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Executive summary

During the second quarter of 2026, the UK accountancy sector operated within a complex macroeconomic and operational landscape. With the Bank of England maintaining benchmark interest rates at 3.75% in late April and persistent inflation weighing on workforce wellbeing, accounting practices faced acute service delivery constraints alongside rising regulatory oversight.

The primary operational narrative defining Q2 2026 was an unprecedented capacity bottleneck across UK practices. Severe talent shortages left nearly three-quarters of practices unable to accept new client engagements. This labour deficit was aggravated by friction regarding return-to-office (RTO) mandates, which heightened attrition risks and workplace stress.

To navigate these headwinds, practices across the spectrum pursued operational scaling and technological transformation. Regional mid-tier practices delivered notable revenue growth, while private equity capital continued to fund practice consolidation strategies across the market.

Concurrently, the Financial Reporting Council (FRC) demonstrated an uncompromising enforcement stance, levying major financial sanctions for statutory audit failures and launching new investigations into high-risk audit engagements. Meanwhile, practice leaders sought to balance the integration of automated compliance workflows against emerging liabilities associated with unverified generative artificial intelligence (AI) tools and social media tax misinformation.

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Firm performance and operational trends

Revenue growth and regional expansion

Despite operational headwinds, mid-tier and regional accountancy practices demonstrated resilient top-line performance throughout Q2 2026, driven by sustained client demand across core tax, audit, and restructuring mandates.

Regional practices reported significant top-line progress. Mid-market group DJH announced that its regional turnover reached £14m following a five-year strategy that expanded its physical footprint and headcount across Cheshire and Liverpool.

Similarly, Scottish practice Accountants Plus achieved a key growth milestone, disclosing that its turnover touched £3m as part of a five-year transformation plan that culminated in the opening of a new three-story headquarters in Motherwell. Physical footprint expansion was further mirrored by Clive Owen, which relocated its regional headquarters to Gainsborough House in Newcastle to accommodate expanding client operations across the North East.

Capacity constraints and engagement rejection

While client demand remained elevated, operational delivery was severely restricted by structural recruitment and retention bottlenecks. Mid-quarter reporting in May indicated that 71% of firms reporting slowed growth trajectories pointed to acute staffing shortages as the primary structural barrier.

By late June, this capacity deficit reached a critical threshold, with industry survey data establishing that 73% of accountancy firms rejecting new engagements cited a lack of available professional staff.

This operational bottleneck highlights a causal chain within practice economics: rigid working policies drove employee burnout, which intensified staff attrition and exacerbated existing recruitment shortages, ultimately placing a strict ceiling on practice delivery capacity.

Consequently, firm expansion in Q2 was constrained not by client origination or market demand, but by execution bandwidth, forcing practices to prioritize client profitability over volume.

Workplace policy friction and attrition risks

Workforce management and hybrid work policies emerged as central friction points during the quarter. A comprehensive industry study by recruitment specialist Morgan McKinley published in May revealed that 57% of accounting and finance employees considering resignation were driven specifically by rigid return-to-office mandates.

The financial burden of travel heavily influenced workforce sentiment, with 69% of workers requiring pay raises specifically to offset higher commuting costs. Furthermore, standard three-day office requirements correlated with widespread workplace stress, as 67% of respondents experiencing heightened burnout linked their mental exhaustion directly to mandatory office attendance.

The research revealed pronounced gender disparities in office mandate impacts:

• Workplace stress: 74% of female professionals reporting increased stress under office mandates contrasted with 55% of male peers experiencing similar pressure.
• Perceived productivity: 61% feeling less productive in traditional office spaces was reported by female professionals.
• Caregiving demands: 49% of female finance staff actively managed caregiving responsibilities alongside practice duties.

Overall, 28% of practices recording direct resignations traced staff departures straight to return-to-office policies. With 77% of employers struggling to recruit skilled talent, rigid attendance policies proved counterproductive, as 62% of job candidates rejecting non-hybrid roles cited the absence of flexible working options.

Flexible working hours remained the single most valued employee benefit, cited by 66% of all finance professionals.

Mental wellbeing and purpose alignment

Broader employee sentiment was further affected by macroeconomic pressures. Reporting from Caba published in May noted that cost-of-living increases negatively affecting accountant mental health heightened demand for firm-sponsored mental health support and financial wellbeing initiatives.

Simultaneously, value alignment became a key driver for talent retention. ACCA research released in late May showed that 54% of finance staff seeking social impact roles prioritised environmental and societal commitments, with this figure rising to 63% among younger professionals.

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Strategic developments and regulatory news

Consolidation, M&A, and private equity

Private equity (PE) capital and strategic consolidators continued to reshape ownership structures across the UK accountancy market during Q2 2026, providing mid-tier practices with capital for digital transformation and lateral hires.

