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Businesse pressure AccountingWEB Smaller firms are dropping audits amid rising pressures
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Smaller firms drop audits due to rising pressures

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The increasing focus from regulators on raising standards has caused some small firms to abandon audits, unable to cope with the demands and complexities imposed by regulatory requirements.

17th Jun 2024
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Audit has been faced with challenges over the past 12 months and has been under significant scrutiny. Increased regulatory pressures, high-profile corporate collapses, and a growing disconnect between small firms and audit regulators have all contributed to audits’ ongoing issues.

At the 2023 Accounting Excellence Awards, Kreston Reeves won the Audit Team of the Year category for facing these challenges head-on through their purpose-driven approach and continuous improvements. 

With the extended deadline for this year’s awards entries fast approaching (28 June), AccountingWEB caught up with Steve Collings, one of the judges for the Audit Team of the Year, to gain a deeper understanding of the trends and challenges that audit is facing.

Partner at Leavitt Walmsley Associates, Collings addressed the current state of audit affairs: “There seems to be a lot going on at the moment and a lot of it isn’t going in the right direction.”

Auditing standards 

Over the past year, auditing standards have changed significantly due to an increasing focus on raising the bar.

Collings shared that the auditing standards in the UK are written from a “think big first” approach, which has hurt smaller firms. 

He said: “This approach means the same auditing standards that are applied to the Big Four are also applied to small firms, despite not having the same level of resources to manage these demands.

“There are scalability elements creeping into the standards now, but even with those, they’re still not for small and medium-sized enterprise (SME) purposes and not particularly proportionate, which is driving smaller firms away.”

This gap between standards and practical application has left smaller firms struggling. “Some practitioners feel that the regulators are completely out of touch with what goes on in real-life audit, particularly on the smaller end of the scale and others seem to feel that there is too much cosying up to the Big Four by the regulators,” Collings continued. 

Pushback 

This growing discontentment has led to a pushback from smaller firms, resulting in many deciding to abandon audit services. Collings said that he has recently interviewed over 60 practitioners, all at the smaller end of the scale and most of them have said that “they absolutely hate auditing”. 

“It’s become a sort of a beast that seems to cost them money to do it and that’s why a lot of the smaller firms are saying: ‘Enough is enough, we’re going to cancel our audit registration, we don’t want audits anymore.’

“It’s reflective of the fact that there does seem to be this problem between the practitioners and the regulators, in terms of the regulators trying their best to restore confidence in audit but equally what they’re doing at the same time is making the auditing standards completely overwhelming for smaller practitioners.”

This has created one of the biggest challenges for SMEs over the past 12 months, turning the trend of raising standards into a significant issue for small firms in the auditing profession. 

Importance of auditing 

Collings acknowledged that auditing currently has a bad reputation due to recent corporate collapses. However, he stressed that this shouldn’t diminish the importance of auditing, and small firms should still consider its value.

“Auditing is done on a risk-based approach so an audit can add an incredible amount of value to clients. A fresh pair of eyes can be really important and effective. An audit can help identify where clients need to pull their socks up,” he said. 

Collings added that the work auditors do can help put businesses “back on the smooth path”. Auditing is relied on by shareholders and external stakeholders such as banks, so the work of an auditor is incredibly important. 

“There’s a lot of benefits to it and I think those benefits have been drowned out by the bad publicity that the profession has attracted over the past 10 years. There is also a sort of them-and-us divide that has appeared between practitioners and professional bodies,” he concluded. 

Excellence in audit 

When asked what excellence in audit looks like Collings emphasised that it is more than just getting a good grade on audit files. “I think in terms of excellence, it would be demonstrating how you take the challenges that audit is currently bringing and how you overcome them,” he said. 

He placed importance on having the knowledge and awareness but also being able to apply that in order to deliver meaningful results for clients and stakeholders. 

“I’d also say that excellence in audit would involve showing a huge amount of knowledge on the auditing standards, including the quality management standards and demonstrating how audit firms make sure that all staff are aware of the changes in auditing standards.”

As a judge for this year’s Accounting Excellence Awards, Collings offered some tips and tricks on what the judges are looking to see in the entries. 

  • Corroboratory information – provide examples of how you have achieved what you’ve achieved and don’t just state that you’ve recruited audit staff or invested in technology.
  • Include how you have addressed the current challenges and how you have looked at risk assessment as a whole.
  • Don’t be afraid to include examples where things might not have gone to plan in your audit but you were able to fix it. That shows us that your systems are working.

