Audit firm drop is the tip of the iceberg

The revelation that the number of registered audit firms at the ICAEW has
dipped below the significant 5,000 mark comes at a bad time for the institute,
as it struggles with membership numbers and deals with the fall out from the
Durgan controversy.

This is an issue, however, where the ICAEW can’t really be held responsible
for such a drastic fall in numbers.

The institute may have lost over 1,500 registered firms since the end of 2001
but the loss happened over a period when audit exemption thresholds shot up,
first from £350,000 to £1m, and then up to a whopping £5.6m.

Given the vastly increased number of businesses that would no longer have to
undertake a mandatory audit because of the change – and indications are that
most are taking advantage of it, it is not surprising that the number of firms
providing audit work has dropped sharply.

Perhaps it is more surprising that the number is still so high. The UK
representative of small practitioners, the Society of Professional Accountants,
backed the move for an increased threshold.

The argument was that it should enable smaller firms to concentrate on
providing clients with other services with a higher margin. The drop in the
number of audit firms that the ICAEW has experienced signals that this is what
is happening.

‘Largely we were providing the audit service as a loss leader on top of other
accounting services. Now time has been freed up, we are able to apply it more
meaningfully to the client, and profitably to us,’ says Peter Mitchell, chairman
of the SPA.

The institute said the fall was to be expected, and it may be that this
number continues to drop as more firms realise that renewing the registration
just isn’t worth it.

Some have predicted that what will emerge in the future is a few specialist
audit firms for those clients that still want or need assurance on their
accounts, while the rest provide other services. If that turns out to be the
case, then the ICAEW’s registration book could get much thinner.