Accountancy and allied services market

The Accountancy and Allied Services Market July 2016

60 Eastern Green Road Coventry, CV5 7LH [email protected]

The Accountancy and Allied Services Market

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© IRN Research 2016 IRN Research 60 Eastern Green Road Coventry CV5 7LH UK E-mail: [email protected] URL: www.irn-research.com ___________________________________________________________________________ About IRN Research IRN Research (trading name of IRN Consultants Ltd) was formed in 1991 and has a strong track record in providing market research services to the professional services sectors. IRN is a full-service research agency with research capabilities from small-scale research requests to large-scale international projects. We utilise a range of research techniques, e.g. desk research, telephone/online surveys, face-to-face interviews, focus groups, and can provide a full results analysis. We undertake a wide range of research for professional services firms including:

Customer Experience Research: We use a range of research techniques and questions to understand what your customer thinks of your company and brand and what drives such perceptions. Customer Segmentation: We identify and assess how to target customer sub-groups, using a variety of data including attitudinal and usage information plus consumer demographic and business structure data. Market Understanding: We seek to understand the market you operate in by running usage and attitude (U&A) surveys and undertaking desk research to come to a clear understanding of your customer’s needs and potential growth opportunities.


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Table of Contents ABOUT IRN RESEARCH ................................................................................................................................... 1 INTRODUCTION ............................................................................................................................................... 3

AIMS OF THIS REPORT......................................................................................................................................................................... 3 EXECUTIVE SUMMARY ................................................................................................................................... 4

SUMMARY INFOGRAPHIC ................................................................................................................................................................... 4 KEY FINDINGS ..................................................................................................................................................................................... 5 THE STRUCTURE OF THE MARKET ............................................................................................................ 6

OVER 40,000 COMPANIES WITH MOST BEING ACCOUNTANCY AND AUDIT FIRMS .................................................................. 6 26% RISE IN FIRM NUMBERS SINCE 2011 ......................................................................................................................................... 6 IT’S A MARKET WHERE SMALL FIRMS PREDOMINATE BUT THE BIG FIRMS DOMINATE ........................................................... 7 IT’S A MARKET EXHIBITING DYNAMISM .......................................................................................................................................... 8 OVER FOUR-IN-TEN FIRMS ARE BASED IN LONDON AND THE SOUTH EAST… ...................................................................... 9 MARKET SIZE AND TRENDS ......................................................................................................................... 11

IT’S AN INDUSTRY THAT TURNS OVER MORE THAN £23 BILLION ............................................................................................ 11 AND AN INDUSTRY WHOSE SALES GROW WITH ECONOMIC ACTIVITY .................................................................................... 11 A MARKET THAT WAS HARD HIT BY THE GLOBAL FINANCIAL CRISIS ...................................................................................... 12 ACCOUNTANCY AND AUDIT REPRESENTS THE BULK OF THE MARKET .................................................................................. 12 POST-BREXIT WORLD WILL BE A TOUGHER OPERATING ENVIRONMENT .............................................................................. 13 THE STRUCTURE OF DEMAND AND SUPPLY .......................................................................................... 15

AROUND 10% OF ACCOUNTANCY AND ALLIED SERVICES ARE EXPORTED ........................................................................... 15 FINANCIAL AND PROFESSIONAL SERVICES FIRMS THE MAIN USERS OF ACCOUNTANCY SERVICES.................................... 15 THE MAJOR PLAYERS ..................................................................................................................................... 18

THE BIG FOUR LEAD THE MARKET ............................................................................................................................................... 18 KEY MARKET DEVELOPMENTS ................................................................................................................... 19

AUDIT ROTATION AND NEW RULES .............................................................................................................................................. 19 CLOUD OUTSOURCING OF THE ACCOUNTING FUNCTION. ........................................................................................................ 19 FROM DATA PROVIDER TO CONSULTANT ..................................................................................................................................... 20 THE PUBLIC TURNS AGAINST TAX PLANNING .............................................................................................................................. 20 ADVENT OF ONLINE TAX ACCOUNTS BY THE HMRC FROM 2017 ........................................................................................... 20 APPENDIX: FINANCIAL PICTURE OF THE TOP TEN FIRMS................................................................. 21

PRICEWATERHOUSECOOPERS LLP ................................................................................................................................................ 21 DELOITTE LLP .................................................................................................................................................................................. 22 ERNST & YOUNG LLP ..................................................................................................................................................................... 23 KPMG LLP ........................................................................................................................................................................................ 24 GRANT THORNTON UK LLP ......................................................................................................................................................... 25 BDO LLP ........................................................................................................................................................................................... 26 RSM (FORMALLY BAKER TILLY UK HOLDINGS LTD) ............................................................................................................... 27 MAZARS LLP ...................................................................................................................................................................................... 28 SMITH & WILLIAMSON UK HOLDINGS ........................................................................................................................................ 29 MOORE STEPHENS/CHANTREY VELLACOTT DFK ................................................................................................................... 30


