The UK’s top accountants are pushing ministers to remove a fees cap on ESG work for their audit clients, a move that would dilute independence rules and help the Big Four firms to boost their revenues.
Alan Vallance, head of the Institute of Chartered Accountants in England and Wales, told the Financial Times that work to verify companies’ environmental, social and governance claims should not count towards the cap on non-audit fees that accounting firms are allowed to receive from their audit clients.
The cap prohibits accounting firms from charging fees higher than 70 per cent of their audit fee for other work, such as consultancy or tax advice, for clients whose financial accounts they check.
The cap was introduced in 2016 as part of EU-wide measures to boost auditors’ independence following concerns that the profession had become too cosy with corporate clients. It was designed to ensure that auditors’ desire to win advisory fees from companies would not undermine their willingness to challenge management on the accuracy of their financial figures.
Vallance said in an interview that he had urged business secretary Jonathan Reynolds and employment minister Justin Madders to exclude audits of companies’ ESG data from the types of work subject to the cap.
He had also regularly raised the issue with Richard Moriarty, chief executive of the Financial Reporting Council, which regulates the accounting and audit sector, he added.
Vallance said that his organisation had held conversations with major audit firms about the issue “individually and jointly”, adding that they supported his organisation’s approach. A person at one Big Four firm said the groups had wanted the cap to be changed “for years”.
ESG assurance — verifying information companies publish about their social and environmental impact, such as their CO₂ — is a lucrative and growing line of work both for accounting firms and for other consultants that are not restricted by a fee cap as they do not carry out financial audits.
EU rules that apply from this year require large companies operating in the bloc to get independent verification when they publish standardised information of this kind.
FRC figures show that the Big Four — Deloitte, EY, KPMG and PwC — performed 40 per cent of the FTSE 350’s ESG audits in 2023, and the firms are eager to increase that share. By comparison, the firms completed 88 per cent of financial audits in the same year.
The timing of the new EU rules would cause a surge in ESG assurance work this year, creating a “huge opportunity”, said Vallance, whose organisation’s biggest member firms are the Big Four.
But he added that UK firms were “at a disadvantage with respect to European audit firms”, which could include ESG work within their regular audit fees, while UK firms could not. “It’s really important for UK plc that is addressed,” he said.
European firms “can’t cope with the demand” for ESG audits, Vallance said, and were passing on the excess to UK firms. But the UK rules often stopped UK firms from taking the work, he said.
The UK government has singled out professional services as one of eight sectors that can fuel economic expansion and has pushed regulators to prioritise growth.
A long-awaited audit reform bill, intended to improve standards after high-profile company failures such as Carillion and Patisserie Valerie, could be a vehicle for the changes.
Vallance also said that accountants were more qualified than other advisers to carry out ESG assurance because of their training in verifying figures published by companies.
“The skills that you learn to become a chartered accountant — objectivity, critical judgment, those sorts of things — are just as relevant [to ESG audits] . . . our profession should be the go-to profession for that,” he said.
Deloitte, EY, KPMG and PwC declined to comment.
