Top 50 +50 2011 analysis: Audit

IT HAS BEEN a tough year for audit, with just two of the top ten enjoying income growth. Fifteen of the Top 50 managed to lift audit income while 13 saw it slip and, for seven, the number was unchanged.

Of the Big Four, field-leader PwC dragged its income higher, up 4% to £893m. Ernst & Young’s data was even healthier, as it slapped 5.2% growth on its audit income, taking its total to £403m. KPMG suffered the worst setback among the top firms, shedding £27.7m in audit income to £458m, a decrease of 5.8% holding a mirror up to E&Y’s 5.2% gain.

Despite this seemingly neat exchange, there has been no single triumph to account for E&Y stealing a march on KPMG. An E&Y spokeswoman said the firm has had a very successful few years characterised by an openly aggressive approach towards winning more audits, which is reflected in the figures.

KPMG said there has been “a bit of musical chairs” when it comes to audit, suggesting differences in the way service line income is recorded could account for some of the fluctuations.

Deloitte clung on to its number-two spot despite shedding £19m in audit income, a decline of 2.9% that widens the gulf between it and market leader PwC to more than £260m.

Meanwhile, Baker Tilly continued to shed audit income, losing 10% to £84m after slipping back 8% in 2010, while BDO and Kingston Smith relinquished around 7% of their audit income apiece.

Montpelier Chartered Accountants led income growth in the audit-providing Top 50, swelling its coffers by 14%, while Haines Watts Group added 12.8%. Managing partner Andy Minifie attributed Haines Watts’ success to focusing on its core client group, owner-managed businesses. “By prioritising new clients rather than higher fees we hope to be well placed for growth in other disciplines as our clients become more active in the coming years,” he said.

Reeves & Co enjoyed a 26% boost to audit income thanks to a merger between Reeves & Neylan and FW Stephens, bumping the former from 40th to 27th in the Top 50 table.

The trends echo previous years, when the aftermath of the credit crunch crippled many firms’ audit activities, followed by a patchy recovery that saw some prosper while others floundered.

Last year, Deloitte and KPMG boosted audit income, while PwC slipped back 1%; 2009 saw a drop in growth rates for just over half of the Top 50. It is likely that the market will continue to be competitive, with much jostling at the top but little changing of positions.

The smallest gap in audit income of the Big Four is between E&Y and KMPG – a difference of £55m – and if the former continues its aggressive tactics then KPMG might well start looking over its shoulder.

Conditions remain challenging for the smaller firms but some clients are beginning to pull away from the suffocating hold of the credit crunch. Now is the time to innovate and establish procedures for future success, as demonstrated by successful growth strategies and promising-looking mergers.

The break-up of the Audit Commission could really set the cat amongst the pigeons. By this time next year, public audits might have been carved up and dished out to the private sector.

There is talk of creating a mutual to compete with the Big Four, but the process will be slow and, in the meantime, firms might find that winning public contracts has the potential to catapult them higher up the ladder.

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