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Against a volatile geopolitical and economic backdrop, 2023 is shaping up to be another critical year for the audit industry. Following three years of pandemic-induced restrictions and disruptions to “traditional” working patterns and practices, a renewed push for audit reform and elevated fraud risk will be key themes for audit professionals over the coming 12 months

Phil Crooks, managing director at Berkeley Research Group, outlines the key changes to the audit landscape in 2023..

Uncertainty remains a key concern

Ongoing economic uncertainty, driven by inflationary pressure and continuing geopolitical conflicts, continues to put pressure on companies’ financial stability. In a recent statement regarding its supervisory focus for the year ahead, the Financial Reporting Council (FRC) said: “Given the difficult economic conditions that are currently being experienced, we recognise that many companies, in many different sectors, are currently under particular commercial and financial pressure.”

Significant increases in interest rates and a slowing economy – compounded by the cost-of-living crisis – have led to growing fears that this year will see a wave of corporate failures. Latest figures from the government reveal that there were 1,964 registered company insolvencies in England and Wales in December 2022, some 32% higher than the same month in 2021, and 76% higher than the number registered three years previously.

In turn, the FRC explained that it plans to “be especially careful over the coming year in monitoring where these pressures are being felt most acutely, and tailor [its] selection of company reports for review and audits for inspection accordingly.”  The regulator has already highlighted several sectors it deems to be high risk in the year to come – including the travel, hospitality, leisure, retail, construction and industrial transportation industries.

The ongoing war in Ukraine, meanwhile, remains a major concern and continuing source of political volatility, sanctions and capital market constraints, as well as supply chain issues – all of which could impact revenues, working capital and companies’ access to funding.

Combined, these factors will create additional pressure on already strained management teams looking to meet their debt covenants – a breach of which could trigger material adverse change clauses and result in the loans becoming repayable on demand.

Within this context, auditors should carefully consider companies’ financial stability, whether any loans are set to reach maturity over the next 12 months and whether they need to (re)finance during this period. Crucially, they should also be prepared to see a potential rise in claims as stakeholders look for someone to criticise and blame.

Audit progress despite continued delays

On the regulatory front, preparations for the FRC’s much anticipated transition to the Audit Regulation and Governance Authority (ARGA) will continue into 2023, with the switch now expected to take place in April 2024 – significantly later than originally planned.

The FRC has been criticised in recent years with ARGA hoping to tackle these concerns head on. The transition will provide the regulator with greater enforcement power and a better ability to tackle audit reform and reduce the concentrated power of the Big Four. To meet these new objectives, the organisation is also expected to progressively increase its headcount – with staff levels growing from the current forecasted number of 486 in March 2023, to 533 in March 2024.

In the meantime, the FRC is continuing to push ahead with the changes it can implement with the powers it currently has. Revisions to International Standard on Auditing (ISA) 600[i] introduce a risk-based approach to the audit of groups, with increased focus on identifying and assessing the risks of material misstatement.

These changes have been made to ensure the standard remains fit-for-purpose, especially given changing work environments resulting from the pandemic and group auditors’ inability to travel to the component teams. In turn, ISA 600 imposes enhanced responsibilities for direction, supervision and review of the work of component auditors.

Effective for audits for periods beginning on or after 15 December 2023, this marks the third major revision to ISA guidance in three years, following revisions to ISA 315[ii], which deals with identifying risks of material misstatements, in December 2021 and ISA 220[iii], which deals with quality control, in December 2022. The revisions to ISA 315 were implemented to enhance risk assessments and ensure they obtained a detailed understanding of a company’s IT environment and internal controls commensurate to its size and nature. ISA 220 revisions were aimed at strengthening quality management by the whole audit team and emphasising the importance of professional scepticism and auditors’ judgement.

Staying vigilant

Reviewing these auditing standards at regular intervals provides a valuable opportunity for the industry to reflect on past experiences, address situations that were not envisaged when the standards were drafted and adapt guidance for the future.

As work practices evolved to adapt to the pandemic and today’s hybrid working environment, management teams may have taken advantage of this time to override controls, manipulate financial statements, and to conceal or misrepresent information about their financial performance.

Together with an ever-evolving economic and regulatory environment, audit professionals must remain vigilant to the risk of fraudulent financial reporting. Audit firms should be taking a proactive approach in their communication with clients and regulators to spot and address any such inconsistencies or errors in reporting. In what is set to be another challenging year for the industry, auditors must remain on high alert for any threats to the financial reporting ecosystem.