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INTRODUCTION Aims of this report This report presents a short summary profile of the accountancy and allied services market. For the purposes of this report, the accountancy and allied services market is taken to consist of firms engaged in three types of activities:

Accounting and auditing activities Bookkeeping activities Tax consultancy


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EXECUTIVE SUMMARY Summary infographic


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Key findings In 2015, just over 41,000 firms were active in the accountancy and allied services market, collectively employing over 300,000 individuals Over eight-in-ten firms engaged in the market undertook accountancy and audit activities. It’s a dynamic market with many new businesses entering the market each year and the number of firms having risen by around 26% between 2011 and 2015. Most accountancy and allied service firms serve a local catchment area with only the larger firms serving a regional or national market. As such, most firms active in the market are small in size: over 90% employ fewer than 10 people but the big four players – PWC, Deloitte, EY and KPMG – collectively account for 42% of the industry turnover. More than four-in-ten firms are based in London and the South East. Accountancy and allied services firms in the UK have a collective turnover of over £23 billion with accountancy and audit firms representing more than three-quarters of the sales. Market turnover moves closely in sync with the trends in the UK economy. Between 2012 and 2015, turnover grew at an annual average rate of 3.5% but in 2016 IRN Research anticipate growth of just 0.3%. While the UK market is very self-contained - firms export only around 10% of their services and only 3% of the domestic market is supplied by imported services - Brexit is anticipated to have a negative impact on the market with the scale of the Brexit hit varying according to the trade deal the UK arranges with the EU. By 2021, Brexit could cost firms between 3% (EEA style trade deal ) and 5% (WTO style trade deal ) of their turnover. The biggest consumers of accountancy services in the UK are financial and professionals services firms who will be hit by leaving the EU. Important issues facing the market at the moment are: new audit rules (and audit rotation); the move towards cloud-based accounting and the growing automation of accounts production; the advent of online digital accounts from the HMRC; and the growing need for accountants to move from being data producers to account consultants.


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THE STRUCTURE OF THE MARKET Over 40,000 companies with most being accountancy and audit firms In 2015, just over 41,000 firms were active in the accountancy and allied services market, collectively employing over 300,000 individuals. Over eight-in-ten firms engaged in the market undertook accountancy and audit activities and employed around 75% of employees. Bookkeeping firms, while smaller in number, employ a relatively larger number of people given the fact that there tends to be a small number of large firms which skews upwards average employee numbers in this sector (see later in this report). Figure 1 The number of accountancy and allied services firms and employment by type, 2015

No of companies Employment Av. No of employees per firm Number % Number % Accounting and auditing activities 34,255 83% 231,927 75% 6.8 Bookkeeping activities 5,765 14% 73,594 24% 12.8 Tax consultancy 1,415 3% 4,191 1% 3.0 Total 41,435 100% 309,712 100% 7.5

Source: Office for National Statistics/IRN Research 26% rise in firm numbers since 2011 The number of firms in the accountancy and allied services market has risen by around 26% between 2011 and 2015. There has been an especially sharp rise in the number of bookkeepers (+75%) and tax consultancies (+62%), while the number of accountancy and audit firms has risen by only 19%. As will be shown later, most of these newbies are small operations. One of the reasons for the relatively slow growth in the number of firms engaged in accountancy and audit work is the drop in the number of audit firms recently. According to the Financial Reporting Council, the number of audit firms registered with Recognised Supervisory Bodies (RSBs) has fallen in recent years from 7,375 in the year ending 31st December 2011 to 6,331 in the year ending 31st December 2015. The change in regulations exempting more firms from the need to get audited explains this.


