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CC says bundling non-audit services not a barrier

The Competition Commission has found no evidence to support some market views that the bundling of non-audit services (NAS) creates a barrier to entry for audit firms that wish to enter the market.

The competitions watchdog has revealed its findings in a paper, Bundling of audit and non-audit services, which is part of its greater investigation into statutory audit services in the market.

‘Companies may request firms to include the price for certain services in their tender but we do not believe that these services exclude any of the largest challenger firms. Furthermore, evidence from the survey of purchasers of audit services does not indicate that NAS is a significant consideration when selecting an auditor,’ the CC has said.

The CC considered if there was evidence of a barrier to entry caused by firms bundling or tying audit services with other audit-related services or NAS as permitted by the rules on auditor independence.

The forms of ‘bundling’ examined included ‘pure bundling’, ie, refusing to supply any of the individual services separately; ‘mixed bundling’, in which audit and NAS are available separately or bundled together at a lower price than the sum of the individual prices; or ‘tying’, ie, one of the services is available individually but the other is available only if bought in a bundle.

The CC found that almost all companies in the FTSE 350 receive some level of NAS from their statutory auditor. Of the FTSE 100 companies, 87% receive NAS to a value of more than 5% of their UK audit fee and the figure for the FTSE 250 companies is 83%. The median ratio of non-audit to audit services for FTSE 100 companies is 44% and 53% for FTSE 250 companies.

It also found that the proportion of companies buying NAS from their statutory auditor is declining, and the value of those NAS is also falling.

Tax and transactions generate the largest value of NAS revenue for statutory auditors and revenues from these services have also declined. Restructuring, risk assurance and IT consulting have all increased, but generate relatively low revenues.

No robust or consistent evidence was found to indicate that firms differentiate their audit prices on the basis of the level of NAS provided. The CC said the data showed that the average level of NAS varies significantly by industry and profits generated in each industry also vary.

‘Regardless of any link between NAS and engagement profitability, there is no evidence to indicate that audit does not make a profit, even where NAS is relatively high,’ the CC said.

The findings also challenge a common contention - that audit is not profitable – often argued by the top four firms.

Statutory auditors for listed companies are understood to have changed their strategy for audit in the last 10 years, following regulatory pressure which seeks to prevent issues of conflict should firms provide both audit and non-audit services to their clients.

In the UK, the top four firms have therefore rapidly sought to target the remainder of potential listed clients, outside of their audit clients, for non-audit work and consultancy services.

Published 19 October 2012


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