Author

Phil Crooks

Date published March 3, 2023 Accountancy Age

Demographic trends and changing work patterns have set the profession on the road towards an inexorable collision between supply and demand. What can accountants caught up in the skills crisis do to come out unscathed?

There’s nothing more frustrating than watching a situation unfold where you can see the underlying causes, but you can’t do anything to prevent it.

That’s the feeling I get from watching accounting’s increasingly acute skills shortage. As we near the end of 2022, it feels like we’ve careered down the mountain road, the brakes aren’t working properly and we’ve crashed through the wooden roadblock marked “Danger steep drop ahead”.

The warning light started flashing as far back as 2018–19, when we could see staff retention and recruitment climbing up the list of concerns for entrants to our annual Accounting Excellence Awards. Progressive practitioners were clearly beginning to see that the lack of available talent was cramping their ambitions for growth.

Thanks to Covid, this storyline went a little out of focus during 2020–21, but when things settled down this year, we found that as with technology adoption and flexible working, the pandemic greatly accelerated the underlying trend. Making Tax Digital (MTD) and its more sophisticated cousin Digital Transformation might have been the focus of public conversations within the profession, but recruitment, retention and the lack of skilled people to tackle all these new challenges has become a persistent and ominous throb in the profession’s background soundtrack.

While regulatory shocks like MTD and the ever-changing nature of accounting services have intensified the squeeze in 2022, the current talent crisis goes back more than a decade to the profession’s response to the global financial crisis, when firms large and small reined in their training budgets. And the signs are that the downward cycle is starting to repeat itself this year. While the skills gap we’re seeing is entirely predictable, the extent of its impact is adding to my sense of delayed and slightly helpless shock.

Escape routes

The sound of people raising alarms echoed around the AccountingWEB Live Expo hall last week, along with indications of how accountants were adapting to the post-pandemic skills crunch. In his talk about how private equity investors were putting money into accountancy firms, Sam Edwards from PwC’s Strategy& consultancy commented that talent and skills featured in every conversation he and his colleagues were having.

“Accountants operate in a very constrained talent market,” said Edwards. “Everyone talks about how difficult it is to keep the talent you have. If you could just turn the talent taps on, there’s so much work out there you could be doing.”

For years and years, the software industry has been telling accountants that automating mundane tasks will increase their capacity and free their people up to do more valuable work. As Edwards put it, “Using technology will create more capacity in your team for you to take on more core work or cross-sell some of those interesting advisory services.”

The flow of traffic to stands of expense and data capture, accounts payable, payment apps, practice management and CRM suppliers showed that a lot more accountants are responding to those calls.

Other avenues are opening up, including a bigger role for bookkeepers and a surge in outsourcing. The roll call of providers at Coventry included Affinity Outsourcing, befree Global, Diamond Outsourcing and GI Outsourcing, not to mention IRIS, which runs a managed services division. Circulating among the crowd were well-known outsourcing faces Alex Falcon Huerta (Smart Offshore) and Vipul Sheth (AdvanceTrack).

“Outsourcing is not the dirty word it was,” said Jim Scott, managing director for accountancy at IRIS, during the future-gazing power hour with leading tech players at the event. “It’s a realistic option to make your business more efficient.”

Limits to the tech solution

During an Expo roundtable discussion, Can technology solve the skills shortage? Bobby Lane from Factotum warned of the danger that technology wasn’t so much the solution as a cause of the problem because of the way it was changing the kinds of skills and people needed. 

“We used to recruit people who could process accounts,” said Lane. “Now with technology, people assume that if the data goes in there, it passes across to the right destination in the accounts. How do you find people who can translate these numbers and advise businesses?” 

FreshPay founder Nicola Hageman agreed: “Automated tools like Dext Precision can help, but you still need the skill to be able to review figures and tell if they are correct. That’s the skill we’re losing.

“At FreshPay, we hear so many horror stories about people running payroll who aren’t up to date with the regulations. And sometimes software houses don’t help with sales pitches about how easy it all is, without mentioning what a disaster it could be if you get it wrong.”

Uh-oh! Things are getting scary…

At times like this I’m aware of the risk of sounding like one of those irritating locals by the side of the road muttering, “You need to watch out for that steep ravine…” Hundreds of articles have been published on AccountingWEB and other outlets about recruitment, motivation and retention.

But when the car is hurtling off the cliff, there’s not a lot of helpful information you can give to the people trapped inside. With January looming, accounting practitioners in particular are heading for a very bumpy ride.

