Audit reform causing work to ‘cascade down’ through the market

Audit reform causing work to ‘cascade down’ through the market

Industry leaders say audit changes are already creating opportunities for mid-tier firms

Audit reform causing work to ‘cascade down’ through the market

UK audit reform is inadvertently creating opportunities for challenger firms to pick up clients from the Big Four, according to James Hadfield, head of Menzies audit service.

Changes are being introduced to better allow mid-tier firms to compete for Public Interest Entities (PIE) audits, and Hadfield believes these are already having another indirect impact.

“As the largest audit firms have rationalised their client portfolios in the face of change, there has been a cascade effect of audit work coming down through the marketplace,” he says.

“This has led to significant growth opportunities for medium-sized firms.”

The accounting veteran adds that a wider lack of staff is causing some to “close their doors to new business,” thus narrowing clients’ options and raising audit fees.

More broadly, Hadfield says reforms have also led to an “increase in the tenacity of the FRC”, but Alistair Main, head of assurance at Duncan & Toplis, argues they’ve not done enough to level the playing field.

“There have been some changes to the audit regime, although not as drastic as many would say are necessary to promote both quality and competition,” Main explains.

“If the recent changes achieve their aim, that’ll be a huge benefit to the market. However, the risk and reward balance has to be correct for it to be successful.”

Taking advantage of PIE reform 

Under proposed legislative changes, the definition of a PIE is set to be expanded to include a wider pool of companies. These are likely to see all private, AIM-listed, and third-sector businesses with more than 750 employees and a £750 million turnover, included.

The expansion is being introduced as part of a wider package or reforms to overhaul the UK’s audit and corporate governance framework, instigated by the department for Business Energy and Industrial Strategy (BEIS).

The overhaul has been in the pipeline since March 2021, when BEIS published its 200-page consultation paper – Restoring Trust In Audit and Corporate Governance.

According to Hadfield, the reforms could, “in theory”, create competition.

However, he adds that making the leap into the PIE audit market is “hugely challenging” logistically, and the idea of taking on new risk has meant “the response so far has been lukewarm”.

Duncan & Toplis’ Main says the reforms could well bring mid-tier firms into the PIE space, but he believes those considering entering the market will need to consider staffing before doing so.

“Although the managed shared audit regime is hoped to increase audit market competition, only auditors of PIEs will be able to act as the joint auditor,” he says.

“This will significantly limit the number of companies that can enter this market. To take advantage of this situation, an auditor will need to invest heavily in the skills and experience required to audit PIEs.”

In order to take full advantage of the opportunities presented by PIE reform, Main adds that firms will need to ensure they work closely with the FRC.

This, he says, will enable practices to better understand the added resources they’ll need to enter the PIE market, and any support that can be provided to help them achieve this.

“If the regulator gets the balance right between risk and reward, then mid-tier firms may have an opportunity in the managed shared audit space.

“[But] practices would need to be engaging with the FRC, either directly, via member groups or at a network level.”

Resourcing driving opportunities?  

In Search’s 2021 Skill Shortage Report last year, 38% of those surveyed in the finance and accounting industries admitted they were struggling to fill top vacancies.

Similarly, Hadfield says Menzies has “certainly felt the impact” of work cascading down from the Big Four, but he believes audit reform will only tighten the race for accounting talent.

“While the last few years have been extremely hard work for our auditors, they have also created great opportunities for career advancement and exposure to exciting new clients and sectors,” he says.

“We have worked hard to create a unique people culture. Decent performance on employee retention and recruitment is supporting our growth in fees.”

Main also sees the hostile macroeconomic climate as a significant opportunity for those practices seeking to take business from better-established rivals.

With top-ten accounting firms having to “focus on higher fee work” due to tight resources, larger companies are “becoming better suited” to the services his firm can offer, he argues.

Likewise, when it comes to practically taking advantage of opportunities and connecting with clients, Main says Duncan & Toplis’ membership of wider networks has been beneficial.

“Owner-managed businesses have naturally needed to find a new home – either through their own choice or from direct recommendation – and they are therefore coming to us and other auditors of similar size.

“The growth of our internal market through our membership of the international accounting network, Kreston Global, is further contributing to this movement.”

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