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Figure 2 The number of firms offering accountancy and associated services, 2011-2015

Source: Office for National Statistics/IRN Research It’s a market where small firms predominate but the big firms dominate It is clear that most accountancy firms are small in size, given that on average the typical firm employs less than 8 people. Over 90% of accountancy and allied services firms employ fewer than 10 people and 85% of firms turn over less than £250,000 per year. There are only 90 firms in the market employing more than 250 people and less than 300 turning over more than £5 million annually. Figure 3 The size structure of the firms offering accountancy and associated services

Source: Office for National Statistics/IRN Research

28,740 30,180 30,410 32,480 34,255

3,290 3,945 4,405 4,865 5,760875 1,025 1,200 1,320 1,42032,905 35,150 36,015 38,665 41,435

05,000

10,00015,00020,00025,00030,00035,00040,00045,000

2011 2012 2013 2014 2015Accounting and auditing activities Bookkeeping activities Tax consultancy

Number % Number % Number % Number %Employment size band0-4 26,870 78% 5,025 87% 1,240 87% 33,135 80%5-9 4,315 13% 410 7% 120 8% 4,845 12%10-19 1,990 6% 150 3% 35 2% 2,175 5%20-49 770 2% 70 1% 20 1% 860 2%50-99 180 1% 35 1% 5 0% 220 1%100-249 85 0% 25 0% 0 0% 110 0%250+ 45 0% 45 1% 0 0% 90 0%Total 34,255 100% 5,760 100% 1,420 100% 41,435 100%Turnover size band0-49k 9,370 27% 2,520 44% 245 17% 12,135 29%50k-99k 10,585 31% 1,655 29% 460 33% 12,700 31%100k-249k 8,790 26% 1,120 19% 460 33% 10,370 25%250k-499k 2,750 8% 175 3% 120 8% 3,045 7%500k-999k 1,475 4% 100 2% 70 5% 1,645 4%1m-4.99m 1,085 3% 110 2% 50 4% 1,245 3%5m+ 200 1% 85 1% 10 1% 295 1%Total 34,255 100% 5,765 100% 1,415 100% 41,435 100%

Accounting and auditing activities

Bookkeeping activities Tax consultancy Total


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As the figure below indicates, the accountancy and audit sector (like the whole accountancy and allied services market) is very lop-sided in terms of the scale of the companies that operate. The top 50 companies, representing just 0.1% of the accountancy and audit firms in the UK, account for 70% of the turnover. Figure 4 The turnover breakdown of accountancy and audit sector firms, 2015

Number of firms Turnover Average turnover per firm (£ million)

(£billion) % Top 5 firms 5 £9.61 57% £1,922.6 6-10 5 £1.19 7% £237.0 11-50 40 £1.11 7% £27.8 51-100 50 £0.36 2% £7.1 Others 34,155 £4.67 28% £0.1 Total 34,255 £16.93 100% £0.5 All Top 50 50 £11.91 70% £238.2

Source: IRN Research estimates based on Office for National Statistics/company accounts It’s a market exhibiting dynamism The accountancy and allied services market exhibits a high degree of dynamism. This is particularly so for the bookkeeping and tax consultancy areas of the market where over four-in-ten firms were established less than four years ago. The accounting and auditing sector is more stable with almost half of firms having been established for 10 years or more, but even in this sector around one-third of businesses are less than four years old. In 2015, most companies operating in the accountancy and audit sector are limited companies (25,275) with 6,755 being sole proprietors. Just over two thousand (2,165) are partnerships with just 60 being either non-profit-making or mutual associations, or public sector bodies. Most of the largest accountancy firms are limited liability partnerships.


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Figure 5 The Age of accountancy and allied businesses, 2015

Accounting and auditing activities Bookkeeping activities Tax consultancy Total

No of firms Less than 2 years 6,385 1,350 360 8,095 2 - 3 years 4,545 1,185 310 6,040 4 - 9 years 7,540 1,775 460 9,775 10 or more years 15,785 1,455 285 17,525 Total 34,255 5,765 1,415 41,435 % of total Less than 2 years 19% 23% 25% 20% 2 - 3 years 13% 21% 22% 15% 4 - 9 years 22% 31% 33% 24% 10 or more years 46% 25% 20% 42% Total 100% 100% 100% 100% All less than 4 years’ old 32% 44% 47% 34%

Source: Office for National Statistics/IRN Research Over four-in-ten firms are based in London and the South East… Most accountancy and allied service firms serve a local catchment area with only the larger firms serving a regional or national market. The importance of London and the South East is clear across all the sectors of the market, being at its highest for tax consultancy. In fact, Southern England as a whole (London, South East and South West) accounts for around half of all accountancy and allied services firms in the UK. While London and the South East account for 43% of accountancy and audit business these areas collectively generated 59% of the UK turnover of accountancy and audit companies in 2015.