Maybe you’ve seen the resource shortages coming and successfully implemented remedies, whether through automation, outsourcing or internal training and development. But if those routes haven’t steered you out of trouble, the only thing I can think to say is: don’t panic. Maybe slow down a little and put as much effort and time as you can into looking after your team. It also helps to know where you want to go so you can plan your route to bypass those resource barriers. You know where to find us if you want any more help or advice.

Writes John Stokdyk in AccountingWeb

UK audit reform is inadvertently creating opportunities for challenger firms to pick up clients from the Big Four, according to James Hadfield, head of Menzies audit service.

Changes are being introduced to better allow mid-tier firms to compete for Public Interest Entities (PIE) audits, and Hadfield believes these are already having another indirect impact.

“As the largest audit firms have rationalised their client portfolios in the face of change, there has been a cascade effect of audit work coming down through the marketplace,” he says.

“This has led to significant growth opportunities for medium-sized firms.”

The accounting veteran adds that a wider lack of staff is causing some to “close their doors to new business,” thus narrowing clients’ options and raising audit fees.

More broadly, Hadfield says reforms have also led to an “increase in the tenacity of the FRC”, but Alistair Main, head of assurance at Duncan & Toplis, argues they’ve not done enough to level the playing field.

“There have been some changes to the audit regime, although not as drastic as many would say are necessary to promote both quality and competition,” Main explains.

“If the recent changes achieve their aim, that’ll be a huge benefit to the market. However, the risk and reward balance has to be correct for it to be successful.”

Taking advantage of PIE reform 

Under proposed legislative changes, the definition of a PIE is set to be expanded to include a wider pool of companies. These are likely to see all private, AIM-listed, and third-sector businesses with more than 750 employees and a £750 million turnover, included.

The expansion is being introduced as part of a wider package or reforms to overhaul the UK’s audit and corporate governance framework, instigated by the department for Business Energy and Industrial Strategy (BEIS).

The overhaul has been in the pipeline since March 2021, when BEIS published its 200-page consultation paper – Restoring Trust In Audit and Corporate Governance.

According to Hadfield, the reforms could, “in theory”, create competition.

However, he adds that making the leap into the PIE audit market is “hugely challenging” logistically, and the idea of taking on new risk has meant “the response so far has been lukewarm”.

Duncan & Toplis’ Main says the reforms could well bring mid-tier firms into the PIE space, but he believes those considering entering the market will need to consider staffing before doing so.

“Although the managed shared audit regime is hoped to increase audit market competition, only auditors of PIEs will be able to act as the joint auditor,” he says.

“This will significantly limit the number of companies that can enter this market. To take advantage of this situation, an auditor will need to invest heavily in the skills and experience required to audit PIEs.”

In order to take full advantage of the opportunities presented by PIE reform, Main adds that firms will need to ensure they work closely with the FRC.

This, he says, will enable practices to better understand the added resources they’ll need to enter the PIE market, and any support that can be provided to help them achieve this.

“If the regulator gets the balance right between risk and reward, then mid-tier firms may have an opportunity in the managed shared audit space.

“[But] practices would need to be engaging with the FRC, either directly, via member groups or at a network level.”

Resourcing driving opportunities?  

In Search’s 2021 Skill Shortage Report last year, 38% of those surveyed in the finance and accounting industries admitted they were struggling to fill top vacancies.

Similarly, Hadfield says Menzies has “certainly felt the impact” of work cascading down from the Big Four, but he believes audit reform will only tighten the race for accounting talent.

“While the last few years have been extremely hard work for our auditors, they have also created great opportunities for career advancement and exposure to exciting new clients and sectors,” he says.

“We have worked hard to create a unique people culture. Decent performance on employee retention and recruitment is supporting our growth in fees.”

Main also sees the hostile macroeconomic climate as a significant opportunity for those practices seeking to take business from better-established rivals.

With top-ten accounting firms having to “focus on higher fee work” due to tight resources, larger companies are “becoming better suited” to the services his firm can offer, he argues.

Likewise, when it comes to practically taking advantage of opportunities and connecting with clients, Main says Duncan & Toplis’ membership of wider networks has been beneficial.

“Owner-managed businesses have naturally needed to find a new home – either through their own choice or from direct recommendation – and they are therefore coming to us and other auditors of similar size.

“The growth of our internal market through our membership of the international accounting network, Kreston Global, is further contributing to this movement.”

Article From Accouintancy Age