2022 and 2023.

Figure 1. Audit firms' share of PIE audit fees in 2022 and 2023

(Bar chart showing audit firms' share of PIE audit fees in 2022 and 2023. X-axis: PwC, Deloitte, KPMG, EY (Big Four) and BDO, Forvis Mazars, All Others (non Big-Four). Y-axis: Percentage from 0% to 30%. Data points: PwC: 2022: 26%, 2023: 27% Deloitte: 2022: 26%, 2023: 24% KPMG: 2022: 20%, 2023: 18% EY: 2022: 20%, 2023: 19% BDO: 2022: 4%, 2023: 4% Forvis Mazars: 2022: 4%, 2023: 4% All Others: 2022: 2%, 2023: 2%)

Source: KFAT Reports 2024, 2023 and firms' transparency reports. Note: Only UK audit firms are included and audit fee income from PIE clients includes audit fees of PIE parent entities of the audited entities and their non-PIE subsidiaries, wherever applicable.

10Figure 2 shows the audit firms' share of FTSE 350 audit fees from 2019 to 2023. In 2023, the Big Four's share of FTSE 350 audit fees remained the same as in 2022 (97%).⁵ Among the firms, there were some variations, with Deloitte's share falling from 28% in 2023 to 24% in 2022. Meanwhile, EY's share increased from 20% in 2022 to 24% in 2023.

Figure 2. Audit firms' share of FTSE 350 audit fees, 2019-2023

(Line chart showing audit firms' share of FTSE 350 audit fees from 2019 to 2023. X-axis: 2019, 2020, 2021, 2022, 2023. Y-axis: Percentage from 0% to 40%. Lines represent: Deloitte, Ernst & Young, KPMG, PwC, Others. Key data points for each line (approximate from graph): Deloitte: 2019 (25%), 2020 (27%), 2021 (28%), 2022 (28%), 2023 (25%) Ernst & Young: 2019 (17%), 2020 (22%), 2021 (21%), 2022 (20%), 2023 (24%) KPMG: 2019 (29%), 2020 (25%), 2021 (25%), 2022 (25%), 2023 (24%) PwC: 2019 (25%), 2020 (25%), 2021 (24%), 2022 (25%), 2023 (25%) Others: 2019 (1%), 2020 (1%), 2021 (1%), 2022 (2%), 2023 (2%))

Source: FRC analysis of Audit Analytics Audit Opinions data for 2019-2023.

11In 2023, the Big Four audited 88% of the FTSE 350 companies,⁶ down from 89% in 2022. PwC has held the largest market share of FTSE 350 audit engagements since 2019, maintaining a 28% market share in 2023. The number of FTSE 350 audits supplied by challenger firms has risen from 4% in 2019 to 13% in 2023. Figure 3 shows the audit firms' share of FTSE 350 audit engagements from 2019 to 2023.

Figure 3. Audit firms' share of FTSE 350 audit engagements, 2019-2023

(Line chart showing audit firms' share of FTSE 350 audit engagements from 2019 to 2023. X-axis: 2019, 2020, 2021, 2022, 2023. Y-axis: Percentage from 0% to 40%. Lines represent: Deloitte, Ernst & Young, KPMG, PwC, Others. Key data points for each line (approximate from graph): Deloitte: 2019 (26%), 2020 (24%), 2021 (22%), 2022 (21%), 2023 (22%) Ernst & Young: 2019 (18%), 2020 (20%), 2021 (19%), 2022 (20%), 2023 (18%) KPMG: 2019 (28%), 2020 (24%), 2021 (22%), 2022 (21%), 2023 (20%) PwC: 2019 (30%), 2020 (28%), 2021 (30%), 2022 (28%), 2023 (28%) Others: 2019 (4%), 2020 (6%), 2021 (8%), 2022 (11%), 2023 (13%))

Source: FRC analysis of Audit Analytics Audit Opinions data for 2019-2023.

12Regarding the wider PIE market, while there are many audit firms active in the PIE audit market, the majority of these continue to supply only a few PIE audits. In 2023, only 14 audit firms active in the PIE audit market supplied more than 10 PIE audits.⁷

13Figure 4 shows the changes in the number of audit firms active in different categories of the PIE audit market. From 2022 to 2023, there was a 24% increase in the number of audit firms supplying PIE audits for other listed equities. There was a small decrease in the number of audit firms conducting PIE audits in the unlisted credit institutions and insurers category. There was no change in the number of audit firms conducting PIE audits for FTSE 100, FTSE 250, and listed debt.