In mid-June, regional practice Fortus announced that it was securing growth capital from LDC to execute its strategic expansion plans and scale regional service delivery. Concurrently, corporate consolidator Xeinadin expanded its regional presence through targeted practice acquisitions, integrating Alan W Simons & Co into Xeinadin on June 1, followed by acquiring Blackpool-based insolvency specialist Campbell Crossley & Davis in mid-June to strengthen its corporate recovery arm.

The appetite for tech-enabling deals extended across corporate leadership, with EY research from May establishing that nearly nine in 10 UK CEOs planning M&A within 12 months aimed to accelerate artificial intelligence capabilities and organizational transformation.

Regulatory enforcement and audit oversight

The Financial Reporting Council (FRC) maintained strict supervisory oversight throughout Q2 2026, imposing substantial financial penalties and initiating formal investigations into audit deficiencies.

On May 28, the FRC announced that it was fined BDO £1.3m over NMCN audit failures, issuing a severe reprimand to both the firm and an audit partner regarding statutory audit failures for the collapsed construction company NMCN. Regulatory oversight continued on June 23, with the watchdog sanctioning King and King for severe statutory audit deficiencies following an investigation into non-compliance with auditing standards.

The regulator also widened its enforcement scope on June 11 by opening formal investigations into Market Financial Solutions audits, examining the conduct of Magus Chartered Accountants under the accountancy scheme.

Parallel to enforcement, structural reforms advanced. On June 24, the regulator published updated guidelines, revising UK auditing standards to reduce reporting burdens on audit teams while maintaining rigorous quality benchmarks. Legal commentary published on June 17 noted that these revised standards will be pivotal in altering the future landscape of audit negligence litigation, redefining the legal benchmark of care expected from statutory auditors.

Macroeconomic drag and cross-border trade pressures

Macroeconomic and post-Brexit trade friction remained significant challenges for mid-market clients and their accountancy advisors. Findings from BDO’s bi-monthly mid-market tracker published on June 16 disclosed that 26% of mid-market firms viewing Brexit outcomes as worse than anticipated experienced ongoing operational strain.

Overall, 46% of mid-market enterprises described the impact as negative, compared with 54% reporting a positive effect. Among businesses experiencing negative operational impacts, 42% highlighting import and export compliance as their greatest disruption pointed to administrative red tape.

Disruption was disproportionately felt across industrial sectors, affecting 41% of construction firms and 27% of manufacturing companies. Furthermore, nearly a third of mid-market businesses reported severe recruitment difficulties in securing professionals with specialised international trade and cross-border tax compliance expertise.

Leadership appointments and governance

The quarter saw major governance shifts and leadership transitions across professional bodies and top practices:

• ICAEW leadership: The Institute of Chartered Accountants in England and Wales celebrated a key leadership transition after appointing Caroline Smale as ICAEW President, with the Bishop Fleming partner focusing her tenure on digital transformation, practice inclusion, and sustainability standards.
• MHA network expansion: MHA executed several partner promotions across its UK network, advancing Laura Farrow to audit partner in Cardiff, David Stone to partner in Milton Keynes, and Jonathan Dowding to international tax partner in London.
• BDO governance and lateral hires: BDO appointed Syreeta Brown as an independent non-executive director and hired former PwC specialist Dean Chamberlain as London private equity tax partner.
• Mid-tier senior appointments: S&W recruited a former EY partner as an international tax partner in London, James Cowper Kreston appointed a business tax partner from Grant Thornton/BDO, and FRP added Emma Thompson as a restructuring partner.

Practice technology and AI misinformation risks

Firms aggressively leveraged software automation to mitigate compliance workloads during Q2. In May, Baker Tilly advanced its digital infrastructure by collaborating with HubSync for automated tax processing, integrating artificial intelligence to streamline client data intake and processing.

At Accountex 2026 on May 28, key industry discussions at Accountex 2026 centered on AI deployment, cybersecurity risk management, and the danger of regulatory drift surrounding unmonitored practice software.

However, rapid technology adoption introduced new practice liabilities. An analytical report published on April 28 addressed the professional risks posed by finfluencers and unvetted generative AI. The report highlighted how generative AI tools and social media accounts generate “context collapse” – presenting narrow tax strategies as universal rules while omitting statutory caveats.

This trend creates compliance risks for SMEs and underscores the necessity of professional, human oversight to ensure legal compliance.

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Key takeaways for managing partners

Strategic capacity governance

With nearly three-quarters of practices actively turning away work due to staffing constraints, managing partners must pivot from aggressive client acquisition to disciplined capacity management. Practices should perform systematic client profitability reviews to offload low-margin engagements, reallocating professional bandwidth toward high-value advisory mandates and complex compliance work.

