Scotland’s accountancy profession is going through “a time of great transformation,” says Bruce Cartwright, chief executive of the Institute of Chartered Accountants of Scotland (ICAS).
Sustainability reporting, audit reform, consolidation, the war for talent and unprecedented changes in technology are some of the factors driving this.
Accountants now have to help clients report their impact on the climate, and this is “completely reshaping the role of chartered accountants”, Cartwright reckons.
“Chartered accountants have an absolutely fundamental part to play in driving action on the climate crisis and building a net zero economy,” he adds. This includes helping clients develop strong corporate governance and make sustainable decisions.
The UK Government has also consulted on a major overhaul of the UK’s audit and corporate governance regime. This would include breaking up the dominance of the ‘Big Four’ accounting firms - Deloitte, EY, KPMG or PwC - in auditing large companies.
Big corporate failures like Carillion, Thomas Cook and BHS lead to “severe job losses and the British taxpayer picking up the bill,” the government has stated.
The Financial Reporting Council (FRC), which regulates auditors, accountants and actuaries, completed 150 audit inspections in the last financial year alone and issued a slew of fines.
Cartwright points out: “We should acknowledge that not all corporate collapses mean there has been an audit failure, ultimately, there’s a need for holistic reform of the corporate reporting ecosystem.”
ICAS supports the introduction of enhanced internal control measures, but Cartwright adds: “We now doubt whether the government will have the courage of its convictions to introduce such provisions.”
The industry is still awaiting feedback on the UK Government’s audit and corporate governance consultation paper, which is expected to set out specific plans.
One of the Big Four firms to have been fined by the FRC is KPMG.
Over the last four years, it has been fined more than £34m for audit failings related to companies including restaurant and bar group Revolution Bars, former drinks business Conviviality and construction group Carillion.
James Kergon, KPMG’s senior partner in Scotland, says: “Since 2018, we’ve made a significant investment in our audit business, focused on strengthening our governance, controls, technology, culture and training.
“We will continue to invest in our business and work closely with our regulator to demonstrate progress against our improvement plans, particularly our banking audit regulatory review results.”
Restoring trust is important for clients, but also for recruitment and retention. Kergon notes that the firm, which employs around 1,000 people across its offices in Aberdeen, Edinburgh and Glasgow, has recently announced 98 promotions across all grades.
“We also took on 61 new graduates and apprentices,” he adds.
There is a growing demand for digital solutions that can make processes faster and more efficient, and KPMG has responded with the launch of a new digital platform called Beyond.
The aim is to help clients build connections, spot areas for growth and access market insights from KPMG’s teams around the world.
“It’s going to be a game-changer in digitally transforming our business and how our clients access information and explore services,” Kergon says.
Looking ahead, the conflict in Ukraine will increase costs and risks for businesses. “It’s too soon to tell what the impact of the conflict may be,” he says. “But we do expect that rising inflation, energy price hikes, supply chain issues and overhead pressures, which we’ve seen over the last few months, will eventually feed into the market.”
On the invasion, Cartwright said ICAS had watched this with “sadness and concern” and was committed to helping members whose lives and work were affected. Chartered accountants “must now comply with financial and trade sanctions on Russia and Belarus, which presents new challenges,” he adds.
Greater regulation - including climate-related change - is another potential threat.
“If we look at environmental reporting as one example,” Kergon says. “We know that, from next year, the UK’s largest firms will have to report and have a formal environmental strategy in place to operate.”
This brings increased risk and more need for “market awareness and clarity,” he adds.
Another firm that has faced FRC fines is Grant Thornton.
In 2021, it was fined £2.3m for failures in the audit of cake chain Patisserie Valerie and more than £700,000 for failures in the audit of construction business Interserve.
Scotland managing partner Andrew Howie says Grant Thornton has invested heavily in audit quality and this was having a positive impact.
“This improvement was evidenced most recently in the regulator’s latest Annual Quality Review, which shows markedly better results for our firm than had been the case in previous years,” he says.
In corporate advisory, the firm has had a “record-breaking year” in Scotland.
“Over the last calendar year, the team here completed 13 deals across Scotland, totalling £573m,” Howie says. “We saw strong investor interest in technology, business services, life sciences and healthcare, in particular.”
Private equity firms continued to be “very active” among mid-market-sized companies and were ready to pay good multiples for the right business, particularly those with strong environmental, social and governance credentials. “This is being driven by a combination of government regulations - aiming for net zero - and evolving consumer preferences,” Howie adds. “So it’s no surprise we are seeing lots of activity in the clean energy sector.”
Uncertainty over possible rises in capital gains tax is also causing more entrepreneurs to sell their businesses. The exchequer took almost £13bn in capital gains tax receipts in 2021 – an all-time high.
Changes include a cut from £10m to £1m in the value of tax relief entrepreneurs can claim over their lifetime on business asset disposals.
Howie predicts “another year of growth ahead” in capital gains tax receipts. He adds: “A lot of well-funded groups in key sectors are now pursuing acquisition as a way of accelerating growth and de-risking their strategy through diversification.”
Consolidation is a continuing theme in the accountancy sector and Anderson Anderson & Brown (AAB), which is headquartered in Aberdeen, announced two mergers during the year, with Glasgow-based accountancy firm Hardie Caldwell and Leeds-based Sagars.
The firm also acquired Edinburgh-based Purpose HR, which provides outsourced human resources services.
“This enables us to continue to build our capabilities in the HR space and extend our payroll and HR offering to clients,” says Graeme Allan, chief executive at AAB.
