Audit fees in Europe

Düsseldorf, 12 October 2011 – All roads in Europe lead to the “Big Four” (PwC, KPMG, Ernst & Young and Deloitte). This is confirmed by a study issued by ECGS (Expert Corporate Governance Service) which is specializing in proxy voting advice and whose German partner is DSW (Deutsche Schutzvereinigung für Wertpapierbesitz). Altogether 93 percent of the analyzed companies are audited by one of the Big Four.
“To avoid any potential conflicts of interest at the outset, ECGS principally recommends the separation of audit and advisory mandates”, says Jella Benner-Heinacher, ECGS-Chairwoman.
As the General Meeting season 2011 has shown a lot is at sixes and sevens. ECGS recommended to oppose in 37 percent of cases the election of the auditors, mainly because the audit fees were out of proportion to the advisory fees. “Disproportion means non-audit fees exceed the audit fees or non-audit fees amounting up to 50 percent of all audit fees within a three-year period”, explains Benner-Heinacher.
PwC takes the lead with an European fee pool of 1.3 billion Euro. Audit fees amounting to 850 million Euro face 275 million EUR non-audit fees. Out of the 450 analyzed companies the Big Four pocketed just 4 billion Euro. The remaining advisors together reached no more than 103.5 million Euro.
The definitely highest amount was transferred by UBS. The 2010 fees of the large Swiss bank amounted to just under 73 million Euro and were paid to Ernst & Young.
 
Voting advice
In the past meeting season ECGS had serious concerns with regard to remuneration or the remuneration systems. In 66 percent of those companies which had this item on their agenda, ECGS recommended to oppose. Only in 28 percent of all cases an approving advice has been given. ECGS’ recommended to abstain in 6 percent of cases.
ECGS’ negative recommendations are mainly a result of the lack of transparency with regards to the variable remuneration as well as to an excessive potential compensation.
Due to missing information about the variable compensation components, e.g. individual components or maximum remuneration, the ECGS analysts could not assess if the companies really complied with the principle “Pay for Performance” instead of “Reward for failure”.
Mainly in the UK, Performance-Benchmarks for variable remuneration have been rated as not ambitious enough. There often also were concerns about the appropriateness of the post-contractual remuneration components, such as pensions or transitional payments.
 
Independence of auditing companies
Last weeks have shown that the Big Four’s leading role is a red rag to some members of the EU Commission. Particularly the combination of audit and advisory mandates is being criticized by the Commission. And rightly so!
When you come to think of it, it is quite questionable if an audit company has to examine its previous advices. In this respect a closer look on the allocation of mandates and fees cannot hurt. Not least since the focus is on the companies’ independence.
As you can see by this chart, the figures speak for themselves.
PwC leads with a fee pool of 1.3 billion Euro. Audit fees amounting to 850 million Euro face 275 million EUR non-audit fees. Out of the 450 analyzed companies the Big Four pocketed just 4 billion Euro. The remaining advisors together reach no more than 103.5 million Euro. Allocation of mandates is alike.

 

To avoid conflicts of interest ECGS as well as the EU Commission principally recommend the separation of audit and advisory services.
ECGS rejects the election of an auditor each time the non-audit fees are inappropriately high. Inappropriate are excessive non-audit fees in relation to audit fees or non-audit fees amounting to 50 percent of all audit fees within a three-year period.
Within the analyzed companies the proportion of non-audit fees averages 19 percent all over Europe.