Modernising hybrid work and talent retention

Enforcing rigid return-to-office mandates presents a major retention risk, with over half of finance staff inclined to resign over strict attendance rules and 28% of practices recording direct departures. Given that 62% of job candidates reject non-hybrid positions, firm leaders should adopt nuanced flexible models – such as chrono-working or tailored hybrid schedules – to alleviate burnout (67%) and address gender-specific stress disparities (74% among female staff).

Elevating regulatory compliance and audit quality

The FRC’s severe financial sanctions against national practices and enforcement actions against regional auditors demonstrate that regulatory oversight remains intense. Managing partners must update internal quality control frameworks to align with the FRC’s revised UK auditing standards, ensuring engagement teams maintain documented professional skepticism to protect against future negligence litigation.

Deploying automation to offset structural labour deficits

As mid-market clients struggle with post-Brexit import/export compliance and cross-border tax skills remain scarce, practices should deploy automated workflow platforms similar to Baker Tilly’s integration model. Simultaneously, firm leaders must establish clear governance frameworks regarding generative AI tools to safeguard client data integrity and protect clients from unverified online tax guidance.

Michael Northcott

Accountancy Today

Annual review stresses need for greater investment in quality management systems

The Financial Reporting Council (FRC) has published its annual review of audit quality, highlighting a persistent gap in standards between the largest and smallest audit firms.

The regulator said its Annual Review of Audit Quality 2026 provides a market-wide assessment designed to support decision-making by audit firms and committees.

The report combines assessments of systems of quality management with audit file inspections to analyse factors shaping quality, including governance and operating models. According to the regulator, firm-wide systems of quality management are the foundation of audit quality and create conditions for sustainable improvements over time.

While progress in audit quality continues across the market, the level of consistency varies significantly. The FRC noted that the gap between large and small firms is particularly evident in the development of and investment in quality management systems.

In response, the regulator has moved to a risk-based supervisory approach to drive improvements. The FRC is also implementing targeted programmes to address market inconsistency, including initiatives to build audit firm capacity and an audit and technology sandbox to support innovation.

Anthony Barrett, executive director of supervision at the FRC, said: “Audit quality and trust in the audit sector are fundamental to well-functioning markets and confidence in the UK economy. Reliable audits support informed decision-making, strengthen accountability and underpin sustainable growth.

“It is encouraging that audit quality continues to improve, but it is not yet being delivered consistently across the market. Strengthening the systems within firms that underpin audit delivery is therefore critical. Well-designed and effectively operating systems of quality management create the conditions for high-quality audit to be delivered consistently over time.”

He added: “There is no one-size-fits-all approach to delivering audit quality. Firms differ in their structure, strategy and risk profile; what matters is that each firm’s systems can deliver quality outcomes reliably.

“Our supervisory, investigatory and enforcement activities deliver improvements in audit quality which support the UK as a great place to raise capital and to do business. We recognise that there is more work to be done in improving audit quality and are committed to a regulatory approach that underpins a thriving and resilient audit market.”

Heather Sandlin writes in Accountancy Today

It comes as the regulator is moving to an integrated approach to align supervisory, investigatory and enforcement activity

The Financial Reporting Council (FRC) has published reforms to its audit enforcement procedure today (17 June), in a bid to modernise its regulatory toolkit.

It comes as the regulator is moving to an integrated approach to align supervisory, investigatory and enforcement activity. The FRC is looking to identify risks earlier, act quicker and support continuous market improvements. 

Under the new principle that enforcement serves the public interest, the framework introduces a graduated range of responses beyond standard investigations or private constructive engagement. It is understood that cases will be handled based on their impact, while retaining the capacity to pursue full investigations for significant failures.

The framework includes three new routes to resolution: published constructive engagement, which combines remediation with public transparency; an accelerated procedure for faster resolution when evidence is available; and an early admissions process to encourage firms to cooperate earlier.

Richard Moriarty, chief executive of the FRC, said: “Good regulation supports well-functioning markets by giving confidence that high standards are upheld and action is taken when they are not met. The FRC’s toolkit retains the use of investigations to maintain accountability and public trust where serious or significant failures have occurred. 

“This revised framework now provides us with additional options which are more proportionate, timely and targeted, which will support us to deal with issues more quickly and support system-wide learning.”

Penrose Foss, executive director of investigations and enforcement at the FRC, said: “The revised Audit Enforcement Procedure introduces a broader and more flexible range of routes to resolution. The updated framework enables proportionately focused enforcement activity to achieve swifter accountability. 

“Robust enforcement is fundamental to confidence in audit, corporate reporting and UK markets more broadly. These reforms are about ensuring the FRC continues to operate as a modern, effective regulator, using the right tools at the right time to serve the public interest.”

Anthony Barrett, executive director of supervision at the FRC, added: “The FRC’s new supervisory, investigatory and enforcement approaches represent an integrated, modernised approach to regulation. 

