Accountancy firm numbers decline as consolidation increases
Nearly 500 accounting firms dropped away last year, ending the start-up boom which saw the number of practices grow to 35,520 in the UK.
Float’s new ‘Accounting for change’ report crunches the latest Official Labour Market Statistics from the Office of National Statistics (ONS) and highlights a downward trend in accounting firms startups.
Up until last year, the number of firms had been on the rise, gaining an average of 1,212 new a year since 2011 to peak at more than 36,000 in 2017.
Float’s CEO Colin Hewitt put this growth down to the rise of cloud accounting, and the digitalisation of tax.
AccountingWEB’s own statto, John Stokdyk, has been tracking similar figures for the past decade and suggested that immediately after the financial crisis, firm formations were driven by experienced accountants who had left larger organisations.
In more recent years younger accountants who may have become frustrated within traditional firm hierarchies took advantage of the lower cost of entry made possible by new cloud tools to set up their own practices.
Float also speculated that lower barriers to entry contributed to the decline of accountancy partnerships, which halved during the past decade from 3,125 in 2010 to 1,745 last year. The introduction of limited liability partnerships in 2014 may have played a part here, but many professional firms also now operate as limited companies.
The steady increases came to a halt in 2017 and nearly 500 firms disappeared from the profession’s grand total since then.
Thanks to the Brexit vote, the economic outlook has not been as encouraging for firm formation since 2016. Yet AccountingWEB has been seeing a lot more contracting and freelancing going on within the profession. Family commitments and lifestyle preferences may be fuelling an increase in part-time/slash accountants who reflect the growing gig tendency in the wider economy.
But while accountancy firms have been receding, the number of bookkeeping has risen steadily to 6,640 - a 113.5% increase on the 2010 numbers.
According to Hewitt, “We’re in the middle of a technological revolution that represents an incredible opportunity for bookkeepers. Cloud accounting services, smartphones and the introduction of Open Banking mean bookkeepers can scale up like never before.”
Consolidators move in
There’s another possible explanation for the relative decline in the number of accounting firms – consolidation.
In 2018, regional firms looked to increase their geographic footprint and seized the opportunity to build a national brand. Firms like Baldwins have embraced the rise in digitalisation to scale up very rapidly. Small and mid-size firms holding on during the hard times in the hope that things will improve made easy pickings for larger predators.
At the other end of the market, practitioners suffering the unrelenting onslaught of Making Tax Digital, new money laundering regulations and GDPR started to question their future in the profession.
AccountingWEB’s Any Answers section has regularly been peppered with practitioners vowing to draw up their exit plans or crossing their fingers and hoping consolidators would come and find them.
ICAS assistant director of practice Jeremy Clarke said sole practitioners earning between £100,000 to £500,000 would be keener to explore consolidation options with local two-to five partner firms rather than facing the “admin hassle” alone.
Firms profit as consolidation rises
Although accounting firm numbers declined, the fortunes of the remaining firms grew. The number of firms earning more than £100,000 increased from 14,985 in 2017 to 15,630 in 2019 – a 4.35% increase. Concurrently, the number of firms with a turnover under £100,000 decreased 5.4%.
“A lack of growth does not necessarily mean the industry is in poor health,” said Float’s Hewitt. “The UK accounting industry now has a smaller number of more profitable accounting firms, following years of growth at the lower end of the market.
“We witnessed a great accounting boom in the UK this decade, with it being easier than ever to set up and run a new firm. This appears to have tailed off more recently, as we also saw increased market consolidation over the last two years which has contributed to a net reduction in firms.”
Click here to see the results in full and read added commentary in Float’s ‘Accounting for Change’ report