Audit ‘trickle-down effect' could help small firms
The Brydon report opened the door for further reforms to the audit profession. Graham Marjoribanks assesses the implications and predicts an audit ‘trickle-down effect’ that could boost work for smaller practices.
We are in very interesting times as far as the audit market is concerned. There’s been much public commentary and numerous reviews about about audit reform and regulation.
A lot of this focus has been on publicly listed entities and large private companies, plus the biggest audit firms. The mood music has been all about increasing the bite of the regulator, while making the market more appealing for challengers to the Big Four.
While Financial Reporting Council statistics show the number of audit firms in the UK has continually fallen in recent years, I do believe that audit and related work will trickle down from the Big Four to the next tier – and that trickling effect will create opportunities and strategic questions for the next tier and beyond. Perhaps we’ll lose fewer firms from the market in the future.
Auditors have generally undersold themselves, leading to the service becoming ‘commoditised’. As more is expected of auditors, the offering will have to not only demonstrate its value, but will need to develop into a much more risk-focused service. Directors will be under more pressure from a regulatory and legal perspective to take greater responsibility for their reporting. As such, audit – alongside an increase in ‘pre-audit or extended audit’ services – will hopefully become more robust.
This shift will drive demand for more assurance work, particularly if joint audits come into fruition at the top end of the market. The biggest firms are already becoming pickier about the work they undertake, and for whom. Opportunities are arising for larger firms and as they move up, work will become available below them and so on.
The challenge facing audit providers is to choose our opportunities wisely, which is particularly important in today’s marketplace where talent is at a premium. We must balance ambition and growth in an ever-changing marketplace with the resolve to say no to opportunities that are not in our sweet spot.
For our firm this means carefully developing our sector specialisms by adding different skills that will help us provide services outside of the traditional financial audit offering.
Broader range of audit services
A broader and deeper range of audit and audit-related services might make the sector more attractive – a point broached in Sir Donald Brydon’s report into audit. Extending audit’s remit into fraud prevention, alongside increasing use of digitisation to analyse vast swathes of company data, is an exciting opportunity.
The evolving audit market will reward firms who accurately identify riskier engagements and either price accordingly or turn down opportunities. Where a company has poor internal controls, the risks are likely to outweigh the rewards and auditors may not want to accept an engagement without a commitment to listen to advice and recommendations on how to improve.
Auditors will need to be much more proactive in this area so they are well equipped to deliver this advice and steadfast in their resolve to walk away from fee income provided by these clients if recommendations are not taken seriously.
Audits are there for shareholders, and for smaller firms, the shareholders are often those running the business, which is fundamentally different to the situation with publicly listed entities. We hope that all the changes at the top of the market don’t lead to ‘regulatory creep’ impacting owner-managed businesses, otherwise many firms will lose the ability to provide the advice that businesses need to run their business effectively, which moves us further away from being trusted advisers with no real benefit to clients or the profession.
At Johnston Carmichael we understand what types of clients we deliver value to. We will develop our industry expertise and keep working with privately owned business and, where risk levels are appropriate, with listed clients. New opportunities will arise for us and you – and if managed correctly we can all round-out the services we offer and the markets we operate in.
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Graham Marjoribanks is head of audit & assurance at Johnston Carmichael, a member firm of PKF International. He has over 15 years’ experience in audit and financial services, having worked in a variety of roles across the UK and Canada including within Big 4 firms and investment banking.