Audit firm numbers drop as red tape tightens

The ever-increasing audit threshold, and weight of regulation, has seen the
number of firms carrying an audit certificate slashed in the past five years.

Figures from the Professional Oversight Board’s (POB) latest annual survey of
the profession finds there are 7,843 registered audit firms in the UK and
Ireland, 21.2% lower than in 2004 (9,950). The rate of decline has slowed,
falling 3.2% in 2009 compared to 4.7% in 2008.

The threshold for auditing companies leaped in 2004 from companies with £1m
annual turnover to £5.6m, introduced by then DTI secretary Patricia Hewitt to
ease the regulatory burden on SMEs. The current figure stands at £6.5m. During
that period auditors have come under much greater scrutiny from their institutes
over continuing professional development and enhanced supervision.

“Some firms have found that there is no longer a good business case for
retaining their audit registration, merged with other firms or passed on this
work to larger firms where there are greater economies of scale in relation to
matters such as quality assurance and CPD,” the report stated.

Small firm representatives have spent years urging them to drop audit
services to provide clients with a greater, and more lucrative, range of
business serv- ices. According to the numbers, some have listened.

“Once a practice has only a handful of audit clients remaining, the economics
of maintaining audit registration fees come into question,” Society of
Professional Accountants chairman Peter Mitchell wrote for Accountancy Age in
2008.

As recently as May, POB called on the institutes to increase their monitoring
levels on non-regulated services such as tax or accounts production.

In response, advisers called on the audit threshold to be raised even more
dramatically. Harris Lipman senior partner Barry Lewis wants the turnover
threshold hiked to £25m.

The number of audit sole practitioners decreased 8% between 2008 and 2009, to
4,285.

Despite declining sole practitioner numbers, and red tape concerns, students
are still attracted to the profession.

Across the six main institutes there were 421,073 registered students in
2009, an increase on the previous year’s figure of 395,355. Not all the
institutes have fared well. ICAS has seen students numbers fall to 2,426, from
2,672 in 2008.

IN OUR VIEW

A fall in audit registrations might have slowed, but not significantly. With
pressure to push the threshold higher, the question remains whether sole
practitioners and smaller firms can survive either the compliance burden and
cost of undertaking audits, or conversely keep clients on board if the threshold
climbs again. Those sticking with audit must now understand that a broader range
of assurance and ‘handholding’ is the best way to provide clients with value and
maximise revenues, rather than rely on just the annual sign-off.