UK Big Four strengthen audit market position as regulatory pressure eases

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UK Big Four audit dominance

Highlights

UK government dropped legislation to strengthen the Financial Reporting Council, signaling a regulatory retreat from tighter audit oversight after Carillion's 2018 collapse.
The Big Four continue to audit 97 of the FTSE 100 and have avoided mandatory work-sharing with smaller firms, reinforcing market dominance.
Audit fees for UK-listed companies increased 75 per cent from 2018 to 2023, boosting profitability and pricing power for leading audit firms.

Regulatory retreat reshapes audit oversight

As reported by Financial Times, the UK is stepping back from a decade-long push to tighten audit regulation after the failings exposed by the 2018 collapse of Carillion. Long-promised legislation to strengthen the Financial Reporting Council and curb the Big Four’s dominance has been dropped, while the watchdog is moving toward an "evolved" model that puts less direct emphasis on reviewing individual audits and more on firms’ internal systems.

The earlier crackdown followed serious concerns that auditors had signed off company accounts without sufficient scrutiny in one of the world’s most influential audit markets outside the U.S. Record fines and repeated political pressure had targeted weak standards and market concentration, but that mood is now changing on both sides of the Atlantic.

Even so, the tougher supervisory phase appears to have improved standards. Annual inspection results by the FRC have improved, and senior audit leaders now seem more willing to accept a more exacting review process rather than expect regulators to overlook smaller errors.

Higher fees and stronger market control

One of the main consequences of the clampdown is that the largest firms have strengthened their hand with clients instead of losing ground. The Big Four still audit 97 of the FTSE 100, according to Adviser Rankings, and they have also avoided proposed rules that would have required them to share work with smaller rivals.

Audit fees for UK-listed companies rise 75 per cent in the five years to 2023, helped by the cost of stronger systems, extra training and operational separation rules that prevent UK audit practices from being routinely subsidised by advisory divisions. That has shifted pricing power toward the auditors, with audit work now seen as a more profitable and stable business line than it was a decade ago, in some cases even offering better margins than parts of consulting.

The next area of scrutiny may increasingly fall on mid-tier firms that take on smaller and riskier audits shed by the Big Four. Although those firms hold only a modest share of the market, half of the FRC’s open investigations into audit firms now concern work outside the Big Four, highlighting how regulatory attention may be moving rather than disappearing.

Our earlier coverage of the UK Defence Investment Plan explained that the Treasury was preparing to take tighter control of spending on the Global Combat Air Programme (GCAP) as part of a broader overhaul of defence funding. We noted that the proposed settlement could add about £15bn in military spending through 2030, but rising costs and a wider funding gap were driving concerns over delays, cuts elsewhere, and the need for stronger cross-government oversight.

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