UK accountancy M&A market heats up

T

he biggest issue is auditing and the dominance of the Big Four. A recent survey shows that while the quality of UK reporting has improved, it still has a long way to go. Consolidation has continued in the UK market, while smaller firms have been leaving the auditing arena. An unexpected side effect of the consolidation, especially in private equity, is that the new players are bringing a focus on technology, introducing a very different look and feel than the industry has provided previously.

"Discussion continues on further regulation of the audit industry, including plans to break the dominance of the Big Four" says Mark Wildi, tax partner at Baxter and co, an Abacus member firm. "But no firm proposals have been put forward. During the year the Financial Reporting Council (FRC) continued to monitor audit firms and, whilst it noted an improvement in the quality of audit, following criticisms in previous years, overall quality still fell short of the regulator’s expectations."

In June 2021 the International Auditing and Assurance Standards Board (IAASB) issued an exposure draft of a standard for the audit of ‘Less Complex Entities’. Like the less complex accounting standards for smaller entities this auditing standard would be based on a simplified risk-based approach. Currently IAASB are reviewing feedback on the exposure draft.

The UK auditing market is going through a lot of change and one of the more worrying aspects is the lack of competition.

"Small accountancy firms are increasingly unable to cope with the compliance and digitalisation burdens facing audit, some large firms are pricing themselves out of the audit market for owner-managed businesses, and a booming international mergers and acquisitions market is also driving new audit requirements for UK entities, " says Andrew Griggs, senior partner and head of international at Kreston Reeves.

"In recent years, we have seen significant consolidation activity in the accounting industry," says Joanne Kingsnorth, joint managing director at Seymour Taylor, an MGI member firm. "We have ourselves acquired another practice within the last three months to aid our growth and indeed within our local area, we have seen the number of competitors reduce significantly as consolidators have acquired local practices where partners are retiring, with the result being that whilst we now have fewer competitors, our competition is now with a number of larger firms. This looks set to continue into 2022."

A number of private equity funds moved into the sector in 2021. Azets, previously Cogital, which is in the HG Capital portfolio, continued to expand, acquiring a number of practices. August Equity which invested in Anderson Anderson Brown, made a couple more significant acquisitions during the year and Horizon Capital’s investment in Dains, marked its entry into the sector.

Probably the most interesting thing about the recent consolidation in the UK market is the nature of the new players. Industry observers say their approach, with an emphasis on technology and custom-built applications, is dovetailing with client's increased focus on IT and is changing how accountancy firms interact with their clients.

"The current consolidators brand themselves very differently from the consolidators of the past such as Tenon, Vantis and Numerica," says Wildi. "The new consolidators focus on technology and a subscription fee model, having the feel more of software firms than traditional accountancy practices. "

Seymour Taylor has been following this trend and developing its own application over the last year, which Kingsnorth says has taken off.

"We have seen increased demand for our outsourced accounting services, which is essentially the provision of some or all of the finance function from bookkeeping to outsourced finance director services," she says. "This has been a solid area of growth for us in the last year. The future of accounting will continue to involve automation linked to third party apps designed to make processes easier and more streamlined."

A focus for all firms over the next year will be increasing investment in technology, according to Wildi. "There will be a drive to reduce unit compliance costs and automate processes," he says. "Those firms with the financial resource to do so, will thrive, whilst others are likely to fall behind. Combined with staffing cost pressures many partners in smaller practices are likely to see a fall in their earnings."

The pandemic has had little effect on demand within the industry, which remains strong.

"There continues to be the demand for standard compliance services, but also for specialist project work," says Stuart Brown, director and head of technical and compliance at Duncan and Toplis, a Kreston Global member firm. "The accounting industry has gone from strength to strength in recent times, barring some high-profile issues associated with the quality of audit work performed by some of the largest firms."

Like many other countries, the UK has felt a recruitment squeeze. According to Wildi, demand has grown in particular for transactional services, with pick up in merger and acquisition activity at all levels. New tax requirements, such as online reporting of capital gains on residential property and making tax digital (MTD) for VAT have created new compliance opportunities for smaller firms. But there is a skills shortage and recruits have more demands than in previous years. As well as higher salaries, many want a more mentally healthy work environment with a hybrid office/home arrangement. This brings its own challenges for employers.

“The demand for accountancy services in the UK continues to remain strong," says Griggs. "In times of uncertainty, accountants can provide businesses and individuals with some certainty, and the support and guidance they need. I do not see that slowing down any time soon. That demand has seen the recruitment market heat up, matched with an increased willingness by individuals to move into new roles or firms more regularly. It is a challenge facing all firms across the profession and one that is likely to continue throughout 2022.”

Accountancy firms within the Kreston network are pooling their resources to keep up with the skills demand and are collaborating to ensure they have enough staff to meet the client demand.

While working from home is a new demand, Kingsnorth pointed out that it can be hard to measure the efficiency of home working and employees are changing their minds on how much of a hybrid model they want as the pandemic eases.

"Working from home continues to be a much talked about issue and expectations from our team continue to evolve in this area," she says. "As a professional service business selling our time, it seems that until we are fully through the pandemic and social distancing that we cannot reliably measure the business efficiencies of hybrid working. In addition, our team’s views of how much they would like to work from the office or from their homes is changing regularly, so it remains challenging for us as employers to work through the best solution for all."

But while there is still high demand for accountancy services and the UK is looking forward to the end of the pandemic, the near future still looks rocky.

"Inflation, whist driven by a temporary spike on energy and fuel costs will inevitably lead to higher costs for everyone," says Griggs. "Businesses will have little choice but to pass those costs on to their own customers. Supply chain challenges will continue well into 2022 and will inevitably hit cash flow. Businesses appear to be turning to domestic markets for growth at a time when the UK is looking to reset its position on the global stage.”

With the drive to make the UK economy green, Griggs also pointed out that all sectors are going to come under increasing scrutiny. "Businesses that continue to exploit resources, pollute the environment, or have disregard for the environmental toll they take will face greater scrutiny and actions from employees, investors and customers," he says.

But this does not have to be a problem that requires resources to solve – as Kingsnorth pointed out, it can also be an opportunity.

"ESG (Environmental, Social, Governance) is something that we expect to develop a lot in the next 12 months as the practices expected of larger companies are passed down to SMEs and it is an area that we as accountants can guide our clients on," she says. "As a business ourselves, we also have to act and be seen to be acting, which means changing operational practices rather than just ‘tweaks’. We plan to put a greater emphasis on this area in the next couple of years with key areas being defined for development."

Wildi feels the trend for private equity investment is likely to continue, with new entrants looking to establish mini-conglomerates, whilst the existing consolidators will continue to expand their portfolio. Independent practices with a niche specialism or expertise in a particular sector, are likely to be attractive targets.

"I also think there will be increased enforcement activity by HM Revenue & Customs, following the relative ‘light touch’ over the last couple of years, due to the pandemic," he says. "The focus will very much be on increasing tax revenues, and closing the perceived ‘tax gap’. This will create opportunity for those firms specialising in this area."