We are currently hurtling towards the end of the Brexit transition period on December 31st. As this cliff edge looms, there is a sense of confusion throughout the country, as we all try to get to grips with the implications of a range of Brexit scenarios and how they might apply to our own circumstances.
For those working in accountancy and audit, however, trying to imagine life beyond Brexit is even more challenging as so little has been said about its impact on the profession, despite the industry’s critical importance to the UK economy. In October this year, a report published by the government’s EU Services Sub-Committee said that accountancy and audit firms are being “overlooked” in Brexit trade negotiations. This is rather troubling when you think that the professional services sector is worth an estimated £224.8bn and adds 4.6m jobs to the country’s economy.
As anyone in the sector will tell you, however, Brexit uncertainty is just one of many issues accountancy and audit face right now. I say this not to depress us further, but because there is huge value in looking holistically at all issues in order to find common solutions. It’s impossible to look at problems the industry may face as a result of Brexit without looking at ongoing challenges – none more pressing than margin decline.
An industry under pressure
Recent figures from the FRC, show that in 2019 The Big Four’s fees for non-audit work for audited entities fell by 20.8%. This highlights how accounting firms can ill afford to lose any revenue right now. For several years, margin decline at the Big Four has been an issue, with profits falling from 30% in 2006 to just over 18% in 2019. It is as premature as it is unhelpful to describe it as an industry in crisis, but it is under tremendous pressure.
The Big Four has not seen revenue per employee rise in line with inflation and this has put pressure on productivity improvements to maintain margins, with varying degrees of success. If you add in confusion and potential revenue loss as a result of Brexit to the mix, a rather dismal picture of the industry can be painted. Accountancy firms must urgently prepare themselves for a whole range of post-Brexit trading scenarios but one of the best things they can do is tackle productivity issues and rebuild margins.
Will tech save us?
One reason for cautious optimism, however, lies with technological innovation. In particular, digitisation, which for many years has been considered a nice-to-have but is now, as result of the pandemic, business-critical for accountancy firms of all sizes.
According to McKinsey, three fundamental business changes brought on by COVID-19—new customer behaviour and needs, unpredictable demand, and an unprecedented spike in working remotely—have led to a swift migration to digital technologies in all industries and sectors. Accounting and audit are no exception and the industry’s rapid embrace of new technologies in 2020 has been inspiring.
We must not lose sight of the fact that the accounting, bookkeeping and auditing professions have already been through huge transformation in the past decade. This is even more impressive when you think how these have been traditionally cautious industries when it comes to deploying new technology. The introduction of Making Tax Digital, the rise of cloud accounting apps and the automation of basic compliance functions have all positively disrupted the profession and help to provide a better, more efficient and more proactive service to clients while improving productivity.
The government, the regulator, associations and the industry as a whole are all now behind moves to accelerate digitisation in order to increase productivity and rebuild margins so firms can weather the current storms – wherever those storms come from. I would never want to characterise COVID-19 as a positive thing, but the unexpected and unintended consequence of efforts to deal with its effects have had a transformative impact on business which will be felt for many years to come.
By Shamus Rae, CEO and founder of Engine B