How are mid-sized accounting firms preparing for the impending audit threshold reforms? Diversification, specialisation and a move away from a ‘chargeable hours’ culture are just some ways in which these firms are adapting to new market realities, advises Simon Warren, managing director of CaseWare.

The mid-size accountancy market is changing fast in anticipation of the impending audit threshold reform. In late 2014 or early 2015, the audit exemption threshold is expected to be increased once again, freeing a large number of companies from a compulsory audit.

This new development raises important questions for mid-market firms which derive a significant proportion of their revenue from auditing: How are their newly exempted clients likely to react? Will they continue with a voluntary audit, and if so, why? How can audit firms work smarter to protect recovery rates in the face of a possible decline in clients?

A survey of 50 mid-tier accountancy firms conducted in summer 2014 by CaseWare, found that around half (51%) believe that the new threshold will affect their revenue, while one in ten said it would alter their future recruitment plans. Many accountants expect a large proportion of clients to choose not to have an annual audit when given the option; with 22% saying that only about half such clients would continue with an audit and 26% expecting only about a quarter or fewer would continue with it.

The mid-sized accountancy firms interviewed for the CaseWare report ‘The changing shape of the audit market in the UK, indicated that in order to retain their position in the marketplace, post-audit reform, they will have to diversify their range of services, review their relationship with clients and join forces to influence the perception of audit and its value for their clients.

The diversification of services offered to their clients is an inevitable response of many accountancy firms. This means greater specialisation in existing service areas, such as audit or tax. But it could also mean further specialisation in particular industry sectors, such as manufacturing or retail. Surveyed firms also indicated that they plan to take on additional services such as personal and commercial legal advice, property valuation or financial advice to private clients on investment or pensions.

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Spofforths, a Sussex-based firm with five offices, has already diversified, recruiting a team to provide tax advice and private client services on wills, trusts and estate management. But the accounts and audit team has also adapted. Partners and their staff have become less ‘general’ and more specialised. From 2009 onwards, partners also became organised around sector specialisms to ensure clients receive expert advice.

Another option open to mid-sized firms is adapting their organisational structure and services around becoming sector specialists. North London firm, Berg Kaprow Lewis, has already separated its assurance teams from the company’s support team. David Landau, principal in audit and advisory at Berg Kaprow Lewis, explained: "We’ve restructured ourselves internally and separated out our assurance teams from our support teams. We are looking to keep the audit skill-set in a smaller number of better trained people so we can give better advice and more focused work. We think clients will get access to better quality work and at more reasonable prices than from a generalist, or the bigger firms who are sitting on more expensive overheads."

When audit ceases to be a commodity, audit firms will have to identify and target new groups of clients requiring audits and assurance for purposes other than a statutory obligation. Among them will be companies that may need audit reports from suppliers as part of their procurement process, as an integral part obtaining credit facilities from banks, or stakeholders who demand audits to ensure that financial discipline is being exercised. Moreover, owner-managers looking to sell their businesses are better placed with a set of clean audit reports to support the transaction. Richard Spofforth, of Spofforths, believes clients that give up on audit may be converted to an alternative ‘assurance’ product. Spofforths was as an early adopter of the Assurance Service, and since 2010 has been offering the service as an alternative for those no longer subject to a statutory audit.

Communication skills will be of key importance. If they wish create growth in their audit service, firms will need to learn how to market and sell the merits of a voluntary audit, to both current and future clients, as an added-value service. Alternatives to a full audit, such as assurance reports, have had mixed support in the past, but the firms surveyed by CaseWare agreed that both firms and the industry would need to focus on explaining the benefits.

Finally, the industry will also have to address a fundamental culture issue relating to the way accountants do business with their clients. Some firms are leading the way by leaving behind a ‘chargeable hours’ culture and moving to one focussed on building good, value-based relationships with their clients. This change removes the incentive to simply maximise chargeable hours, with the resulting benefit of improving contact time with customers and as a consequence adding value to the audit service, over-and-above straightforward compliance.

Chief executive of Midland-based firm Dains, Spencer Wright, stresses that this is going to be the number one issue for the industry in the future. Audit clients are "not a once-a-year visit", but should instead be subject to year-round contact, which sees the firm act as an ever-present sounding board for commercial and financial decisions. The relationship is not then just about compliance. "Any accounting firm still following that model is on a hiding to nothing."

Also Paul Dearsley, partner at Price Bailey, a firm whose audit practice accounts for one third of its income, stresses the importance of staff, particularly senior staff, spending as much time as possible with clients. "Clients appreciate spending time with a professional adviser. This is us investing our time."

This culture change, more than anything else will contribute to strengthening the business relationship of mid-sized firms with their clients and ultimately the profitability and growth of audit as a service.