Figure 4. Number of audit firms supplying each type of PIE audit, 2019-2023

(Bar chart showing the number of audit firms supplying each type of PIE audit from 2019-2023. X-axis: 2019, 2020, 2021, 2022, 2023. Y-axis: Number of firms from 0 to 45. Bars represent: FTSE 100, FTSE 250, Listed Debt, Other Listed Equity, Unlisted credit institutions and insurers. Key data points (approximate from graph): 2019: FTSE 100 (20), FTSE 250 (24), Listed Debt (18), Other Listed Equity (8), Unlisted credit institutions and insurers (4) 2020: FTSE 100 (22), FTSE 250 (24), Listed Debt (16), Other Listed Equity (8), Unlisted credit institutions and insurers (4) 2021: FTSE 100 (18), FTSE 250 (29), Listed Debt (16), Other Listed Equity (9), Unlisted credit institutions and insurers (4) 2022: FTSE 100 (17), FTSE 250 (33), Listed Debt (17), Other Listed Equity (10), Unlisted credit institutions and insurers (6) 2023: FTSE 100 (17), FTSE 250 (41), Listed Debt (16), Other Listed Equity (17), Unlisted credit institutions and insurers (6))

Source: Audit Quality Review Inspection Scope Surveys 2019-2023.

Switching in the FTSE 350 audit market

14In 2023, 23 FTSE 350 companies changed their auditor. Most of these companies (20) switched from one Big Four firm to another. The proportion of Big Four to non-Big Four switches was the lowest since 2019, as shown in Figure 5.

Figure 5. Number of FTSE 350 companies switching auditor by type of switch, 2019 - 2023

(Bar chart showing the number of FTSE 350 companies switching auditor by type of switch from 2019-2023. X-axis: 2019, 2020, 2021, 2022, 2023. Y-axis: Number of companies from 0 to 25. Bars represent: Switches from Big Four to Big Four, Switches from Big Four to non-Big Four, Switches from non-Big Four to Big Four, Switches from non-Big Four to non-Big Four. Key data points (approximate from graph): 2019: B4 to B4 (24), B4 to non-B4 (4), non-B4 to B4 (2), non-B4 to non-B4 (1) 2020: B4 to B4 (18), B4 to non-B4 (7), non-B4 to B4 (1), non-B4 to non-B4 (1) 2021: B4 to B4 (17), B4 to non-B4 (4), non-B4 to B4 (1), non-B4 to non-B4 (1) 2022: B4 to B4 (13), B4 to non-B4 (2), non-B4 to B4 (1), non-B4 to non-B4 (1) 2023: B4 to B4 (20), B4 to non-B4 (3), non-B4 to B4 (1), non-B4 to non-B4 (1))

Source: Audit Analytics Auditor Changes database; FTSE 350 constituents as at 30 June 2024.

Audit fees

15Audit firms earned £1.4 billion in PIE audit fees in 2023, an increase of 27% on 2022.⁸ Total audit fees paid by FTSE 350 companies increased by 14% to £1.3 billion in 2023 (94% of all PIE audit fees).⁹ Figure 6 shows the percentage growth in audit fees paid by FTSE 350 companies to UK and non-UK audit firms between 2022 and 2023. To note, total audit fee figures and changes in audit fees by category of company can mask significant variations in the audit fees paid by individual companies and charged by audit firms. There may also be different factors driving changes in audit fees year on year, as detailed in paragraph 26.

Figure 6. Growth in audit fees paid by FTSE 350 companies, 2022-2023

(Bar chart showing growth in audit fees paid by FTSE 350 companies, 2022-2023. X-axis: 2022, 2023. Y-axis: Percentage from 0% to 20%. Bars represent: FTSE100, FTSE250, FTSE350. Key data points (approximate from graph): 2022: FTSE100 (14%), FTSE250 (13%), FTSE350 (14%) 2023: FTSE100 (17%), FTSE250 (5%), FTSE350 (14%))

Source: FRC analysis of Audit Analytics Audit Fees data for 2021-23.¹⁰

Audit firm income from audit and non-audit work

16In 2023, the challenger firms with the largest growth in audit income were BDO, RSM and Forvis Mazars, with an average increase of 22%. Among the largest audit firms, Deloitte had the largest growth in audit income with a 24% increase between 2022 and 2023 and Grant Thornton had the lowest, with a 15% increase on the previous year. Growth in non-audit income was lower for all the firms, but EY experienced the highest growth in non-audit income with a 16% increase from 2022 to 2023.

