New audit threshold reform – a threat or an opportunity?

THE MARKET for audit is about to change once again. This autumn or in early 2015, the audit exemption threshold will rise once more, freeing a large group of companies from a compulsory audit. This new development raises important questions for firms who derive a significant proportion of their revenue from audit How are their newly exempted clients likely to react? Will they continue with audit voluntarily, and if so, why? How can audit firms work smarter to protect recovery rates in the face of a possible decline in clients?

A recent survey of 50 mid-tier accountancy firms conducted by CaseWare found that half believe that the new threshold will affect their revenue, while one in ten said it would alter their future recruitment plans. Many accountants expect a large proportion of clients to choose not to have an annual audit when given the option; with 22% saying that only about half such clients would continue with an audit and 26% expecting only about a quarter or fewer would continue with it.

In fact, the number of registered audit practices in the UK has been falling since 2009. The FRC found that between 2009 and 2013 the number of audit firms decreased by 11.2%.

Sector specialisms

It is obvious that doing nothing is not an option for firms wishing to grow their business or at least retain their position. These companies will have to review their operations, their relationship with their clients and perhaps also join forces to influence the perception of audit and its value for corporations.

Becoming a sector specialist could be the first step and, in fact, some companies have already implemented significant internal changes, identifying sectors where there is growing demand and focussing their audit skill-set on those areas. North London firm, Berg Kaprow Lewis, separated its assurance teams from the company’s support team.

David Landau, principal in audit and advisory at Berg Kaprow Lewis, explains: “We’ve restructured ourselves internally and separated out our assurance teams from our support teams. We are looking to keep the audit skill-set in a smaller number of better trained people so we can give better advice and more focused work. We think clients will get access to better quality work and at more reasonable prices than from a generalist, or the bigger firms who are sitting on more expensive overheads.”

The diversification and broadening of services will be an inevitable response. Audit firms have the opportunity to identify and target new groups of clients requiring audits and assurance for purposes other than a statutory obligation.

There are those organisations such as charities and academies who will continue to require an audit; other companies may need audit reports from suppliers as part of their procurement process, as an integral part of the process of obtaining credit facilities from banks, or stakeholders who demand audits to ensure that financial discipline is being exercised. Moreover, owner-managers looking to sell their businesses are better placed with a set of clean audit reports to support the transaction.

Culture issues

The industry will also have to address a fundamental culture issue relating to the way accountants do business with their clients. Some firms are now changing from a ‘chargeable hours’ culture to one centred on building good relationships with their clients. It removes the incentive to maximise chargeable hours, with the benefit of improving contact time with customers while at the same time adding value to the audit service, over-and-above straightforward compliance. This culture change, more than anything else will contribute to strengthening the business relationship with their clients and ultimately the profitability of their services.

Chief executive of Midland-based firm Dains, Spencer Wright, stresses that this relationship will be the number one issue for the industry in the future. Audit clients are “not a once-a-year visit”, but should instead be subject to year-round contact, which sees the firm act as an ever-present sounding board for commercial and financial decisions. The relationship then is not just about compliance. “Any accounting firm still following that model is on a hiding to nothing.”

Then we come to communication. If they are to create growth in their audit service, firms will need to learn how to market and sell the merits of a voluntary audit, to both current and future clients, as an added-value service. Options on alternatives to a full audit such as assurance reports have had mixed support in the past, but the conclusion remains that firms across the board will need to focus on explaining the benefits.

Efficiency and recovery rates

Last but not least, efficiency and recovery rates are not simply at the mercy of client pressure to reduce fees. It is as much about adopting the most efficient audit processes, freeing up practice time for other services, consulting and client relations.

Large numbers of smaller firms still favour paper-based audit processes over electronic alternatives, significantly reducing their ability to service clients effectively and worse still costing them more to do so. This will inevitably make them less competitive in the process.

The months (perhaps years) following the implementation of the audit threshold reform will provide evidence of how extensive its impact on the industry is going to be. However, there is no doubt that accountancy firms which have relied on audit for a substantial part of their income, will have to find new ways of clawing back their lost revenue from other sources, and start offering alternative services to their clients.

Simon Warren is managing director of CaseWare

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  • Darren Smith

    The auditor threshold is not due to increase? The changes noted here only relate to small and medium sized classification changes. Currently these are in line with one another but, once increased, will become different again, as they were until recently. Auditors therefore need to worry more about changes in disclosure rather than a loss of income.

  • John

    Strange for David Landau of BKL to imply some of his colleagues are not ‘better trained’ people or perhaps the quote is not in full context?