Mid-tier firms avoid listed audits as high regulatory fees bite

MID-TIER accountancy firms have hit out at what they believe are restrictive and prohibitive financial hurdles to entering the listed audit market, including excessive fees imposed on them by the ICAEW.

Matthew Lee, managing partner of Bishop Fleming, the £17.5m turnover West Country practice, is one of a growing band of similarly sized firms that are unhappy with the current fee structure.

With offices in Bristol, Worcester, Bath, Exeter, Plymouth, Torquay and Truro, the firm currently doesn’t conduct any listed company audits.

Lee says that while there were only five AIM-listed businesses in the South West, the ICAEW “wants such a large increase in fees” that undertaking listed audit works is “simply not worth it” after public indemnity insurance costs are taken into account.

“It’s based on a very unfair matrix of the number of partners and the number of offices,” says Lee. “It favours the very large and the very small. The mid-tier gets disproportionally penalised. So if we were to step up from none to some, it will cost us between £15,000 to £20,000 – so you’d have to do quite a few audits make it cost effective.”

Squeezed middle 

It comes at a time of increasing audit thresholds heaping even more pressure on the ‘squeezed middle’.

The FRC’s recent annual assessment of the profession found that almost one in 20 firms registered to audit company accounts in the UK have quit that line of work in the past year. According to statistics from the reporting watchdog, the number of registered audit firms fell 4.9% between 31 December 2013 and 2014, compared to 3.8% during 2013. Just last month, Accountancy Age’s own Practitioner revealed that their firm had decided to relinquish its own audit registration.

The falling number of audit registrants coincides with an increase in the proportion of companies filing annual accounts at Companies House that are audit exempt, from 70.2% in 2009/10 to 73.5% in 2012/13. As at 31 December 2014, the number of registered auditors was 6,635, a double-digit fall of 11% over the previous four years.

This, in turn, follows increases in the audit exemption in 2004 and 2008, while earlier this year a new EU accounting directive slipped into force under which member states had the option to significantly raise the thresholds of businesses not required to file full, audited financial statements for those with a turnover below €12m (£10.3m) and a balance sheet below €6m.

David Gratton, who runs the Spalding office of Duncan & Toplis and chairs the £19m turnover practice’s audit and accounting committee, says he supports Lee’s view “totally”.

The firm, which boasts ten offices across the East Midlands and the winner of the ICAEW’s medium accountancy firm of the year gong in 2014 and 2015, does provide services to AIM-listed clients, but does not audit them.

Gratton says that while there are few AIM-listed clients located in its geographical heartland of Lincolnshire, Nottinghamshire and Leicestershire, this is an irrelevance as the practice has clients spread across the UK.

“As a firm, at this moment in time, we have a policy that we do not audit AIM-listed clients. That is a combination of the internal resources required to do it, the additional inspection requirements and the costs levied by the institute, which means it just would not be cost effective when you are starting out in that market place,” he explains.

And Gratton doesn’t see how to create “the critical mass required to make the additional costs worthwhile” given the current formula. “We just don’t feel it’s there,” he says, which is why they “concentrate on owner-managed businesses outside the AIM market”.

Cost of compliance 

But what if the ICAEW reviewed and subsequently dropped its costs?

“It might encourage more firms to enter that market,” he says. “It is a factor in that decision, but it’s not an overriding factor. But at the moment the upfront cost structure doesn’t make it feasible when the potential may be only two or three clients.”

Yet another mid-market voice less than impressed with the status quo is John Warner, managing partner of BHP, a six strong network of offices spread across the Yorkshire region.

Currently 41st in the Accountancy Age Top 50+50, Warner says: “As a firm we have a policy where we won’t act as auditors for listed companies because of the cost of compliance, and regulation.

“If you do five to ten, it’s probably worthwhile, but to dip a toe into those waters is not something we would consider.”

In response to the groundswell of opinion voiced over the fee structure for listed audits, Vernon Soare, ICAEW’s executive director of professional standards, says: “Our regulatory fee structure is something that we keep under regular review. We need to ensure that we are able to meet our regulatory responsibilities as a Recognised Supervisory Body under the Companies Act while being alive to the commercial pressures and constraints of our members.”