Business as usual for the Nordics

The Nordic region is experiencing a calm, unruffled business environment, with local accountancy businesses shielded from the worst of the global economic down-turn. Apart from the headaches caused by the skills shortage, the only turbulence seems to be from an active M&A market but that is a growth strategy, not a ploy to survive.

In Norway, local firms see only healthy competition and growing customer demand, especially in the areas of attestation and assurance services, according to Joachim Trana, partner, Crowe Partner Revisjon AS, Norway. “Generally, there is a high level of staff recruitment in the region, as highlighted by the expectation that over 5,000 auditors will be recruited over the next five years by the five major audit firms in Norway alone.”

There have not been many region-specific legal changes over the last twelve months. The industry in the Nordic countries has been subject to the general legal developments that impact the industry globally. The industry-related legislation in the Nordic countries closely resembles each other across the region's national borders. Throughout 2022 and 2023 “new” areas that have received the most attention are: ISQM1 and ISQM2; Anti-Money Laundering and anti-terror financing; and ESG.

In contrast to other Nordic regions, Sweden has experienced significant regulatory changes within the accounting and auditing sectors, notably with the application of the revised version of ISA 315.

“This revision, effective from 2022 for financial reports starting December 15, 2021, has introduced notable alterations, placing a heightened focus on addressing IT-related risks,” said Erika Hed, partner at Finnhammars, a Kreston member firm. “This is highly relevant in the era of advancing process automation, which is a growing phenomenon.”

“The Nordic countries have generally been subjected to significant challenges in terms of recruitment, which, in the period following the Covid-19 pandemic, has been the most prevalent challenge,” said Chris Dyhr, partner, Martinsen, Denmark, a PrimeGlobal member firm. “The recruitment challenge has resulted in clear pressure on client assignments, both in terms of delivering core services such as auditing, accounting and taxes, but also an increasing pressure in solving issues arising from Covid-19, mainly relating to various national support packages that were awarded for businesses.”

Hed also describes the accounting industry in Sweden as robust, driven by strong customer demand. “Anticipated growth throughout 2024 is attributed to businesses, irrespective of size, increasingly relying on accountants to navigate complex tax regulations, manage financial affairs, and guide strategic decision-making,” she said.

It is the staff shortage that seems to be putting pressure on fees, but, so far, clients have been understanding. Anders Hübertz Mortensen, partner, Redmark, an MGI worldwide member firm, said that the largest issue by far faced by Danish firms is recruitment and retention. “Increased salary competition has forced many firms to raise their fees but, so far, clients have understood the need,” he said.

Merger and acquisition activity in Denmark is stronger than in many of the other Nordic countries, where M&A activity has been confined to smaller firms.

“The market has seen an increase in M&A transactions which has slowed down throughout 2023,” said Dyhr. “Consequently, there has not been the same price pressure as before, as supply has not been able to meet demand. Instead, the pressure has shifted to personnel salaries and recruitment. At the end of 2023, the recruitment challenge appears to be decreasing.” 

With customer demand remaining strong, many Danish firms have experienced organic growth, but with a general strategy for growth among many audit and accounting firms, acquisitions and mergers have been part of that strategy. According to Dyhr, M&A is a key route to growth for firms that are outside the Big 4 but are part of the national top 10, who have been busy snapping up smaller auditing firms.

“Similarly, there has been a trend where Big 4 firms have increasingly focussed on auditing larger entities and, as a result, have divested activities related to small and medium-sized enterprises,” said Dyhr. “Thus, there has been a trend where firms that are the ‘biggest of the rest’ have grown through acquisitions both from above and below. Martinsen has itself grown using this strategy, as we have also experienced organic growth.”

“We merged by January 1st 2023, and we see other large mergers within the top 20 audit businesses in Denmark,” said Mortensen. “The mergers and consolidation are primarily not big four related.”

Hed has also seen a continuation of venture capitalists entering the Swedish accounting market where bookkeeping agencies have been acquired by both national and international companies.