17All the largest audit firms experienced higher income growth from their audit work than their non-audit work between 2022 and 2023, with the largest differences experienced by KPMG, Deloitte and PwC. Figure 7 illustrates the income growth from audit and non-audit work for the largest audit firms between 2022 and 2023.

Figure 7. Income growth for the largest audit firms from audit and non-audit, 2022-2023

(Bar chart showing income growth for the largest audit firms from audit and non-audit, 2022-2023. X-axis: Deloitte, BDO, RSM, Forvis Mazars, KPMG, PwC, EY, Grant Thornton. Y-axis: Percentage from 0% to 30%. Bars represent: Audit income growth (2022-23), Non-audit income growth (2022-23). Key data points (approximate from graph): Deloitte: Audit (24%), Non-audit (10%) BDO: Audit (23%), Non-audit (11%) RSM: Audit (22%), Non-audit (12%) Forvis Mazars: Audit (21%), Non-audit (13%) KPMG: Audit (18%), Non-audit (5%) PwC: Audit (18%), Non-audit (4%) EY: Audit (18%), Non-audit (16%) Grant Thornton: Audit (15%), Non-audit (4%))

Source: KFAT Reports 2023, 2024.¹¹

2. Our approach to competition in the audit market, and our recent and future work

18In this section, we provide details of how we are evolving our approach to competition in light of recent developments in the audit market. We also summarise some of our recent work to improve the functioning of the audit market and our plans for future work.

19While the previous section shows some changes in the supply of audit in recent years, there have been no significant changes since the CMA's market study. At the same time, other issues have emerged. These include concerns about audit firms' capacity to deliver audits, a widened gap in audit quality between the largest audit firms and the rest, and concerns from some companies, especially Small and Medium Enterprises (SMEs), about increasing audit fees and difficulties finding an auditor.

20We are evolving our approach to competition to factor in current issues and ensure we focus our policy and work on the areas of most concern to our stakeholders. Some of our previously published approach remains relevant, but there are also updates to our thinking. Our evolving approach to competition is set out below.

A focus on audit quality

21As we stated in 2022, we are not interested in promoting competition for competition's sake. We want competition that drives higher audit quality and market resilience. We want to see a market that provides sufficient choice of good audit firms for all companies, noting choice can sometimes be restricted due to mandatory tendering and rotation requirements.

22We know audit quality has improved in recent years, but not in all audit firms. In our most recent annual review of audit quality, we reported that overall performance in audit quality for individual firms within Tier 1 continues to vary with a widened gap between the top four leading audit firms, where results have either improved or are broadly stable, and BDO and Forvis Mazars, where results have declined.

23We have identified that smaller audit firms need to grow their capacity and capability to deliver good quality audits. We will continue to work with audit firms, including smaller audit firms through our scalebox – to help them improve. We want to see sufficient choice of audit firm across the whole audit market.

A broad approach that takes account of the whole audit market

24Our approach to competition is broader in focus than the audits of the UK's largest listed companies (the FTSE 350 audit market). Our remit focuses on the PIE audit market but as the Competent Authority for Audit in the UK we also want the entire audit market to function effectively. We want to ensure that every UK company – big or small – have access to a good audit.

Recognising concerns about higher audit fees and limited choice across the market

25In 2022, we said we were mindful that different parts of the audit market will function differently. The choice of audit firm available to large and small companies, and the factors influencing their choice of audit firm, will vary. For some companies, especially smaller ones, the level of fee may be a significant consideration in their selection of an audit firm.

26In the past year, we have heard growing concerns about significant increases in audit fees, which may be driven by various factors. For example, significant changes to IFRS accounting standards may have created additional work for auditors in the last year. Audit firms have reported growing cost pressures, including from wage inflation, and greater investment in technology. We have been exploring the extent of increases in audit fees, and what is driving these increases, and we will continue to monitor this closely.

Not aiming to create a 'Big Five'

27Our broad focus on the whole market means the primary aim of our competition policy is not about growing another firm so it can rival the Big Four. Growing a firm to rival the Big Four would be very difficult to do. Forming an audit firm with a size, by PIE audit fee income, the same as the smallest of the Big Four (EY) is the equivalent of combining the next eight largest audit firms.

It will take time to realise changes in the audit market

28Our evolving approach to competition continues to recognise that it will take time to realise any significant changes in the audit market, especially at the top end of the market. The existing issues are deep-seated and the market structure is heavily entrenched. It will take time – perhaps some considerable time – to realise a well-functioning audit market. Large audit firms operate internationally and their focus will vary in line with wider developments.

