The soaring cost of audit fees has become a pressing concern for quoted companies – most notably for many of the smallest that choose to trade their shares on London’s markets today. Unaffordable audits are encroaching upon tighter budgets, hindering growth, and limiting opportunities for expansion.
This isn’t just a hypothetical scenario; our research has found that it is the reality faced by numerous businesses today. By our estimate, the average percentage rise of audit fees has increased by five times the rate of inflation and has the potential to leave companies outside the FTSE 350 in crisis.
From 2017/18 to 2022/23, the average percentage change in audit fees skyrocketed by a staggering 127%. For companies across various markets, including the LSE Main Market, AIM, and Aquis, this translates to an average increase of nearly £300,000 between 2017/18 and 2022/23. The numbers speak volumes, revealing a trend that demands attention.
But why such a dramatic rise? The reasons are multifaceted. Firstly, the evolving regulatory landscape has significantly increased financial reporting requirements and auditing standards. This complexity diverts resources and necessitates additional documentation, driving up costs. Secondly, audit firms, in a bid to mitigate risks, have become increasingly selective, opting to avoid high-risk audits and charging higher fees to offset perceived risks. Additionally, talent and staffing challenges within audit firms, coupled with profitability concerns, further contribute to the escalating costs.
The repercussions of these soaring audit fees are profound. Small and mid-caps who are already operating on tight budgets find themselves burdened with financial strain, diverting funds from crucial areas like research and development. Furthermore, the availability of auditors has dwindled in recent years, making it increasingly difficult for smaller companies to find a suitable auditor. This leads to more challenges in financial reporting and leaves companies vulnerable to investor concerns about transparency and regulatory adherence.
In light of our research, we have proposed several measures to address the current situation.
- Streamlining the audit process to promote efficiency;
- Enhancing the attractiveness of the industry;
- Evaluating the liability regime and considering a shift from individual to collective accountability; and
- Promoting transparency and benchmarking within the industry.
Now more than ever, it’s crucial for the community to come together and addresses the pressing issue of rising audit fees. It’s not just individual companies that will bear the burden of these escalating costs; the entire economic ecosystem in the UK cannot afford for this trend to continue unchecked. By implementing strategic measures and fostering collaboration, we can pave the way for a more sustainable and equitable audit market – and UK economy – as a result.
Download the full report It Doesn’t Add Up: The Crisis of Unaffordable Audits to learn more about the challenges at hand and get in touch if you would like to join the conversation.
