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The Pamphleteers

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May 2003

AUDIT PRICES WILL SOAR AS AUDIT FIRMS STOP SELLING NON-AUDIT SERVICES

EQUITY VALUES SET TO LOSE BILLIONS

SMALLER COMPANIES HIT HARDEST

Z/Yen, the leading risk/reward management firm, has answered the question “how much might audit fees rise to cover the loss of fees from non-audit services?”.  The answer is: prices are set to soar.  Z/Yen has used data from BvD’s FAME database of 1.4M UK companies, applying the data to PropheZy, Z/Yen’s risk/reward engine for building predictive models.

Z/Yen tested PropheZy’s advanced statistical techniques on predicting audit prices for 200,000 companies from the FAME database.  PropheZy met or exceeded most tests of statistical accuracy.  Z/Yen then examined the largest 100 companies in the UK, asking PropheZy “what will the audit fee be in two years time if non-audit fees reduce from current levels to nil?”   PropheZy predicts that the mean average audit fee will increase by some 58%.  That is a rise from £197M per annum to over £311M per annum for those 100 companies’ combined audit fees.  This rise represents about 0.58% of profit, which would wipe £1B to £2B off the equity values of just those 100 large companies (based on conservative p/e ratios).  The median audit fee will increase by 108%, i.e.  more than double.  The smaller companies in the sample set will be hit much harder than the giant companies.

Michael Mainelli (FCCA) and Ian Harris (ACA), Directors of Z/Yen Limited, pull no punches.  “For years, big audit firms have claimed that they do not cross-subsidise audits with the sale of non-audit services.  This claim did not make sense, but was hard to dispute until now.  Audit prices are already rising and we are confident that this over 50% rise, as foretold by PropheZy, will come true.”

Z/Yen also built predictors to ‘Price-Your-Audit!’ and ‘Recommend-an-Auditor?’ which identify the most appropriate audit price and firm for a company.  Both ‘Price-Your-Audit!’ and ‘Recommend-an-Auditor?’ ought to be useful tools for any audit committee.  Z/Yen has a more detailed predictor, “Who’s-Going-to-Move” for audit firms themselves.

More detailed statistics from the ‘Price-Your-Audit!’ research and/or feature article copy on this story and/or information on other newsworthy PropheZy predictions are available for journalists to use upon request – please see contact details below.

The Auditor's Cross Subsidy (Statistical Modelling Of Audit Prices) Michael Mainelli, Ian Harris and Alan Helmore-Simpson 2003
Strategic Planning Society E-Newsletter, Article 1 . (Also published as Anti-dumping Measures & Inflation Accounting: Calculating the Non-Audit Subsidy, www.mondaq.com)

Results - “As Predicted By PropheZy” in Now & Z/Yen May 2004 issue.



For further information, please contact Michael Mainelli or Ian Harris, tel: (020) 7562-9562, e-mail: michael_mainelli@zyen.com or ian_harris@zyen.com

Z/Yen specialises in risk/reward management, an innovative approach to improving organisational performance.  Z/Yen’s clients include blue chip companies in banking, technology and professional services as well as charities and care organisations.