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Figure 6 The regional distribution of accountancy and allied services firms, 2015

Source: Office for National Statistics/IRN Research The Figure below shows the geographic distribution of accountancy and audit firms in 2015. It demonstrates how these firms cluster around the major conurbations such as London and the North West (i.e. Manchester, Liverpool) Figure 7 The geographic distribution of accountancy and audit firms in the UK, 2015

Source: Office for National Statistics/IRN Research

Number % Number % Number % Number %North East 675 2% 110 2% 25 2% 810 2%North West 2,880 8% 490 8% 130 9% 3,500 8%Yorkshire and The Humber 1,975 6% 325 6% 100 7% 2,400 6%East Midlands 1,915 6% 370 6% 75 5% 2,360 6%West Midlands 2,670 8% 395 7% 85 6% 3,150 8%East of England 3,600 11% 630 11% 140 10% 4,370 11%London 8,880 26% 1,340 23% 365 26% 10,585 26%South East 5,690 17% 1,110 19% 285 20% 7,085 17%South West 2,675 8% 550 10% 95 7% 3,320 8%Wales 1,005 3% 150 3% 30 2% 1,185 3%Scotland 1,695 5% 245 4% 60 4% 2,000 5%Northern Ireland 595 2% 50 1% 25 2% 670 2%United Kingdom 34,255 100% 5,765 100% 1,415 100% 41,435 100%All london and South East 14,570 43% 2,450 42% 650 46% 17,670 43%

Accounting and auditing activities

Bookkeeping activities Tax consultancy Total


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MARKET SIZE AND TRENDS It’s an industry that turns over more than £23 billion Accountancy and allied services firms in the UK have a collective turnover of over £23 billion. Turnover rose steadily between 2012 and 2015 but is likely to see only modest growth in 2016. Data from the first four months of 2016, prior to the Brexit vote, already showed turnover slowing rapidly (growth of just 0.5% compared with the same period of 2015) and the uncertainty caused by the UK’s decision to leave the EU is unlikely to have improved this situation for the rest of 2016. Between 2012 and 2015, turnover grew at an annual average rate of 3.5% but in 2016 IRN Research anticipate growth of just 0.3% Figure 8 The turnover of accountancy and allied services firms (£ million), 2010-2016

Source: Office for National Statistics/IRN Research And an industry whose sales grow with economic activity The turnover of accountancy an allied services firms tend to move in tandem with economic activity in the UK, with some slight deviations year on year. The long-run trend in accountancy turnover matches closely the long-run trend of the UK economy. This indicates that any slowdown in the UK economy as a result of the Brexit vote will have a direct impact on the accountancy and allied services market.

£22,073

£21,016£21,509

£22,417

£23,287 £23,348

£19,500£20,000£20,500£21,000£21,500£22,000£22,500£23,000£23,500£24,000

2011 2012 2013 2014 2015 2016 (est)


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Figure 9 Turnover of accountancy and allied service firms and UK GDP

Source: Office for National Statistics/IRN Research A market that was hard hit by the global financial crisis The global financial crisis caused a significant drip in the turnover of accountancy and allied services firms. Between 2007 and 2009, the turnover of firms dropped by almost 4%, causing a £620 million drop in revenue. However, the market recovered quickly and in 2010 turnover grew by over 14%. Accountancy and audit represents the bulk of the market Accountancy and audit firms represent more than three-quarters of the revenue of the market, with bookkeeping firms accounting for around 17% of revenue, leaving tax consultancies with around 5% of the market. The structure of the market has not changed much in recent years, although over 2012 to 2014 accountancy and audit firms may have lost share of the market given the rapid growth in bookkeeping and tax consultancy firms. This would have been offset by the fact that the largest players in the market – the large accountancy and audit firms – have probably enjoyed above average revenue growth recently.

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Figure 10 Estimated breakdown of the turnover of accountancy and allied services firms, 2014-2016

2014 2015 2016 (est) £m £m £m Accounting and auditing activities £17,529 £18,255 £18,251 Bookkeeping activities £3,799 £3,916 £3,967 Tax consultancy £1,089 £1,116 £1,130 Total £22,417 £23,287 £23,348

Source: Office for National Statistics/IRN Research In 2016, IRN Research expects the economic slowdown to hit all three sectors of the market, especially the accountancy and audit sector. Post-Brexit world will be a tougher operating environment In IRN Research’s report The Impact of Brexit on Consumer Financial Services, IRN laid out three scenarios for the future course of the UK economy:

Scenario 1 (No-Brexit): Brexit did not happen and the economy grows in the fashion laid out by the Office of Budget Responsibility in its March 2016 forecasts Scenario 2 (EEA): The UK arranges a European Economic Area style deal with the EU Scenario 3 (WTO): The UK arranges a World Trade Organisation style deal with the EU Scenarios 2 and 3 assume a trade deal is arranged or at least largely nailed down by the end of 2018. Using these scenarios, IRN has laid out three future paths for the accountancy and allied services market. The main negative impact of Brexit is felt between 2016 and 2018 because businesses will be in the dark about the future trade relationship. After 2018 the uncertainty declines and the impact of the trade arrangements take over. Under a WTO deal by 2021, the turnover of accountancy and allied firms over the 2016-2021 period will be £6.4 billion lower than it would have been without Brexit (£154 billion without Brexit and £149.3 billion with Brexit) while under an EEA style deal it will be £4.7 billion lower (£154 billion without Brexit and £147.6 billion with Brexit). In other words,by 2021 Brexit could cost firms between 3% (EEA) and 4% (WTO) of their business.


