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CC probe shows audit is a lucrative market

The Competition Commission’s statutory audit market probe has finally sunk the myth that audit work is a loss-leader.

In its Profitability – part 2 report, the CC said its analysis indicated that ‘there was no overall trend in whether assurance or non-assurance as a whole generated higher gross margins’.

‘Assurance – which is largely comprised of audit services – is not a loss leader. Relative to other service lines it is profitable – generally less so than tax, but it is not consistently the lowest margin work undertaken by the firms.’

It also found that assurance margins are ‘generally more stable than other lines of service’ and that the risk profile of audit is ‘lower than that of consulting – the income stream is less lumpy, the cost base is fairly stable and there is a high proportion of repeat business and significant long-term clients’.

The report highlighted the fact that profits per partner at the non-Big Four firms were typically less than half that of the Big Four.

It went on to reveal that it was unable to conclude whether there are ‘excess returns in the FTSE350 audit market’ and insufficient data meant it wasn’t possible to estimate a return on capital employed or an adjusted return on sales accurately.

However, it concluded that for the two largest firms, total remuneration per audit partner is slightly higher on average than for non-audit partners.

‘Whilst our review of the profits by service line is subject to the cost allocation choices of the parties, we note that assurance/audit work is rarely the lowest margin service line.’

Published 23 October 2012


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