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Wednesday, 17th April 2024
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Accountancy: price war to be a feature of market going forward as big four move into mid-tier territory Back  
As a result of the Sarbanes Oxley inspired restrictions in relation to providing other services, the big four accountancy firms will increasingly be chasing more mid-tier clientele, which will result in an all-out price war between the big four and mid tier firms, as they seek to replace lost revenue sources with new clients writes Anthuan Xavier.
The only constant is change! Never has a saying been more true of the accountancy industry than in the last twelve months. Uncertainty, turmoil and increased regulation was the name of the game in 2003, and sweeping changes have been occurring at both a national and global level.

The most notable development on an international front has undoubtedly been the Sarbanes Oxley Act. Its implications have been far-reaching, affecting any accountancy practice connected to public interest companies (directly or through international subsidiaries), who will soon find themselves subject to the scrutiny of the SEC’s oversight board.

He who pays the piper....
As a result of Sarbanes Oxley, the issue of corporate governance has been brought to the fore. The wave of corporate activism sweeping the world was most recently illustrated by the ousting of Sir Conrad Black, the chairman, chief executive and 73 per cent shareholder of Canadian media group Hollinger. The auditors forced the inclusion of a warning in their annual report stating that Black’s controlling ownership represented a conflict to other shareholders, and revealed details about excessive management fees. This provided a single minority shareholder with enough ammunition to push for an investigation. In what is seen as a victory for minority shareholders the investigation led to Black’s resignation as chief executive, as well as an undertaking to repay more than $7m to the company in fees. Beware the executive directors who forget that auditors are answerable first and foremost to shareholders and not management!

Another major implication of the Sarbanes Oxley Act is the restrictions now placed on auditors in relation to cross-selling other services. Audit has traditionally been used as a platform for selling additional professional services to clients. This restriction will encourage auditors to price their services in a more commercial and realistic manner, which will lead to a significant increase in auditors fees. Furthermore, as a result of compliance with more detailed legislation, auditors will undoubtedly be subject to increasing legal costs. To add to this, professional indemnity insurance costs have increased sharply. These costs will ultimately be borne in some proportion by the client.

Ireland ahead of international peers....
At a national level the accountancy industry has been in the spotlight for a number of years. Long before the first details of the Enron / Andersen scandal emerged, existing regulatory practices of the Irish accountancy industry was under scrutiny. The Review Group on Auditing (RGA) has been busy implementing new recommendations and the government has now issued a draft of the new Companies (Auditing & Accounting) Bill.

Danger of over regulation…
While the industry welcomes the majority of the new Bill, there are concerns over the proposed legislation. In its existing form it would effectively make Ireland the toughest regulatory regime in the world, making it uncompetitive and discouraging international investment. Critics might argue that such concerns are self-serving for an industry which has until now been self-regulatory, but the accountancy profession is not alone in it is view.

Speaking about the Bill’s proposals in relation to director responsibilities, Anglo Irish Bank chief Sean Fitzpatrick recently commented that it would: ‘deter brighter candidates from accepting board positions… the time for discussion on business development, on strategy and on driving forward shareholder value would shrink and be replaced with a focus on self-protection’.
Other bodies who have expressed concern at the proposed legislation include the IDA and ICT Ireland, the lobby group for the technology sector, and the Law Society.

Principles versus rules....
Excessive regulation of the industry creates the danger that auditors may take a more heavy-handed, draconian approach merely to cover their own backs. Not everything is black and white, and sometimes auditors must make a judgement call on certain accounting issues. Principles afford them the opportunity to act in the shareholders best interest in these situations. Conversely, with a rules-based system, applying prescriptive treatment to certain issues may serve more to protect the auditor, rather than protecting the interests of the shareholders. The development of a hybrid approach of regulations and principles in consultation with industry would ensure a more effective and workable system that is fair on both the industry and the public alike.

Making the auditor the whistle-blower…
Recent reforms by the Office of the Director for Corporate Enforcement have placed the burden of reporting offences on auditors’ shoulders. Auditors are now required by law to report to the ODCE any suspicion of a possible 128 indictable offences, and this number continues to grow. In the past companies have turned to their auditors (often regarded as a trusted business advisor) for advice and assistance in ensuring that they comply with appropriate legislation. However, due to the new reporting requirements of auditors, companies are reluctant to raise issues. This is not only damaging to the relationship between client and auditor, but it also creates a legal minefield. As a result of the increased exposure, auditor requirements for legal and professional advice will increase significantly, therefore driving up the costs to the client.

Changing industry structure…
With the accounting environment becoming more and more litigious, many practices are now seeking ways to limit their liability. On a global basis, both big four and mid tier firms are seriously considering becoming a limited liability partnership (LLP) if they have not already done so. The UK has introduced legislation allowing traditional partnerships to avail of an LLP structure, but this has yet to filter through to the Republic of Ireland. As the law stands now, limited liability companies are not allowed to act as auditors. Unless the Irish law is amended to allow for the incorporation of auditors, we may find fewer firms willing or able to audit large companies. This would be bad for competition and further compound the dominance of the big four, which is ultimately not in the interests of the consumer.

Looking to the future - consolidation and all out war!
The ramifications of all of these developments on the industry will be dramatic in the coming years. Small and mid-tier firms will find it difficult to operate in an increasingly regulated environment, and will be at a distinct disadvantage to their larger counterparts both in terms of knowledge and cost efficiencies. This will result in further consolidation of the industry, with M&A activity likely to gain momentum in the coming months and years.

Another feature of the market going forward will be a blurring of the lines between what has been traditionally considered big four and mid-tier territory. As a result of the Sarbanes Oxley inspired restrictions in relation to providing other services, the big four will increasingly be chasing more mid-tier clientele. This will result in an all-out price war between the big four and mid tier firms as they seek to replace lost revenue sources with new clients.

In summary, if you think that the last few years has been a white-knuckled roller-coaster ride for the accountancy industry, hold tight because its not over yet! The bar has been significantly raised, and there is little room for apathy. There will only be winners and losers, and it is those who embrace change and innovation who will make it through the next period of industry reformation.

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