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Figure 11 The forecast path of the turnover of accountancy and allied services firms to 2021

Source: IRN Research

£21.0 £21.5£22.4

£23.3£24.1 £24.6

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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021No-Brexit Brexit (EEA) Brexit (WTO)


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THE STRUCTURE OF DEMAND AND SUPPLY The official input and output figures produced by the ONS provide a useful guide to how the supply of accountancy and allied services to the UK market is structured and which sectors are the major users of accountancy services. Unfortunately, the last set of data relates to 2013 so is out of date but it still provides a useful introduction to the market. Around 10% of accountancy and allied services are exported The figure below shows the structure of accountancy supply and demand valued at producer prices. The figures here do not match the turnover figures given earlier because of timing differences and because the table below deals with value added, therefore, looks at a firm’s sales less intermediate goods and services purchased. The input/output data shows that accountancy and allied services firms export around 10% of their output and that the UK accountancy market is overwhelmingly supplied by domestic firms: imports account for only around 3% of the final market. Figure 12 The supply structure of the UK accountancy market, 2013

Supply Total domestic output of accountancy services at basic prices* £16,506 PLUS: Imports £528 PLUS: Taxes paid on accountancy services £311 EQUALS: Total supply of accountancy services at purchasers' prices £17,345 LESS: Accountancy services exported £1,694 EQUALS: The UK accountancy services market £15,651 Exports as a % of domestic output of products at basic prices** 10.3% Imports as a % of the accountancy services market 3.4%

* value added not turnover ** this slightly inflates the export share because exports are valued at purchaser’s prices (i.e. include taxes) and output is measured at basic prices (excluding taxes) Source: Office for National Statistics/IRN Research Financial and professional services firms the main users of accountancy services The input output tables for 2013 show that two sectors of the economy are the most important for the sales of accountancy services. Financial service firms and professional, scientific and technical firms both account for over 20% of the UK accountancy market. These two sectors plus the wholesale and retail


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trades (including the repair of motor vehicles and motorcycles) are the only sectors accounting for more than 10% of the market. Figure 13 The largest sectors consuming accountancy services, 2013

UK Market Demand (£m) % of total Financial Services £3,611 23.1% Professional, scientific and technical activities £3,344 21.4% Wholesale and retail trade; repair of motor vehicles and motorcycles £1,735 11.1% Administrative and support service activities £1,432 9.1% Manufacturing £995 6.4% Information and communication £853 5.5% Transportation and storage £837 5.3% Construction £592 3.8% Other service activities £485 3.1% Accommodation and food service activities £448 2.9% Human health and social work activities £372 2.4% Real estate activities £251 1.6% Electricity, gas, steam and air conditioning supply £151 1.0% Mining and quarrying £138 0.9% Education £122 0.8% Arts, entertainment and recreation £113 0.7% Water supply; sewerage, waste management and remediation activities £83 0.5% Households/Consumers £48 0.3% Agriculture, forestry and fishing £29 0.2% Investment* £12 0.1% Grand Total £15,651 100.0%

* accountancy services sold as part of gross fixed capital formation Source: Office for National Statistics/IRN Research A closer look at the figures indicates that the types of firms who are the most significant users of accountancy services are Financial service activities, except insurance and pension funding

Architectural and engineering activities; technical testing and analysis Insurance and reinsurance, except compulsory social security & Pension funding Retail trade Wholesale trade Legal activities Construction Computer programming, consultancy and related activities


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Figure 14 The 25 largest sub-sectors consuming accountancy services, 2013

* except of Motor Vehicles and Motorcycles PST = Professional, scientific and technical activities ASSA = Administrative and support service activities Source: Office for National Statistics/IRN Research