With the implementation of the Corporate Sustainability Reporting Directive coming into force the big focus for firms in the Nordics over the next 12 months will, of course, be ESG. Dyhr is under no illusion that meeting demand in this area will be challenging.

“This area has significant public attention, and from the auditing industry's perspective, it remains an area with more questions than answers,” he said. “As a good colleague has expressed, ESG is a journey where we lay the tracks while traveling. This encapsulates well how the industry views the ESG reporting requirements.” 

Dyhr pointed out that there will be specific requirements for authorised auditors to also be ESG certified in order to sign off on ESG and sustainability reporting in annual reports in the future. This could potentially lead to a restructuring of client distribution in the industry, as not all authorised auditors may obtain the required ESG certification.

Technology is bringing its own pressures. Hed has observed that as businesses increasingly rely on technology, there is a growing demand for auditors and accountants who can assess and manage technology risks. “This includes risks such as cyber security, data privacy, and cloud computing, and has been an ongoing trend for quite some time,” she said. “However, with the revised version of ISA315 being implemented, the demand of skilful IT-auditors will likely increase with time.”

Clients are experiencing their own skills shortages and Mortensen has seen business services in general grow. “More and more clients want to outsource their accounting department and I cannot see this demand dropping off anytime soon,” he said.

Economically, the regions are experiencing mixed fortunes overall. The Swedish economy is projected to contract in 2023, broadly stabilise in 2024 and show moderate growth in 2025, according to the IMF. Tightened financial conditions and high energy prices hit the Swedish economy, in particular the household and construction sectors, reflecting high debt and overvalued house prices. A cooling labour market is expected to contribute to a drag on domestic demand. Inflation is expected to fall appreciably in 2024, but to rise back to slightly above 2% in 2025. The general government balance is expected to show a small deficit in 2023, and a somewhat larger deficit in the subsequent two years. The general government debt ratio is set to decline from 32.9% in 2022 to just under 30% of GDP in 2025.

Denmark’s GDP has shrunk in two consecutive quarters, meaning the economy is now technically in recession according to a preliminary indicator from Statistics Denmark. That comes despite inflation having dropped to almost zero. The GDP indicator for the third quarter of 2023, a 0.3 percent decline, is the same factor by which the economy shrank in Q2.

Economy Minister Troels Lund Poulsen is still confident that the Danish economy has good prospects for a soft landing and that new growth will come when households regain their purchasing power.

Norway’s economy has been growing but so has inflation. At 4.25%, inflation remains well above the bank’s 2% target and the labour market is still tight, but unemployment has risen and consumer price hikes are tapering off and even falling in some cases.

It would be impossible for the Nordics to escape the ravages of a global downturn completely, but they have been experiencing a startup boom. The region is home to some of the fastest-growing startups and companies in the world and has been known for its knack for spotting trends early on. The Nordics were among the first European countries where digitalisation was adopted in every sector of society, creating an environment where startups can flourish today.

Despite the gloomy global economic outlook of 2022, the Nordics achieved its second-highest year for venture capital funding. A study by Dealroom found that, in 2022, there was a decrease in late-stage funding (series C+), but that early-stage funding remained stable (with just a 6% decrease compared to 2021) and in fact grew significantly in Norway and Iceland. All five Nordic countries feature among the top 10 European tech ecosystems by VC funding raised per capita last year. Iceland is second only to Estonia for VC dollars raised per capita, at USD 1000 in 2022, compared to a Europe-wide average of USD 126.

The Nordics are leaders in the impact space, with Sweden and Stockholm being the leading hubs. The Nordics are the most impact-focused region in the world with 38% of funding going to impact startups, compared to 22% for Europe and less than 10% for the US and Asia. The four major Nordic countries rank amongst the top 11 countries by total and early-stage funding with Sweden leading on most metrics, followed by Norway. At city level, Stockholm is the top hub for impact funding in Europe, Helsinki is also in the top 10 both by total and early-stage funding.

As traditional business sectors struggle in the new economy, it will be interesting to see what kind of impact such a large number of start ups will have on the Nordic economies and the kinds of demands this will place on accountants.