Auditors need to adapt to show they add value

In October, the Financial Reporting Council reported that the audit fee income of the Big Four increased by 6.9% in the UK from 2018 to 2019, compared to growth of just 1.7% the year before. At a time when many businesses are suffering from the economic consequences of the COVID-19 pandemic and facing up to the impact of a nationwide lockdown and the prospect of economic contraction, this news must have felt like a kick in the teeth. However, recent research we’ve undertaken with CEOs, CFOs, and senior finance executives suggests that we shouldn’t expect auditors to have such a bumper year in 2020, and that they too may suffer some serious consequences as a result of the pandemic. Though the impact of the coronavirus won’t be fully seen until next year’s results, it’s clear that there’s going to be serious pressure on auditors to cut their fee rates in ways we’ve not seen for some time. Though the audit may be a non-discretionary piece of work, clients are looking to cut costs wherever they can. Most clients now expect firms to offer a “COVID discount”: Overall, 59% of clients we spoke to in the UK expect to be able to reduce their external audit fees as a result of the pandemic. Of those that expect a reduction, 79% expect a discount of between 5-20%, putting a major squeeze on audit firms looking to maintain their prices. And while we don’t expect COVID-19 to prompt a lot of churn in the audit market—although we think it will increase the likelihood that organisations will consider switching—those clients who are more likely to change external auditor as a result of the crisis are often driven by price. In other words, clients are looking for more than just a nominal symbolic discount; they want real, tangible savings, and they’ll use their feet if these don’t materialise. But tighter margins are just one example of how the coronavirus pandemic is impacting the audit market. Against a backdrop of greater scrutiny from clients, regulators, and market commentators, auditors are going to have to adapt to show that they can still offer value to their clients, not only to reduce the scrutiny they face but also to maintain their prices. The crisis is causing clients to think more about all aspects of what it’s like to work with audit firms, with a majority of clients in the UK telling us that every attribute of working with audit firms we ask about—not just fees—is more important to them during the COVID-19 crisis compared to normal times. But saying audit firms need to do everything better during a crisis isn’t helpful to anyone, least of all firms themselves. If firms really want to avoid dropping their fee rates, and instead compete based on how audits are delivered, they need to focus on those aspects of audits that add most value for clients. Our research suggests that clients that tend to feel firms provide more value for money when they’re able to make the audit process run smoothly. Clients who rate firms more highly for communication between the auditor and client organisation, the account management process, culture, and matching suitable people to audits also tend to rate firms more highly for the value they add in relation to fees charged. We think this is because clients value having an audit that’s as easy as possible for them in terms of being able to get on with their day jobs in a time of constant change and financial pressure. There’s also a strong relationship with the use of technology and clients’ perceptions of value. In part this may be because technology can help the audit process go more smoothly, but also because technology itself can provide a better audit and allow more processes to happen remotely in the age of COVID. Given the immense financial pressure on businesses this year, some discounting will be inevitable. However, firms that are able to adapt, use technology effectively, and make the audit process as smooth as possible are more likely to be able to show clients they add value. And if clients think audit firms add value, they have a better chance of justifying and propping up fee rates.