Sector Sub-sector Demand (£m) %

Financial Services Financial service activities, except insurance and pension funding £2,383 15.2%PST Architectural and engineering activities; technical testing and analysis £1,697 10.8%Financial Services Insurance and reinsurance, except compulsory social security & Pension funding £1,125 7.2%Wholesale and retail trade Retail trade* £768 4.9%Wholesale and retail trade Wholesale trade* £766 4.9%PST Legal activities £711 4.5%Construction Construction £592 3.8%Information and communication Computer programming, consultancy and related activities £537 3.4%Other service activities Other personal service activities £390 2.5%ASSA Office administrative, office support and other business support activities £387 2.5%ASSA Public administration and defence; compulsory social security £362 2.3%PST Activities of head offices; management consultancy activities £342 2.2%Transportation and storage Warehousing and support activities for transportation £330 2.1%Accommodation and food service Food and beverage service activities £326 2.1%Human health and social work Human health activities £268 1.7%PST Accounting, bookkeeping and auditing activities; tax consultancy £245 1.6%Transportation and storage Land transport services and transport services via pipelines, excluding rail transport £240 1.5%PST Other professional, scientific and technical activities £234 1.5%ASSA Rental and leasing activities £222 1.4%ASSA Employment activities £214 1.4%Wholesale and retail trade Wholesale and retail trade and repair of motor vehicles and motorcycles £201 1.3%Real estate activities Buying and selling, renting and operating of own or leased real estate £200 1.3%Manufacturing Manufacture of basic pharmaceutical products and pharmaceutical preparations £143 0.9%ASSA Services to buildings and landscape activities £139 0.9%Information and communication Telecommunications £131 0.8%


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THE MAJOR PLAYERS The Big Four lead the market The lopsided nature of the accountant and allied services market was outlined earlier in this report. Given what was said earlier, it is no surprise that collectively, the Big Four accountancy firms in the UK account for almost 42% of the turnover of all accountancy and allied services firms in the UK and almost 53% of the turnover of firms in the accountancy and audit sector. The Big Four led by PwC and Deloitte are the only accountancy and audit firms to control more than 10% of the market. Figure 15 The share of accountancy and allied services turnover taken by the top 15 accountancy firms, 2015

* RSM (formally Baker Tilly) ** including Chantrey Vellacott DFK (Moore Stephens and Chantrey Vellacott DFK merged in 2015) Source: IRN Research based on company accounts and ONS data The Appendix presents a series of tables for each of the top ten accountancy firms by sales, showing their latest turnover and profit figures and the breakdown of their revenue and fee income.

0.2%0.3%0.3%0.3%0.4%0.4%

0.6%0.9%

1.3%1.7%

2.2%8.4%

8.6%11.7%

13.2%

0.3%0.4%0.4%0.4%0.4%0.6%

0.8%1.2%

1.6%2.2%

2.9%10.7%

11.0%14.9%

16.9%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%UHY Hacker Young

Crowe Clark WhitehillHaines Watts

Saffery ChampnessPKF UKI

Moore Stephens**Mazars

Smith & WilliamsonRSM*

BDOGrant Thornton UK

KPMGEY

DeloittePwC

% of turnover, 2015

Accountancy and audit only Whole market

THE BIG FOUR


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KEY MARKET DEVELOPMENTS Audit Rotation and new rules From 17th June 2016, new rules came into force making it compulsory for firms to rotate their auditors (subject to some transitional arrangements). The Regulation only applies to the audit of ‘Public Interest Entities’ (‘PIEs’), defined as all companies listed on an EU regulated market plus unlisted banking and insurance companies and groups, unless they are small. PIEs must tender their statutory audit at least every ten years and change their auditor every 20 years. The Regulation also imposes additional independence requirements for PIE audits, over and above those laid down by the Financial Reporting Council and the ethical codes laid out by accounting bodies. The new rules impose

Limits to the proportion of non-audit fees that can be incurred in a year, by reference to the average audit fee. The prohibition of certain activities for PIE audits. The prohibited activities are similar to those banned activities laid out in current standards but are broader with fewer exceptions. Therefore, almost all tax work, unless it has no material effect on the financial statements being audited, is prohibited as is work on the design and implementation of internal controls over financial information and systems undertaken 12 months before the auditor is appointed. There are also are more restrictions on internal audit, corporate finance and management accounting activities. The result of these changes has been a rotation of auditors among some very large corporations and organisations, although most of these changes have involved one Large Four accountancy firms being swapped for another. Even before the new rules were established, the number of practices providing audit services was falling because of new regulations and legislation. Smaller audit firms have lost out, given that their main clients – smaller businesses – have become except from having to have their accounts audited. From 2015, companies that meet two of the three following criteria no longer need an audit • They have sales of less than or equal to £10.2m; • They have a balance sheet total of less than or equal to £5.1m; or • They have 50 employees or less

Cloud outsourcing of the accounting function. Many accountancy firms are making large investments to offer their clients cloud based outsourced accounting. This is in response to demand from mid-sized to large companies who are increasingly looking to outsource or continue to outsource all or parts of their finance and accounting operations in the near future.


