UK: Backbite - Auditing the Big Six auditors.

UK: Backbite - Auditing the Big Six auditors. - There is a 50% premium for their scrutiny but not a lot of logic behind the fees.

Last Updated: 31 Aug 2010

There is a 50% premium for their scrutiny but not a lot of logic behind the fees.

The Big Six accountants come expensive. A £1 million-plus turnover company audited by Coopers and Lybrand Deloitte, Ernst and Young, KPMG Peat Marwick, Price Waterhouse, Touche Ross or Arthur Andersen can expect to pay a premium of 50% for the privilege, it is revealed in an exclusive report by independent consultant Dennis Henry.

The gap closes for companies with turnover in excess of £100 million, but at all levels the Big Six cost more. For companies with turnover of anything up to £200 million, the London-based offices of the Big Six cost most of all. Then, curiously, their local branches take the lead.

The Big Six premium doesn't account for the discrepancies in fees. For example, Lord Hanson pays £3 million less than Sir Owen Green in audit fees. It's not relative to size. With turnover of £7.15 billion, Hanson is marginally larger than BTR. Nor is it a difference in auditor. Both are clients of Ernst and Young. Last year BTR paid £7 million and Hanson £4 million, to the auditors. Among 227 companies with a total audit value of £83 million, Henry found that fees for companies similar in size and sector varied enormously.

Measured by turnover, the variations were in the order of two to three times the lowest figure. Measured by size within sector, they were even greater; in manufacturing companies with sales of just over £10 million, there was a multiple of 10 between the highest and lowest audit fees. Differences in sales and sector do have a bearing on charges, but they don't account for such variations. Henry has systematically explored the reasons put forward by auditors to justify discrepancies. He proves that capital employed, current assets and liabilities, the extent of internal auditing and the number of locations and auditors employed are largely irrelevant in determining fees. BTR might do well to follow the example of the 31 companies in Henry's study which have gone to tender in the last five years. Those which negotiated specifically on costs achieved average reductions of 33%. This didn't entail a diminution in quality - the usual grounds on which the Big Six justify their higher bills. One company stayed with its existing auditor but paid 20% less.

It's a lesson that even the canny Lord Weinstock would do well to learn from. With turnover, at £6 billion, some three-fifths the size of British Aerospace, GEC is paying twice as much in audit fees. Touche Ross touched the company for over £4 million last year. It makes BAe's £2 million bill from KPMG Peat Marwick look a bargain that's hard to beat.

Reports available for £250 (inc p and p) from JDH Consultants, 11 Clydebrae Drive, Bothwell, Glasgow G71 8SB.

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