Le Pacte Law (2019) impacts SMEs’ stance on auditing in France

M&A was frantic for a while as firms consolidated to gain the skills and expertise they need in yet another market facing brutal skills shortages. Many firms are still struggling with the events of the last three years and whatever advice they are looking for, many accountants find that crisis management and future planning are now at the heart of everything they do. With the threat of recession looming and France facing huge costs in its efforts to be carbon natural by 2050, the economy is in for a bumpy ride.

The Le Pacte law (2019) limited the audit activities in small businesses, which resulted in a lot of small accounting firms leaving the audit market. According to Chloé Marques, partner at FCN, an MGI Worldwide member firm, the SMEs offering auditing services are still losing clients that are no longer required to be audited, and they are now trying to develop a new set of services for the remaining entities and the ones that are still willing to be audited.

While the Le Pacte law is causing smaller companies to abandon their auditing activities, it was designed to promote growth and simplify business processes in the SME sector. The benefit for the accounting industry was that it allowed chartered accountants to extend their reach, making up for the loss of auditing revenue. Has it worked?

“Because of the COVID crisis, and now the energy crisis, it is difficult to measure the real impact of the law on the companies that are now exempted of legal auditing,” said Marques. “However, there is a real risk of weakening of the level of economic security: with a huge part of the French economic fabric composed of SMEs (more than 99% of the French companies are SMEs), and the uncertainty generated by successive crises, the decrease of control from legal auditors on small businesses could have a tangible impact on financial security and global trust in our companies.”

While the industry had been worried that the SME sector would disengage to a certain extent with accountancy firms once they were exempt from auditing, this has not been the case. “Now that the law has had a few years to take effect, we find the attrition rate from SME business much lower than expected,” said Julien Arnoult, accountant at André Le Groupe Cabinet, a Morison Global member firm. “Especially in Cabinet André Le Groupe, the number of non-renewals has not been significant over the past two years. We believe that this phenomenon can be explained in particular by the relationship of trust that we had created with the managers of SMEs. In fact, we found that in the presence of a shareholders or a strong banking interest, the manager could be strongly encouraged to renew the mandates.”

Overall, everyone we talked to for this report agreed business is good. Despite the difficult economic and social situation caused by the energy crisis and inflation, the customer demand remains strong. “However, HR has become a major issue with a lot of employees leaving firms and less and less young talent interested in our career,” said Marques. “There is also a change in the way employees want to work, with the spread of telecommuting and the development of ESG standards. In order to change our image and to promote our career paths among new graduates, our institution has recently launched a significant communication campaign that will be broadcast on TV and social media until the end of 2022.”

A skills shortage and inflation are also driving an increase in wages, which is having a knock on effect on fees. “Due to inflation, the accounting industry in France is facing very high pressure to increase wages,” said Olivier Lelong, president of Aca Nexia. “In a time when it is very difficult to recruit people and with difficulties in retention, firms have to accept higher salaries. The consequence is the increase in fees to negotiate with clients. It seems that such negotiations are generally positively accepted by accounting and audit clients.”

New regulation is coming on board that will have a big impact on customer demand. This includes the European Union’s Corporate Sustainability Reporting Directive (CSRD), which expands the existing Non-Financial Reporting Directive. The CSRD significantly broadens the number of in-scope companies and requires them to disclose on topics including human rights, environmental impacts, climate change, and the double materiality concept. Arnoult believes this will create a ripple effect, in that the Major groups will ask their suppliers, who are SMEs, to provide the same information. Companies will need to have a comprehensive understanding of the jurisdictions in which they operate and the local regulations they have to comply with. In each jurisdiction where a business earns revenue or has certain levels of personnel or customers, regulations might be triggered. In the case of a new acquisition in a new jurisdiction, a company might be subject to a slew of new requirements overnight.

The main development accounting firms will have to face in a very close future is the implementation of the electronic bill, that will become mandatory for all companies in France by 2024. This will be a major change in the way businesses operate, but also in the way accounting firms are producing financial statements and reports. “Bookkeeping will no longer be a relevant source of income for our firms,” said Marques. “We will have to anticipate that evolution, by training our employees, using new tools and software, but also by developing new services using all the data that can be extracted from invoices.”

Electronic invoicing is going to be a strain for accountancy firms and their clients, according to Arnoult. “Electronic invoicing in 2024 poses a challenge to our resources,” he said. “We must have sufficient manpower to process these additional files. We must also be able to offer the tools that will allow our customers to be in compliance.”

Accountancy firms of all sizes are having to offer a wider range of services to keep up with customer demand. “Our clients are demanding all kinds of advice,” said Marques. “The production of legal audit reports and financial statements is no longer our core business, with new areas that are now covered by our firms. Accounting and auditing firms will soon be able to provide services such as the establishment or verification of a carbon footprint, implementation of an ESG approach, auditing of information systems. Some of the more ‘traditional’ areas, such as HR, are also developing because of the complexification of our regulations and the need for advice on subjects like recruitment.” Lelong is also seeing ESG services (audit and advisory) growing fast, while demand for insolvency, turnaround and restructuring services is resurging after two years with very little in the way of business in these areas.

The need for more varied skills could be behind the boom in local M&A activity. The year 2021 and the beginning of 2022 were marked by a substantial increase in transactions in the M&A market. However, since the beginning of the Ukrainian war, there has been a very strong decline in the number of transactions: from January to June 2022, it has dropped by 4 % in France. Even though the level of transactions remains higher than it was in 2019, this is the second largest decline in Europe behind Germany.

While the French economy is growing slowly, the spectre of recession has been raised. Francois Villeroy de Galhau, head of the Bank of France, said in November that the French economy should not suffer any hard landing although a ‘limited and temporary recession’ remains possible. The Bank of France has predicted that the French economy will manage positive growth in the final quarter of the year. The European Central Bank (ECB) has increased rates by a combined 200 basis points to 1.5% in just three months, its fastest pace of hikes on record. Markets see them peaking at around 3% next year, suggesting that a further series of raises is still coming to keep control of rapid and broad-based inflation. Villeroy has said that the ECB must not stop raising interest rates until underlying inflation has peaked, but it may slow the pace of hikes once rates hit a level that starts to restrict growth. France has fared better than its neighbours in taming price rises thanks to early energy price caps and fuel subsidies, but economists have warned that its heavy spending on protection for households is storing up trouble in the long run.

Further gloomy news came from economist Jean Pisani-Ferry, who has warned the French government that climate transition will lead to a ‘profound change in development models’ in France and induce ‘negative shocks’ on growth, employment, investment, inflation and inequality for the next 10 years. Pisani-Ferry's research aims to outline initial recommendations on how to adapt the French economy to the goal of achieving carbon neutrality by 2050. Pisani-Ferry stressed the need to get away from an ‘optimistic reading’ of the climate transition. If France is to reach its carbon neutrality in 2050, it has to accept it will come with costs attached. Obsolete factories and production processes, and poorly adapted workplaces, will have to replaced. "We cannot think only in terms of recovery through investment, as if nothing else was going to happen. The next ten years will be difficult," he said.