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Increasingly outsourcing is growing in scope moving from the traditional (mainly offline) outsourcing of payroll or benefits administration and moving to the outsourcing of multiple, inter-twined finance and accounting processes. It remains the case, however, that outsourcing, cloud-based or not, is centered on transactional processes, which are less likely to require a depth understanding or each individual business and instead are more open to standardization and are more rules based. Outsourcing is seen as a mean for clients to lower costs, speed up the generation of financial information and free internal staff resources. New services, such a Steam launched by Moore Stephens in 2016, allows businesses to view and drill down into their financial data through one easy-to-use central hub and provide real-time reporting and analytics to support better decision making. From data provider to consultant Within accountancy firms, the greater use of software and cloud based services means the production of accounts and reports is quicker and involves less “grunt” work by accountancy staff. This is freeing the time of accountants employed within accountancy firms, allowing them to move from being data producers to accountancy consultants. Cloud based accountancy services can do only so much to help firms automate their finance functions. The UK tax system, for example, remains complex, meaning firms still require expert assistance to calculate their tax liabilities and meet their obligations. When the “grunt work” is done by computers, accountants are free to offer personalised advice and consultancy services to clients. The public turns against tax planning High profile examples of tax avoidance have turned the public and the firms that serve them against aggressive tax avoidance. This has hit some tax consultancy firms and has made some larger clients reluctant to engage in aggressive tax avoidance schemes. Advent of online tax accounts by the HMRC from 2017 While many accountancy firms see the introduction of personal online tax accounts in 2017 as an opportunity to gain more work, others were concerned that it could lead to an increase in DIY accounting by many individuals and smaller businesses. While self-assessment will be dropped, it will be replaced by quarterly online tax returns. Accountants fear clients will not be willing to pay for accountancy services four times a year and instead will pay once to get their initial online tax return filed and then try the DIY approach for subsequent filings. This could hit the revenue of smaller firms over the longer-term and/or may cause them to lower their prices to maintain and on-going relationship with their clients.


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APPENDIX: FINANCIAL PICTURE OF THE TOP TEN FIRMS PricewaterhouseCoopers LLP Figure 16 Financial picture of PwC LLP, year ending 30th June

2014 2015 £m £m Revenue 2,814 3,083 of which fee income Audit 571 604 Non-audit work for Audit clients 332 365 Work for non-Audit Clients 1,636 1,790 Total fee income 2,539 2,759 Pre-tax profits 793 850 No. No. Partners 854 885 Number PEI Audit clients na 428

Source: Company accounts/Financial Reporting Council/IRN Research


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Deloitte LLP Figure 17 Financial picture of Deloitte LLP, year ending 31st May

2014 2015 £m £m Revenue Audit and risk advisory £706 £708 Tax £562 £590 Consulting £622 £687 Financial advisory £424 £462 Switzerland £236 £267 Total Revenue £2,550 £2,714 of which fee income Audit £486 £475 Non-audit work for Audit clients £176 £173 Work for non-Audit Clients £1,653 £1,799 Total fee income £2,315 £2,447 Pre-tax profits £581 £620 No. No. Partners 718 721 Number PEI Audit clients na 412



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Ernst & Young LLP Figure 18 Financial picture of EY LLP, year ending 3rd July

2014 2015 £m £m Revenue Assurance Services £550 £585 Advisory Services £559 £584 Taxation Services £470 £517 Transaction Advisory Services £289 £324 £1,868 £2,010 of which fee income Audit £341 £370 Non-audit work for Audit clients £264 £267 Work for non-Audit Clients £1,263 £1,373 Total fee income £1,868 £2,010 Pre-tax profits £400 £466 No. No. Partners 576 624 Number PEI Audit clients na 268



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KPMG LLP Figure 19 Financial picture of KPMG LLP, year ending 30th September

2014 2015 £m £m Revenue Audit and related services £438 £471 Other assurance work £57 £55 Taxation Services £381 £432 Risk Consulting £327 £316 Management Consulting £271 £281 Deal Advisory £400 £403 Overseas £35 £0 Total £1,874 £1,958 of which fee income Audit £438 £471 Non-audit work for Audit clients £257 £281 Work for Non-Audit Clients £1,178 £1,206 Total fee income £1,874 £1,958 Pre-tax profits £383 £414 No. No. Partners 599 624 Number PEI Audit clients na 342



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Grant Thornton UK LLP Figure 20 Financial picture of KPMG LLP, year ending 30th June

