The pros and cons of splitting out your audit practices

The Big Four’s dominance in the market has been brought into question once again with audits being described as a “route to milking the cash-cow of consultancy business” by Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) committee. In April this year, following its review into the “broken” audit market, the BEIS committee called for the audit and non-audit businesses of the UK Big Four to be fully separated as a way to boost competition and improve auditing, whilst ensuring that the UK remains a world leader in corporate governance. This has sparked a reaction from BDO, which is now considering splitting its audit practice voluntarily, rather than wait for official governance forcing them to take action. BDO is clear that their plans are still very much in the early stages and “nothing is about to happen imminently,” but what are the pros and cons to separating off your auditing practice? Disadvantages Rising regulation - The auditing industry is swamped in regulation and yearly compliance and it’s getting worse. Firms are being ‘turned off’ from registering as auditors by rising regulation and the potential threat this brings of being sued. Regulation such as yearly audit compliance with ICAEW/ACCA, anti-money laundering (AML) and GDPR to name just a few not only costs money (we estimate this compliance cost to be at least £15,000 per year) but time and hassle for complying practices. There is also a very high barrier to entry with registered auditors having to own at least 51% of a practice. Lack of talent - Good auditors remain scarce. The majority of trainees from the Big Four once qualified tend to move into industry rather than stay in practice. Accountancy practices and recruiters are constantly reporting a severe shortage of experienced auditors. More clients exempt - The pool for potential business is also narrowing with auditing no longer relevant to a good proportion of many practices’ clients since the audit exemption threshold for private limited companies increased from £5 million annual turnover to no more than £10.2 million. Fewer SMBs are now required to do an audit, making many practices question the financial feasibility of setting up a separate auditing arm. Lack of new business – Clients are resistant from changing auditor and tend to stick with the same auditor year on year, reassured by the depth of understanding they have of their business and finances, leaving little ‘new business’ opportunity. As there are often peak times of the year for audits, it can be difficult for an audit only practice to spread their workload evenly and resource efficiently. Advantages of splitting off your auditing arm By specialising in audit your team can truly excel in the field and therefore may be able to market the audit practice within a specific niche. Independence – can demonstrate true independence to regulatory bodies and clients. This should hopefully decrease the risk of non-compliance and potential fines or reprimands. From the client perspective there is no suspicion of additional non-audit selling. Ethical – for the auditor they don’t have the pressure from other parts of the business to keep a particular client happy but should be presenting their findings fairly and not worrying about upsetting the biggest consultancy client of the firm. If this was made mandatory, it may mean that the more sensible audit practices become more successful as they won’t have to compete with mixed practices that are selling audit as a loss leader; a route to cross and upselling additional services. At Goringe, we’ve always offered sensible pricing but we’re aware that across the industry some auditors deliberately underquote on their auditing services as a route to acquiring new business in other areas. Overall, the BEIS proposal to split the audit and non-audit businesses of the UK Big Four is a sensible one, to improve audit quality, but the continuous tightening of regulations around auditing will just stifle competition rather than boost it. Rather than splitting off their auditing services, it’s likely we’ll see many SME accountants ditch their auditing services all together – questioning whether the BEIS proposal is the silver bullet needed to ‘fixing’ the broken audit market.

The pros and cons of splitting out your audit practices

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