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Oct 14

Category: In the News

Thanks to a major package of audit regulation reforms from the European Union (EU), the accountancy profession is at a turning point.

As a result of the EU’s new rules the business model of the Big Four (EY, Deloitte, KPMG, and PwC), which has traditionally relied on long-established relationships with clients, is being seriously shaken up.

At the heart of the shake-up is audit reform – the examination of company accounts – which has long been seen as the bedrock of the accountancy sector.

But now, thanks to new rules requiring that companies allow firms to bid for their audit work every 10 years and an outright ban on limiting tenders to only the Big Four, audit has become the cause of serious competition for clients and revenue.

The result has been that the Big Four, and a handful of optimistic challenger firms, have had to quickly develop more sophisticated business development and bid management functions several times larger than before in an effort to retain existing work and to win new contracts.

What’s behind the drive to regulate audit?

The level of scrutiny facing accountancy firms from regulators, politicians, investors, and others, is high – and has grown massively since the financial crisis began in 2008.

In the aftermath of the crisis a number of institutions, among them the EU, undertook high-level inquiries into the role of banks, hedge funds, rating agencies, regulators, and auditors. In the EU’s consultation paper, released back in 2011, they didn’t hold back on what they saw as the issue:

‘The fact that numerous banks revealed huge losses from 2007 to 2009 on the positions they held both on and off balance sheet raises not only the question of how auditors could give clean audit reports to their clients for those periods, but also about the suitability and adequacy of the regulatory framework’.

The long-term relationships between the Big Four, often spanning several decades, and the major companies they audited were put directly under the spotlight. One eye-raising example was Barclays, which had been audited by PwC since 1896. A 120 year relationship between client and auditor is one example of why change has been forced through to try and make the market significantly more competitive.

KPMG, PwC, EY and Deloitte audited over 90% of all of the UK’s FTSE listed firms in 2013. They also provided millions of pounds worth of other, non-audit related, services, prompting the EU to worry that auditors could potentially be developing too strong a business interest in the firms they audit.

The result was a new EU Audit Directive (a set of EU rules that all EU Member States are expected to implement via their national laws), which introduced mandatory audit rotation every 10 years, banned the practice of restricting audit tenders to only the Big Four, and imposed limits on the amount of non-audit work a firm could do for a company that it also audited.

What do the changes mean for the accountancy firm’s business development functions?

The reforms pose a number of major business development challenges for the big accountancy firms. Not only is there the requirement that all audit mandates be rotated every 10 years, but there are also rules restricting the amount of non-audit work firms can do for their audit clients, and rules preventing bids being restricted to only the Big Four.

The result is that the market is both more competitive and a lot more complicated, as the big firms decide which audit contracts to go for and when to focus on other, potentially much more lucrative, non-audit services. Speaking to the Financial Times recently, Hywel Ball, head of audit at EY, said:

‘Accountancy firms must weigh up: do you tender or not for a large organisation’s audit? You need to evaluate the cost of pitching against the chance of winning and the potential loss of non-audit services’.

The shake-up is already underway. PwC has noted that two-thirds of the companies that have put their audits out to tender since October 2012 have changed firms.

For example, early last year Vodafone put an end to a 26-year relationship with Deloitte when it appointed PwC. In another example, Tesco ended their 32-year relationship with PwC late last year, choosing to partner instead with Deloitte. Such changes have prompted some critics to say that rather than opening up the market, the changes have simply resulted in an auditor ‘merry-go-round’.

What sort of skills are in demand?

The accountancy firms, especially the Big Four are expanding their business development, bid management, and B2B marketing teams to meet the challenges posed by the reforms head on. Over the last few years, David Wall and Andy Sellers have built teams at KPMG, Deloitte, EY and PwC and seen the demand for candidates in this space rise significantly.

The firms have been looking for bid/sales coaches, pursuit managers/leaders and business development candidates who have experience in sales pipeline management, research and conversation. The whole market has evolved and matured and the demand for top talent has shown no signs of slowing down.

Challengers, such as Grant Thornton, who recently won their first FTSE 250 auditing contract with Interserve, are expanding too as more bid opportunities arise so it’s not just the big players who are growing.

3Search works with a number of big professional services clients to connect them with the best talent in business development and bid management. Think you have the skills the big firms are looking for? Get in touch with us now to discuss the latest opportunities.