Future of audit: down the pan?

The recent view of the auditor as droll and unglamorous has certainly been turned on its head, as those with qualifications are fought over while firms hold fast to the qualifieds already in their ranks.

But the Professional Oversight Board has painted a more disturbing picture. While all qualifying bodies have a large number of students, very few are awarded the audit qualification.

The ICAEW had only 225 students with audit qualifications out of 14,193 students while ACCA, with 84,340 students only produced 161 students with the audit mark.

Practice makes imperfect

The POB’s annual trends report showed that fewer audit students are able to meet the practical training requirements necessary for them to be awarded the qualification, largely impacted by reduction in the availability of audit work due to the increase in the audit threshold.

The registration of audit firms has also continued on a downward trend in the numbers of registered firms. Figures stood at 11,211 in 2002, but dropped by 23.5% to 8,574 in 2007.

So firms down the lower end of the scale must consider whether now is the time to drop audit and shift their efforts towards more value-added services.

Accountancy bodies are aware of the decline and are looking to work with the POB on a solution. Mark Allison, executive director, for education at ICAS says he agrees with POB’s reasons for why fewer students are awarded the audit qualification.

‘It is becoming more challenging for students to achieve the practical training levels set by the eighth directive and UK Companies Act, when there is less audit work available at the small to medium-sized firms because of rises in the audit threshold.

‘ICAS training and examining continues to provide students with a thorough grounding in the theoretical skills required by regulation, but actual relevant experience is essential to building the skills required of registered auditors,’ says Allison.

But while the academics consider the problem, the lower end of the audit market faces the dilemma of whether to continue their audit registration, with a dwindling number of clients, or to switch their businesses to less audit-related services.

The UK200 Group is one such group of professionals who, as a cluster of 120 firms in 50 locations across the country, has begun to address the issues head-on.

David Ingall, president of UK200 Group, says they were beginning to see firms giving up their audit registration.

‘If firms get down to having only five or six clients, the question that arises is whether it is worth the pain of getting the registration.

‘Our firm has done work in the past as the main auditor for the client, but then this changed by agreement – as we got to do their preparative work for the external audit by a larger firm – and we earned a better fee for it,’ says Ingall, whose own firm JWPCreers is based in Selby, North Yorkshire.

On the threshold

The market seems to be the ultimate determinant for firms at this end of the market.

‘It’s about what people want. And it is also dependent on the audit threshold. If any of our clients decide to do a flotation and we don’t have the experience, we don’t stop working on their audit, but rather refer them to our group where there is someone with that expertise,’ he says.

Ingall also draws attention to the current economic climate, which is beginning to trigger several firms dropping below the threshold margin of £5.6m in turnover.

‘In the boom times, companies were growing turnover at a rapid right, but with the downturn we’re expecting several to fall below threshold,’ he says.

Companies falling outside of the net of the audit threshold will translate into fewer audits, causing more firms to consider their registrations.

‘The days of firms being able to rely on one large client, which would account for 30% to 40% of fees are pretty much over. We don’t have any jobs which exceed 2% to 3% of turnover.

‘If a firm keeps its audit registration on account of just one client, and that client’s turnover falls below the threshold, then the audit firm is likely to drop its registration,’
says Ingall.

But while the smaller firms struggle against the demise, auditors and prospective students are now acutely conscious of the increased scrutiny and the level of regulation in the profession, with a lot less margin to use their judgment compared with past practice.

PKF’s John Watkins, director of learning and development, says this has led to a decline in the appeal of the role.

‘Many of the partners look at themselves as being reviewed to within an inch of their lives, rather than being able to give the quality value added service they’re capable of. Added to that is the increase in risk without a proportional reward associated with it,’ says Watkins.

The restrictions of the activities of the business in which an audit partners may engage also deter students considering the role.

‘People who want to get into the audit role look to do so more in terms of adding value and providing advice. But now there are restrictions in the level of activities that some partners can get into. So they have to become specialist auditors, which takes away several components about what they thought they would be able to do. Most hope to be general practitioners in the role instead of audit specialists,’ says Watkins.

While the lower end of firms may not be able to cater for training, the mid-tiers seem to have found the right balance in attracting students. They’re positioned perfectly to cater for small and medium-sized firms within the audit threshold, are arguably sufficient in their own size and capability to compete for FTSE audits and can offer a variety of experience and responsibility ea rlier on in the career of a prospective auditor

‘It is still a challenge to get people who want to become audit partners and managers. We’ve not got to the point yet of calling ourselves desperate, but down the line it might potentially become like that. It’s one of the reasons we try to bring our own talent through our ranks,’ says Watkins.

It may be argued that firms below the mid-tier, by virtue of the way in which the market is playing itself out, could be naturally maligned from being able to provide adequate training opportunities. But this puts the mid-tier firms in the spotlight.

Peter Mitchell, chairman of the Society of Professional Accountants argues that the question of training now puts mid-tiers in the spotlight. ‘We haven’t got an answer to the student issue at the bottom end,’ says Mitchell. It may now be an opportune time for the mid-tier firms to pick up the slack and redress the decline in the number of qualified auditors.

Penny Sukhraj, AccountancyAge

Dropped audits will suit some

The POB’s July 2008 report on the accountancy profession reflects that, despite the declining audit market at the lower end, growth in total fees shows most firms continue to thrive.

As was forecast by Society of Professional Accountants in its response to the DTI on smaller practices in October 2003 in favour of higher audit thresholds, there has been a managed reduction of audit registrations enabling time freed up to be more profitably used.

Once a practice has only a handful of audit clients remaining, the economics of maintaining audit registration come into question ­ registration fees, training and compliance costs may be high in relation to audit fee income.

Some charity and other audits remain, but corporate clients increasingly do not require this and, as audit was of little value for most owner-managed businesses, it has been willingly conceded in favour of more valued support services.

Within SPA’s membership, a small number of practices continue to specialise in audit and offer this service to other members for their remaining audit clients ­ a scheme set up 2004 that has proved increasingly helpful as corporate audit clients requiring accounts compilation and tax work can be retained within practices not registered for audit.

In summary, smaller practices have survived the reduction in audit work among their corporate clients, while retaining flexibility to manage this process where it is still required.

Peter Mitchell is chairman of the Society of Professional Accountants