2014 2015 £m £m Revenue Audit and allied work £135 £142 Taxation and financial planning £91 £96 Corporate finance £36 £51 Forensic and Investigation Services £14 £17 Recovery and Reorganisation £117 £89 Other £119 £126 Total £512 £521 of which fee income Audit £125 £132 Non-audit work for Audit clients £49 £48 Work for Non-Audit Clients £338 £341 Total fee income £512 £521 Pre-tax profits £81 £82 No. No. Partners 195 184 Number PEI Audit clients na 71



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BDO LLP Figure 21 Financial picture of BDO LLP, year ending 3rd July

2014* 2015 £m £m Revenue Audit £128 £132 Advisory £157 £140 Tax £99 £119 Total £384 £391 of which fee income Audit £128 £132 Non-audit work for Audit clients £50 £70 Work for Non-Audit Clients £206 £188 Total fee income £384 £391 Pre-tax profits £77 £67 No. No. Partners 277 285 Number PEI Audit clients na 70

* 53-week period Source: Company accounts/Financial Reporting Council/IRN Research


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RSM (formally Baker Tilly UK Holdings Ltd) Figure 22 Financial picture of RSM/Baker Tilly Ltd, year ending 31st March

2014* 2015 £m £m Revenue Tax and advisory £110 £121 Audit and assurance £66 £76 Restructuring advisory £26 £43 Risk assurance £12 £22 Corporate finance £16 £21 Consulting £3 £8 Total £232 £292 of which fee income Audit £66 £70 Non-audit work for Audit clients £36 £43 Work for Non-Audit Clients £143 £179 Total fee income £245 £292 Pre-tax profits £10 £3 No. No. Principals 330 319 Number PEI Audit clients na 15

* 2014 revenue figures from the accounts were restated. The fee income figures from the FRC reflect the non-restated data. Source: Company accounts/Financial Reporting Council/IRN Research


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Mazars LLP Figure 23 Financial picture of Mazars LLP, year ending 31st August

2014 2015 £m £m Revenue Assurance, internal audit and actuarial £52 £60 Accounting and advisory £34 £43 Taxations and financial planning £24 £28 Insolvency and investigation £20 £19 Total fee income £131 £150 of which fee income Audit £41 £44 Non-audit work for Audit clients £16 £17 Work for Non-Audit Clients £74 £89 Total fee income £131 £150 Pre-tax profits £26 £29 No.* No.* Partners 126 128 Number PEI Audit clients na 30



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Smith & Williamson UK Holdings Figure 24 Financial picture of Smith & Williamson, year ending 30th April

2014 2015 £m £m Revenue* Investment management and banking £106 £115 Tax and business services £92 £98 Other £1 £2 Total £199 £215 of which fee income** Audit (Nexia Smith & Williamson Audit) £12 £13 Non-audit work for Audit clients £12 £11 Work for Non-Audit Clients £51 £55 Total fee income £75 £79 Pre-tax profits £34 £39 No.** No.** Principals 161 138 Number PEI Audit clients na 2

* figure from the group accounts Smith & Williamson Holdings Ltd ** figures for Smith & Williamson LLP and Nexia Smith & Williamson Audit combined Source: Company accounts/Financial Reporting Council/IRN Research


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Moore Stephens/Chantrey Vellacott DFK Moore Stephens consists of a network of companies worldwide, headquartered in the UK. In the UK, it operates a series of regional companies, none of which is large enough to file full company accounts. Its main operation in the UK is Moore Stephens LLP, which now also incorporates Chantrey Vellacott LLP which merged with Moore Stephens in 2015. Moore Stephens LLP makes up more than half the UK operation’s fee income of around £137 million and Chantrey Vellacott will push that up to £163 million. The accounts below relate only to Moore Stephens LLP prior to the merger with partial Chantrey Vellacott figures included in the fee income data. Figure 25 Financial picture of Moore Stephens LLP, year ending 30th April

2014 2015 £m £m Revenue (Moore Stephens LLP) * Audit and assurance £43 £43 Restructuring & insolvency £6 £5 Tax advisory £10 £10 Corporate advisory services £1 £2 Forensic accounting £1 £0 Financial planning £2 £2 Management consulting £6 £7 £68 £68 of which fee income** Audit £12 £15 Non-audit work for Audit clients £4 £6 Work for Non-Audit Clients £48 £56 Total fee income £64 £77 Pre-tax profits No. No.** Partners 55 85

* Moore Stephens LLP only excluding the revenue of Chantrey Vellacott and the revenue of the rest of Moore Stephen’s UK operations ** Includes four months of Chantrey Vellacott DFK’s income prior to merger (FRC data) Source: Company accounts/Financial Reporting Council/IRN Research

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Accountancy and allied services market