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Shrinking audit and KPMG SME offering means practice revolution

IT’S THE END of audit as we know it. The beginning of April saw the quiet arrival of a £10.3m audit threshold as it slipped onto the statute books, unnoticed by many. But auditors are, perhaps, quietly weeping as they lament the impending loss of audit clients no longer subject to an annual inspection of the accounts.

Does a hike in threshold spell the end? Is it really all over…and what would that mean?

Actually it’s not so clear cut. Last year I undertook some research looking at how firms had reacted to the prospect of a higher threshold, speaking to four firms in detail. What I didn’t find was anyone in full retreat from audit. Indeed, what was apparent was they had all given considerable thought to a climbing threshold and begun adjusting.

Audit niches

Some had restructured generalist audit teams into specialist teams focused on niche areas. Others had deliberately sought new sectors to exploit. Academy schools had been targeted as had the financial services sector. Their common point was they were sectors that faced a regulatory demand for audit. Of course, this is a gamble on regulators continuing to insist on an audit, but it was paying off nonetheless for that.

Other firms took a punt on clients voluntarily sticking with audit. Indeed, one firm told me 75% of their client base was no longer subject to statutory audit but were still taking one because it reassured bankers and other stakeholders. Some focused on entrepreneurial businesses who, it seemed, stuck with audit because a collection of healthy financial reports would prove useful in due diligence when it came time to sell up and cash in.

Of course this doesn’t mean there is a long future in audit for small firms. Companies House tells us the number of companies requiring an audit is falling, while Financial Reporting Council figures show the number of registered auditors has been falling since 2009. The more sobering fact is that of the roughly 2.1 million businesses in the UK, 98% have turnovers lower than £10m. The market for audit, however you cut it, is shrinking.

But the importance of audit to accountancy firms remains. Why? Because it provides a ready-made introduction to clients who may buy others services. The big question is what firms will do as that door gradually closes.

Beyond audit

The flippant answer is “something else”. In its report Tomorrow’s Practice, the ICAEW points to big data and analytics being an area where firms can make a difference because their familiarity with numbers and their financial acumen mean they already have the right skills.

Here’s where accountancy firms possibly face their biggest strategic challenge. And you don’t have to take just any observer’s word for it. In October last year PwC and Google came to a strategic agreement to supply services to companies. Google provides online business applications, services five million organisations, according to its own figures, and knows the technology of big data and analytics inside out. PwC understands what businesses need. One well-placed Big Four competitor confessed that the PwC/Google deal was the biggest thing to happen in the sector for some time.

But the strategic moves do not end there. On the 30 March this year KPMG signed a similar agreement with Microsoft. See where this is going? The chess pieces are beginning to move.

Why do this now? Because, perhaps, just as the audit market is looking ever more like too much hard work (for the Big Four this is driven by EU audit reform) the big data and cloud based computing market is taking off like a rocket. Gartner predicts cloud computing to be worth $240bn (£157bn) in 2017. Revenues right now amount to around $170bn. According to Synergy Research Group, Microsoft’s cloud service revenues grew a jaw-dropping 96% from 2013/14, while Google’s clocked in at a hefty 81%.

Now think about this. KPMG has recently shown enormous interest in entering the SME market. Let’s say in partnership with Microsoft they develop an analytics service at a price-point a little more modest than those used for trophy multinational clients. What have you got? You have a seriously well-funded competitor to all the UK’s mid-tier firms currently reliant on audit to get them in the room with clients.

It’s not a big stretch to wonder what Deloitte and EY are considering. There are still cloud providers out there to partner with. Indeed, the sector leader is AWS (Amazon Web Services) IBM and Salesforce also command big chunks of the market.

Get analytical

So what does this mean for smaller accountancy firms? In short it means they need to get moving. The call of analytics, big data and cloud services is loud and clear. The largest cloud providers are by no means the only ones around, there may be strategic deals to be done with smaller outfits able to offer the same kind of service. There may be industry specific software vendors to work closely with.

Secondly, while it may be said accountants are well placed to provide analytics as a service, I wonder whether there are enough digital natives in accountancy with the right skills to do the analytical donkey work, and more importantly understand exactly what can be achieved as a service provider

And this last point is one about leadership. How many firms have a leadership group that truly grasps the potential of analytics and are capable of making the strategic decisions needed to exploit it? Few I suspect.

Practice restructuring

Last year I interviewed the Swedish dotcom entrepreneur Niclas Huerlin (Sweden, of course, gave the dotcom giants Spotify and Skype). Huerlin’s message was the usual one about being disruptive with services, but he is also insistent on two other points. Building a dotcom business takes time, effort and patience, far from the common image of overnight success. Secondly, success in the digital sphere is driven by leadership that understands the strategic decisions needed to make things work. It’s not a junior with lots of programming skills that makes the difference, it will come from board members with the right knowledge base.

My guess is that if firms are going to make a success of analytics in response to a waning audit market, they will need to address the composition of leadership.

Senior partners schooled in audit since before they were weened may not be the leaders needed to front their firms as they face the next round of development. Audit will remain important. It will still open doors. But firms need another plan. And they will need a new breed of leaders to deliver it.

Gavin Hinks is a former editor of Accountancy Age, and a founder of Blue Gull Media, a provider of communication workshops for professional services firms

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