PracticeAuditTaxman’s tentacles and auditor arm-twisting are here to stay

Taxman's tentacles and auditor arm-twisting are here to stay

It has been a good month for Ernst & Young, which followed up its Equitable Life victory with a decent set of results this week.

But behind the oddly similar headline numbers – fee income up 15%, profit per
partner up 14%, chairman Nick Land’s salary up 16% – were a couple of telling
details that reveal far more about the health of the profession and the
direction in which it is moving than the headline numbers ever could.

So putting High Court victories, regulatory bonanzas and skills shortages
aside, there is a lot we can learn from the assurance and tax lines.

Tax first. Growth of 4% is hardly impressive, particularly when business
assurance grew by 27%. But splitting that into personal and corporate taxation
reveals far more.

Income from corporate tax work grew by around 11% last year, while growth in
the private client tax arm was non-existent. And the reason? Well, Land made it
clear that this was because of the HM Revenue & Customs anti-avoidance
clampdown.

Now think about that. And put to one side arguments about whether the waters
are now too muddied between evasion and avoidance or whether the taxman’s
assault is the right thing to do.

Either way, the upshot is that this is a crackdown that is more than just
bluster; it is actually delivering results. And if it is getting results, this
will only encourage HMRC in its belief that there is abuse to be stamped out.

Indeed, HMRC director general Dave Hartnett makes it clear this week that the
taxman intends to pursue a hardline policy for the foreseeable future.

Behind the assurance figures is a similarly telling statistic. The massive
expansion of the assurance business was, of course, driven by Sarbox and
IFRS-related work and will begin to flatten next year.

But Land also disclosed that the firm had managed to squeeze higher audit
fees out of clients for a second year in succession. Increases of between 4% and
10% were typical.

Compare that with the picture six or so years ago when allegations of low
balling were rife and fees for most clients had not risen for many years.

Ok, so one results season doesn’t signify a long-term change. But both these
factors – HMRC’s determination to put its money where its mouth is and realistic
increases in audit fees – are likely to outlive the next 12 months.

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