“Earlier engagement and identification of issues through our supervision work, combined with the timelier flow of lessons learned through these reforms, support continuous improvement by audit firms in addition to ensuring there is accountability where failures occur.”

Writes Accountancy Today

For AI users in highly regulated sectors like finance and accounting ‘trusting something partially is not adequate’ with high levels of double checking and worries about lack of audit trail

The trust ceiling for artificial intelligence (AI) is still a challenge with high risks for regulated sectors like finance and accounting, where ‘trusting something partially is not adequate’, warn experts at UnlikelyAI. These untrustworthy results can lead to heightened risk of potential governance failures, bad decision making and a lack of accountability.

Nearly two thirds of senior finance and accounting leaders do not trust AI generated results completely, highlighting concerns from users in regulated industries like accounting and finance where compliance with regulatory environment means inadequate, inaccurate responses can be high risk.

Despite widespread adoption, AI’s promise to make tasks quicker and better is failing to materialise due to employee time spent checking, verifying or redoing AI-generated work.

These are the findings of The AI Trust Report, major cross-industry research by consultancy UnlikelyAI, which identified a significant gap between stated confidence in workplace AI and actual behaviour.

Launching the research at an exclusive event in London, William Tunstall-Pedoe, CEO and founder of UnlikelyAI, said: ‘If systems are not trustworthy and make the wrong decisions there is a huge economic impact – 57% do not trust them completely, and in regulated industries, trusting something partially is not adequate. If you don’t trust it completely, you cannot use it.’

Trust levels are relatively low, with the finance sector only trusting AI systems 43% of the time, and Tunstall-Pedoe warned of ‘high friction with constant checking and uncertainty about outputs’. The level of compliance friction was highest in the finance sector at 70%, compared with only 54% in the public sector, while security concerns and lack of explainability, for example for an audit trail, were also major concerns.

‘Trust is still only partial and companies are facing astronomic costs, but 30% said they would increase their AI budgets if they could trust it,’ he added.

‘Humans have an error rate, but hallucination, that is not a human error. There is a higher bar for automated systems and I think that higher bar is legitimate. There are intrinsic limitations of the technology, even after many years it is still a problem.’

An expert in the AI field, Tunstall-Pedoe warned there are ‘four negative effects of dependence on AI – AI blindess, dependency, burnout and analysis paralysis’.

A lack of trust in the results produced by the AI tools is shaping usage with many hours a week being spent on AI verification with low levels of confidence in the outcome of AI driven results. The research found employees are spending on average two hours and 41 minutes using AI each week, but nearly as long checking or redoing the results at two hours and 30 minutes.

A third of respondents said they experienced ‘AI burnout’ from repeatedly verifying outputs, while 31% experienced ‘analysis paralysis’, unsure whether to trust the AI result or their own judgment.

Almost all respondents (99%) spend at least some time checking AI outputs each week – citing everything from quick sense checks (minor verifying, 18%) to redoing some or all of the task manually in order to verify it (20%) or even ignoring the output entirely (18%).

So far, AI is not making work better, either, according to the research. Just 57% of respondents reported any kind of return on investment (ROI) on their organisation’s current AI investments, while 13% are yet to see a clear positive ROI and do not think they will, and some even say ‘it has been actively bad for [their] organisation so far’. 

Tunstall-Pedoe added: ‘These findings highlight a critical challenge: there has to be a better way to use AI. Large language models (LLMs) have strengths in specific, limited areas, but there’s a huge lack of understanding about when to use them and when to look to other, less-fallible models. That’s where this trust gap is coming from.’

Best models score only 39% on complex, real world finance questions written by experienced  professionals, according to data from PRBench Finance, validating why finance leaders are so wary about the outcomes,

Another issue for businesses is unauthorised use of AI by employees, relying on off-the-shelf systems, rather than advanced LLMs, for example, but these too have to be used with adequate guardrails in place.

‘It is important to set ground rules within teams for when AI is and isn’t appropriate,’ he added. ‘Most people don’t realise that not all AI is built the same. LLMs are great for creativity and summarisation, but they are weak at accuracy and explainability. Training staff on the strengths and weaknesses of different systems builds confidence and prevents misuse.’

The panel discussion also focused on accountability, raising important governance and compliance issues in regulated sectors, where security concerns are a priority, especially when handling confidential client data and financial information, and critically, the question of who has accountability if AI goes wrong.

This raises the serious question about how an accurate, reliable audit trail can be produced when the data is AI generated, an area which is a major focus for the future speed of rollout and trust.

When asked whether now was the right time to ramp up AI investment if only 41% trust the output, Tunstall-Pedoe said: ‘There is a simple trade off, what is your appetite for spending money, what is your appetite for risk? Some of the mistakes being made now are less defensible now, but I think that will change quickly.’

Sara White,

Editor, Business & Accountancy Daily