Building Societies and audit fees; a new report by the BSA
Carlison Morris · Posted on: July 2nd 2024 · read
Carlison Morris, one of the lead partners in the financial services team at MHA, the UK member firm of the global Baker Tilly network takes a closer look at the important findings from a recent report by The Building Societies Association (BSA) on audit fees.
The report examines escalating audit fees within the building society sector and the dwindling competition among auditors. Based on research analysing the audit costs of all 42 UK building societies, as disclosed in their annual reports and accounts, the report also includes a survey of 27 building societies regarding their most recent tender process for selecting an external auditor.
Carlison Morris said, ‘The report's findings are concerning and raise several valid points for further consideration’. Amongst the points made, the report reveals that audit fees for building societies have risen significantly above inflation, disproportionately affecting smaller building societies. The average audit fee increased by 13.7% in the last year, compared to an 8.6% rise in the Consumer Price Index (CPI). Smaller building societies experienced an even steeper increase of 24.2%. Over the past five years, audit fees have nearly tripled (up 177%) across all building societies except Nationwide, while the CPI increased by 24.8% over the same period.
The report attributes these escalating costs to a lack of proportionality in audit regulation and oversight, particularly the continued application of the Public Interest Entity (PIE) definition to all building societies. PIE audit standards and enforcement have increased regulatory compliance risks for auditors, even for small, straightforward building societies. This has impacted audit firms' risk appetite for the sector, leading to reduced competition and choice.
The report's findings are concerning and raise several valid points for further consideration.
The research shows that the majority of UK building societies have been left with little to no choice when selecting their auditor. Larger building societies, on the other hand, received a broader range of bids, allowing for better competition. The report suggests that the application of the PIE audit regime to all building societies is a common thread in the lack of competition and the rising costs of audits.
The BSA argues that the current regulatory environment is disproportionate and unfair. It points out that all building societies operate on a mutual model for the benefit of their members and are legislatively restricted to supporting savers and homeowners. Therefore, subjecting the vast majority to the same intense accounting and audit regime as publicly traded companies is not justified.
The report also compares the building society audit market with other sectors. It notes that the cost of annual external audit for companies on the London Stock Exchange Main Market with a capitalisation under £500m has risen by 75% in the past five years. However, the cost of audit for UK building societies has increased by 177% in five years, excluding Nationwide. The report also compares building societies with credit unions, which are not designated as PIEs. The comparison reveals that building societies pay significantly more for their audits than credit unions of comparable size, even though they offer similar financial products and are subject to similar regulations.
The BSA concludes that the PIE status of most building societies is disproportionate to the risk they pose. It argues that this status increases the risk for auditors, reduces auditor appetite and pushes up audit costs, particularly for smaller building societies. The BSA recommends that the vast majority of building societies be removed from the scope of PIE. This, it believes, would improve competition and choice of auditors and curb further above-inflation increases in audit costs.
In summary, the BSA report paints a challenging picture of the building society audit market. It highlights the disproportionate regulatory burden on building societies, the lack of competition among auditors and the resulting escalation of audit fees. The report calls for a more proportionate regulatory approach to address these issues and ensure a fair and competitive audit market for building societies.
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