The deadline to get your entry in has now been extended to 28 June so if you’re interested in applying for the Audit Team of the Year click here to start your entry

Replies (13)

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John Toon profile picture
By John Toon
17th Jun 2024 21:31

No irony that while some small firms are abandoning the market (not surprising when you can generally make better money doing non-audit services without any ethical restrictions) there are increasingly a number of smaller "challenger" audit only firms who are sniffing at the waterfall effect of audits dropping out of the bigger firms to others and with baseline fee growth at a minimum of 15% each year who wouldn't want to consider this?

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By mkowl
18th Jun 2024 08:31

I think it would work if the practice was dedicated audit only

I retained audit status until about 5 years ago but in a mixed practice with a lot of conflicting calls on available time it was almost impossible to dedicate the chunks of time required to be not only efficient but effective in the audit work. If audit were a sandwich then I was generally ok on the bread and butter of planning, the finalisation not so bad, but it was the paucity of the filling of audit work

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Replying to mkowl:
Cherry
By cherrytelevision
18th Jun 2024 11:00

Great sandwich analogy, I'll definitely be stealing that one!

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Replying to cherrytelevision:
7om
By Tom 7000
18th Jun 2024 12:30

If you spend 4 days buttering the planning bread theres no time left to do the work.

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Replying to Tom 7000:
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By Paul Crowley
18th Jun 2024 14:39

Agree
Clients at my level do not want time wasted each year on planning as they consider that we should 'already know what needs doing'

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7om
By Tom 7000
18th Jun 2024 09:03

The audit thresholds go up soon. Some people with just 2 or 3 will see some them fall outside of auditing and decide its not worth it and another 10% of people will hang up their boots.

We still do them. We let the accountants do the accounts tax and all the management accounts payroll advice etc. All we do is just put the audit sticker on at the end. That seems to be a canny solution for those who have had enough, they still retain the client. We must do about a dozen like that. [email protected] if that's of interest to you . ( shameless plug)

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By Marlinman
18th Jun 2024 11:18

That's why I ditched insolvency work. I got fed up with all the pointless red tape and being inspected by people who knew less than I did.

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Replying to Marlinman:
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By Paul Crowley
18th Jun 2024 14:42

Similar style problem with ICAEW using former big four employees to look at proprietorial companies that needed audit.
Chalk and cheese, but they have never tasted cheese.

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By jon_griffey
18th Jun 2024 12:00

They really need to sort out the audit requirement for ineligible entities like subsidiaries of large groups. There are a lot of small UK companies that have a large overseas parent that get caught. I recently did an audit for such a company with £1M turnover. The amount of work involved for such a simple entity is wholly disproportionate. It doesn't encourage overseas businesses to open up operations in the UK if they immediately get caned with large audit fees.

I know some larger audit firms in my neck of the woods are putting their fees up 15%-25% this year and many are turning away work as it can't be staffed. From some of the enquiries we are getting it is clear that a lot of entities other than the plain vanilla are having great difficulty finding an auditor willing to take them on.

The powers that be rather than assuming that ever increasing regulation must be a good thing need to reflect of the effect it is having at the coal face.

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Replying to jon_griffey:
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By SuperAccountingSteve
19th Jun 2024 13:50

you could get an exemption with parent guarantee (with overseas parent), but brexit killed it.

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By CVCommentary
18th Jun 2024 13:08

Similar issue with the AML regulations. ICAEW applying a blanket compliance approach, irrespective of whether you are a sole practitioner of large audit firm. Just not worth the hassle of taking on many smaller clients, when the opportunity costs of complying will outweigh the benefits of the first few years fees. The one size fits all oversight approach does not work.

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By Paul Crowley
18th Jun 2024 14:35

'The increasing focus from regulators on raising standards has caused some small firms to abandon audits, unable to cope with the demands and complexities imposed by regulatory requirements.'

More likely it is unwilling rather than cannot cope.
Best thing I did was to drop audit.

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By AZM
19th Jun 2024 03:08

It is totally appalling that all the troubles were caused mostly by the Big 4 and as a consequence all in the profession are made to suffer. However we should also take cognizant of the scalability of the standards and not complain too much about it.

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