MAKING A BUCK out of audit is becoming increasingly difficult for the smaller constituents of the Accountancy Age Top 50+50.
According to the latest set of figures, fee income from audit services for the Top 50 firms - based on submissions from 37 firms - increased to £3.47bn from £3.38bn reported by 39 firms in 2012.
However, it is worth noting that the headline 2.6% increase in fee income includes a 4.3% improvement among the Big Four firms alone, which dips slightly to a 3.9% rise when adding Grant Thornton and BDO. Audit fees among the remaining constituents fell by 4% to £664.4m from £690.8m; evidence of the tough pricing environment firms have been wrestling with over the past three years.
According to Paul Woosey, audit partner at Carter Backer Winter - ranked 68th in the overall list - firms in the lower end of the table are suffering from stiff pricing competition raging among their larger peers. "Firms are dropping prices and it's getting more competitive," says Woosey. "We're now competing on price with the top 20."
Indeed, firms are also being squeezed by changes to reporting and auditing requirements that allow more small companies and subsidiaries to decide whether or not to have an audit. Introduced last year for accounting periods ending on or after 1 October 2012, companies are now eligible for audit exemption if they meet certain small company criteria.
Under the old rules SMEs must both have a maximum balance sheet total of £3.26m and less than £6.5m turnover to qualify for an exemption. The new regulations mean SMEs will be able to obtain an exemption if they meet two out of three criteria relating to balance sheet total, turnover and employing no more than 50 staff, while most subsidiary companies will be exempt from mandatory audit, as long as their parent company guarantees their liabilities.
"People are dropping out of audit," explains Woosey. "Will the mid-tier be doing audit work in five years' time? You have to look at where future profits are going to come from. "The market is being driven to a point where you can't do the work for the fees people expect to pay."
One way to make audit services a more attractive proposition for firms is by adding scale through acquisition. At the upper end of the profession BDO merged with PKF, while more recently Baker Tilly was able to snap up ailing firm RSM Tenon. Though neither deal was predicated on audit work, BDO has been able to close the gap in fee income with rival Grant Thornton, with fees up 11% to £105.2m since its deal with PKF.
Other firms are targeting niche segments as a way to drive fee income. For instance, east Midlands firm Duncan & Toplis - ranked 36th in the overall list - was able to grow audit fee income by 45% to £8.2m over the past year by moving into the audit of academies in a big way. Previously, the firm only audited a handful of academies - formerly local authority controlled schools - but has since taken on around 25 contracts in the sector and now audits primary and secondary schools, a sponsored academy and a federation.
Shake it up
Yet it is among the top-end players that the biggest shake-up in audit is set to take place. Final recommendations from the UK competition watchdog are due later this year which are intended to make the FTSE 350 audit market a much more competitive place.
As the proposals currently stand, companies will be forced to put their audit work out for tender every five years; the theory being that more frequent tendering will break the Big Four's stranglehold of the market, while encouraging better quality audits and generally improving corporate governance.
Firms and listed companies have been almost unanimous in their desire for the Competition Commission to water down its proposals in favour of a less draconian ten-year comply or explain approach adopted by the FRC.
Whether the commission opts for a ten year of five year guideline, the changing mood towards the length of audit tenures will nevertheless have an effect on fee incomes at the top of the market.
FTSE 100 companies, including HSBC, Hargreaves Lansdown and Land Securities have all recently replaced incumbent auditors, with the trend set to shake up the fee incomes of the Big Four at least.
The likes of BDO, Grant Thornton and Mazars - the latter pair growing
fee income by 3.2% and 5.8% respectively - are hoping to gain market share from the new rules. But it may be that they will have to wait for the outcome further changes to the audit market currently being discussed in Europe before they can really start eating away at the Big Four's share of the market.
You may also like
If budgeting is to have any value at all, it needs a radical overhaul. In today's dynamic marketplace, budgeting can no longer serve as a company's only management system; it must integrate with and support dedicated strategy management systems, process improvement systems, and the like. In this paper, Professor Peter Horvath and Dr Ralf Sauter present what's wrong with the current approach to budgeting and how to fix it.
In this white paper CCH provide checklists to help accountants and finance professionals both in practice and in business examine these issues and make plans. Also includes a case study of a large commercial organisation working through the first year of mandatory iXBRL filing.