Inflo Top Takeaways: Key Facts and Trends in the UK Accountancy Profession

Background.

The Financial Reporting Council (FRC) in its capacity as the UK and Republic of Ireland (ROI) audit regulator routinely collates information from UK and ROI professional bodies and the auditors of Public Interest Entities (PIEs). The FRC uses this information to produce an annual report titled “Key Facts and Trends in the Accountancy Profession”.

Given the scope, this report does not represent a complete picture of the UK and ROI audit market. Comparisons from year to year can also be difficult, with 26 audit firms submitting 2020 data compared with only 20 in 2019. But within the 72-page report there are several key takeaways for those closely monitoring developments in the UK and ROI audit market.

Progress is being made on audit competition.

The very top of the market is static, with the Big Four firms still performing 100% of FTSE 100 audits. But progress is being made elsewhere, with non-Big Four firms now performing 8.4% of FTSE 250 audits and 32.8% of other UK main market audits, compared with 5.2% and 26.3% in 2019, respectively.

Special mention should be made of BDO who have increased their number of all main market clients by 15% from 2019, and Crowe who also achieved 14% growth. MHA MacIntyre Hudson remain the sole firm outside of the top 9 firms performing FTSE 250 audits, and they increased from 1 such client in 2019 to 2 in 2020.

Notably, all 3 of these firms have made strong investments in audit technology and methodology in recent years, which is helping them compete against larger firms.

Takeaway: Challenger firms are making progress on breaking the Big Four dominance and more opportunities will be available in the future. Technology and audit methodology investment by challenger firms is levelling the playing field.
 

Audit services are fuelling firm growth.

All firms saw growth in 2020, with Big Four growth at 2.7% and non-Big Four growth far higher at 13.1%. Audit services performed very strongly. While Big Four firms saw audit fee income growth increase, up from 6.9% in 2019 to 7.9% in 2020, firms outside the Big Four saw a much stronger leap, up from 2.2% to 20.9%. For many of the firms this comes on the back of investment in innovation and new audit technologies designed to increase the value of their audit services.

The large reduction in non-audit work to audit clients by Big Four firms in 2019 came on the back of high-profile policy changes. This reduction stabilized in 2020.

We can also see a clear differentiation in how client base translates to fee income. For non-Big Four firms 43.4% of fee income is achieved from audit clients, compared to only 26.3% for Big Four firms.

As we continue to see Big Four firms rationalizing their audit client portfolios and smaller firms moving away from the audit market, there remains significant growth opportunities in audit for the largest non-Big Four firms.

Takeaway: Audit remains a high growth service for accounting firms. Firms are increasing fees for higher-quality and more valuable audit services. Non-Big Four firms are more reliant on audit clients than their Big Four counterparts.
 

Audit quality must improve.

While challenging to compare market trends due to the different measurement logic, the two largest professional bodies both saw a reduction in the number of audit files achieving their top grading. ACCA saw a reduction from 6% of files achieving this grade in 2019 to only 3% in 2020, with ICAEW dropping from 25% to 20%.

CAI and ICAS saw the opposite though with their top rankings increasing from 31% to 53%, and from 1% to 5% respectively. ICAS also noted an increase in audits receiving their 2 lowest gradings though, up from 26% of reviews to 32%.

Regardless of the trend, these numbers in absolute terms remain far too low and will not impress stakeholders outside of the profession who are expecting strong improvements in audit quality following high profile corporate failures and frauds.

Takeaway: There must be much stronger commitment to far more robust quality performance. Early adoption of the new quality management standards may help, but continued investment is needed in more robust audit methodologies and an increased utilisation of technology.
 

The battle for talent will increase as student numbers reduce.

Student numbers have fallen 2.1% in 2020 compared with an increase of 0.1% in 2019.

ACCA has the largest number of students but has seen the largest decrease in numbers at 4.7%. ICAEW numbers grew by 2.0% and CAI grew by 4.9%, with ICAS reducing by only 0.6%. Given the make-up of students within each professional body the reduction in students is more likely, in the immediate term, to impact the availability of accountants in industry and commerce rather than practice.

The two professional bodies who offer and track their audit specialism (ICAEW and CAI) saw a 1.2% increase in students following the audit route or being eligible for the audit qualification.

Takeaway: The demand for future talent is only going to increase as firms expand their teams to support audit fee income growth. This may increase the need for technology investment to attract talent and free capacity away from automatable tasks.
 

 More to be done on diversity.

In almost all diversity categories measured in the report, greater diversity exists at the Manager grade than at Partner, evidencing the progression challenge across the profession. It will take time for diversity efforts to bear fruit, and 2020’s result show progress.

This isn’t the case in all areas though, as 2020’s percentage of female partners compares unfavourably to 2019. This may however be a function of the 6 additional firms reporting in 2020 versus 2019, as opposed to an underlying deterioration across all firms.

Takeaway: Firms will want to maintain diversity efforts within senior leadership positions to become more reflective of broader society and their clients.
 

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