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Editor's letter: Predicting the future

This month, International Accounting Bulletin and sister title The Accountant embarked on a mission to discover what the accounting market and the profession at large might look like in 2020.

As part of this investigation we conducted an online survey drawing responses from more than 100 networks, associations and institutes, supplemented by interviews with professional body and firm leaders, as well as recruitment and legal experts. While you can read the comprehensive analysis of the results in this issue (see pages 4-9), I think some of the most interesting predictions were those regarding fee pressure.

Since I started reporting on the accounting market three years ago, fee pressure has rarely been far from the surface of industry discussion, but recently it has become a major concern for the industry with regard to audit quality. More than 48% of survey respondents said fee pressure would continue to increase in the years leading up to 2020, posing a significant danger to audit quality. That almost half the industry expects this seems an alarming reality.

However much clients are struggling under averse economic conditions, decreasing audit quality carries a higher risk of fraud and bad financial management being overlooked. The result, inevitably, will be an increase in liability suits brought against accounting firms.

Needless to say, most firms around the world assure me that fee pressure is not yet impacting on audit quality. But while it's clear that measures have been taken to make audit teams more cost effective, one has to wonder how far software improvements and headcount reductions can shrink overheads before human attention is stretched enough to put attention to detail in danger.

Further movement in this direction surely cannot be in the best interests of clients - especially not at a time when those clients, not to mention shareholders, expect auditors to take adopt a more forward-looking view. Personally, I hope formal changes to the role of the auditor might help stop fee increases, and the trend of asking for 'more for less'. Redefining the role of the auditor could potentially close, or at least decrease, the expectation gap that currently exists.

If one needs a cautionary tale regarding the effects of endemic high fee pressure, the well-publicised story of Olympus (see pages 15-20) should be called to mind.

The Olympus scandal was one of the biggest corporate frauds in the past 12 months, and analysts involved were quick to point to decreasing audit fees as an issue. Despite the company's executive team taking most of the heat for the fraud, auditors were also put under the microscope and new compliance and professional guidelines are being considered by regulators and domestic professional bodies.

Nevertheless, despite Japan's history of large-scale fraud (the profession there is still reeling from scandal brought about by cosmetic giant Kanebo in 2006), the market is notorious for its intense fee pressure, and auditors are still not working together to arrest the downward trend in pricing.

And it's not only Japan. Russian firms, too, have been under severe pressure for years (see pages 10-14). For firms in these markets, and globally, acquiescing to fee pressure is a dangerous gamble.

By 2020, however, the expectation is that other market changes will change the current rules of play - perhaps via mandatory firm rotation or retendering, or even the merger of large mid-tier players to change the competitive landscape. The return of more positive financial circumstances for clients too shouldn't yet be ruled out. Regardless of what may come in the long term, fee pressure is one of the defining issues of the day and a solid definition of the role of an auditor can only help mitigate the risks involved.

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