A cross-system approach is required

29While we want to see a well-functioning audit market, it is not something we can deliver alone. A cross-system approach is required to ensure greater choice of audit firms for all companies, opportunities for auditors entering the workplace, and resilience for the whole market. In recent years we have taken action, but professional bodies, audit firms, companies and the government also have roles to play to help the audit market work better.

Our recent and future work on competition in the audit market

30Over the past year, we have progressed initiatives to improve how the audit market functions. In October 2024, we reported that the three-year transitional period for operational separation of the audit and non-audit practices in the Big Four had concluded, and that all four firms had made significant improvements to their governance to prioritise the delivery of audit quality. In our annual review of audit quality (July 2024), we reported that 11 small audit firms had been participating in our audit firm scalebox, which seeks to help small firms grow and overcome barriers to entry or expansion within the audit market. In our annual review of corporate governance (November 2024), we reported some evidence of early adoption by Audit Committees of our Minimum Standard for External Audit, which seeks to ensure Audit Committees focus on audit quality.

31We will continue to monitor developments in the audit market and seek to improve the functioning of the audit market. In 2024, we established our Market Intelligence and Insights Team to help develop our understanding of the markets relevant to the FRC and our impact on them. This year, we launched two market studies and will be carrying out undertaking further market studies in future, including in relation to the audits of SMEs.

Next steps, including opportunity to comment

32Engaging with our stakeholders is vital if we are to realise a well-functioning audit market. We will continue to work closely with others, including audit firms, on existing and future initiatives to improve competition.

33We welcome any feedback on this update to help inform our ongoing and future work. Please email any comments to [email protected] by 28 February 2025.

Financial Reporting Council December 2024

Financial Reporting Council 8th Floor 125 London Wall London EC2Y 5AS +44 (0)20 7492 2300

www.frc.org.uk

Follow us on LinkedIn or @FRCnews

  1. Public interest entities (PIEs) are defined in regulation 2 of the Statutory Auditors and Third Country Auditors Regulations 2016 and section 494A of the Companies Act 2006. PIEs include: (i) issuers whose transferable securities are admitted to trading on a UK regulated market; (ii) certain credit institutions; and (iii) certain insurance undertakings ↩

  2. Challenger audit firms in this case are defined as all audit firms outside of the Big Four (Deloitte, EY, KPMG, PwC) ↩

  3. Source: Key Facts and Trends in the Accountancy Profession (KFAT) Reports and audit firms' transparency reports ↩

  4. The eight largest audit firms are the Big Four (Deloitte, EY, KPMG and PwC) plus BDO, Grant Thornton, Forvis Mazars and RSM ↩

  5. Source: Audit Analytics opinion data for 2019-2023. Figures based on revenue from audits in each calendar year for companies for which the auditors signed the audit opinions. For data availability reasons, this is calculated at the network level, therefore, a figure calculated on a UK firm-only basis may be slightly different. Market shares are calculated based on the 'Audit Fee Eur' field ↩

  6. Audit Analytics opinion data for 2019-2023. Figures based on revenue from audits in each calendar year for companies for which the auditors signed the audit opinions ↩

  7. Source: AQR Inspection Scope Surveys 2019-2023 ↩

  8. Source: Key Facts and Trends in the Accountancy Profession (KFAT) Reports and audit firms' transparency reports ↩

  9. Source: See footnote 10 ↩

  10. Note: [1] Audit fees are based on the 'Audit Fee EUR' field provided by Audit Analytics via the Audit Fees data download. We convert these figures to £ using the average annual exchange rate provided by the Office for National Statistics used in the 2024 Key Facts and Trends in the Accountancy Profession report. Currency conversions may introduce discrepancies relative to original data sources (for example, annual reports). [2] For 2023, FTSE 350 constituents as of 19 July 2024 based on the list of constituents and associated ISIN provided by Refinitiv Eikon. [3] For 2022, FTSE 350 constituents as of 22 June 2023 based on the list of constituents and associated ISIN provided by Refinitiv Eikon. [4] For 2021, FTSE 350 constituents as of 9 June 2022 based on the list of constituents and associated ISIN provided by Eikon. [5] All Audit Analytics Audit Fees data was sourced on 8 October 2024 ↩

  11. Notes: In the chart, audit firms are ordered by their audit income percentage growth, from largest to smallest. Totals for KPMG and EY exclude figures for KPMG Ireland and EY Ireland ↩

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