In October, AAB announced a “significant investment” of undisclosed value from London-based private equity firm August Equity. The deal would give AAB “significant firepower” to pursue merger and acquisition opportunities across the UK, August Equity said, as well as help the firm invest in people and tech.
The deal enables AAB to fast-track ambitious plans to become, “a key UK regional player in the accountancy and business services market,” Allan says.
“The backing from August Equity and growing client demands means we are also experiencing substantial organic growth,” he adds. “There were 75 promotions and progressions across AAB last year and we welcomed 100 new faces - not through M&A - in 2021.”
On audit fines, Allan notes that many of these relate to “legacy cases that are now two-to-three years old.”
He adds: “Since the collapse of Carillon and Patisserie Valarie, the profession has taken active steps to invest in improvements in audit quality, whether that be training and development, new frameworks and methodologies or improvements in technology and control systems.”
That said, bigger fines from the regulator don’t necessarily mean better improvements.
“For that to happen, we need an altogether more competitive audit market,” Allan suggests. This includes challenger firms standing “a fair chance of competing with the Big Four” to audit larger companies.
At audit, tax and consulting firm RSM, regional managing partner for Scotland and Northern Ireland Alex Tait said accountancy had undergone “significant digital and economic transformation,” meaning a range of skills were now needed to reflect this change.
“Whether its computer scientists and data analytics specialists to support digital expansion - or economists and lawyers - Scottish businesses look to us as business advisers to support them across all aspects of today’s business,” he says.
The demand for digital skills has “never been greater,” and RSM is investing heavily in this as a firm.
“We’re rolling out advanced data analytic platforms for our teams, whilst creating an interactive dashboard for clients,” Tait explains. “We’re also offering an MSc in data analytics to staff and partners across the firm.”
On audit quality, he echoes that the “highest-profile and largest fines” in recent times have been related to audits from several years ago. Tait also notes that multiple stakeholders are involved in the audit process.
“There’s a role for directors, regulators and other assurance providers, like internal audit, to play in building trust and restoring reputation,” he says. “As external auditors are only one of a number of contributors to good corporate governance.”
Many businesses have never operated in an inflationary market like the one that’s predicted. This means they will need to adapt as the market changes.
“In Scotland, recovery has been slower than the rest of the UK due to prolonged restrictions stalling the economy, which is a slight worry,” Tait adds. “Our public sector workforce is also much larger in comparison to other parts of the UK, raising some concerns over sustainability.”
At Scottish mid-tier accountancy firm French Duncan, managing partner Graeme Finnie questions whether the ever-increasing burden of regulation produces better results.
“There can often be too much focus on compliance with processes and not enough work on whether the actual audit and accounts make sense,” he says. “Audit is now an incredibly specialist area and in my view, an audit should not be required for a great many of the businesses which are currently caught in the audit net; perhaps it is time to raise audit thresholds?”
Finnie is sceptical about consolidation in the sector.
“While I can see the attraction of consolidation, I am not wholly convinced that the execution of a consolidation play will be all that it should be,” he says. “That may lead to some consolidators hitting some problems in future years.”
He predicts that the number of accountancy firms in the market will diminish as those that are less financially robust - and less technologically savvy - disappear.
French Duncan started diversifying eight years ago, with the launch of specialist units and Finnie suggests this was prescient, with particularly strong growth in the firm’s outsourced hotel accounting business. This includes an online software platform that hospitality operators can use to monitor and improve their performance.
The firm has also launched units specialising in robotic process automation - using software and artificial intelligence to automate repetitive business processes - and human resources and health and safety.
Finnie predicts the two biggest challenges ahead will be recruiting the best talent and increasing fees in line with inflation. “Most of our staff have only ever worked in a world of low inflation and low interest rates – so asking for a 5%+ fee increase will be a challenge,” he says.
Azets, previously known as Cogital Group, was created from accountancy sector mergers including Scottish firms Scott-Moncrieff and Campbell Dallas.
The firm has 3,500 staff and partners across the UK in accountancy businesses that generate almost £300m of revenue.
“The business is growing and we have plans to grow turnover and staffing levels in Scotland by 50%,” says Peter Gallanagh, Azets’ chief executive for Scotland and the North.
“We have added 200 staff during the last year, which is particularly rewarding and suggests that our business is heading in the right direction.”
Recruitment is tough, though, and Gallanagh believes the accountancy sector needs to increase its investment in training, development and marketing of the profession.
“Churn in the accountancy sector is a major problem,” he says. “As is recruitment, and like every firm, we have lost some great people; but our door is always open for them to return and for fresh talent to join the business.”
There has been “added pressure” to develop existing talent and promote from within. Across the UK, Azets said it internally promoted more than 300 staff in the year to September 2021.
New software means staff can now manage their own career development and 40% of vacancies at the firm are now filled by internal promotions, with a “clear pathway from trainee through to partnership”.
On the outlook for businesses, Gallanagh adds: “We supported our clients through the pandemic and we are now helping them tackle an uncertain global economy fraught with high inflation, the possibility of stagflation, labour shortages and chronic supply chain issues.”
Henderson Loggie was started in Dundee in 1909 and has 160 partners and staff across four offices in Aberdeen, Dundee, Glasgow and Edinburgh. Most of its clients are owner-managed businesses.
David Smith, managing partner, notes consolidation in the Scottish accountancy market in recent years but suggests this isn’t Henderson Loggie’s style.
“Some firms, including Henderson Loggie, prefer to build on what we have created as an independent firm,” he says.
In terms of challenges, finding and keeping talent is high up the list.
“Attracting and retaining staff is a key challenge for many employers, particularly professional practices – including the accountancy sector,” Smith says.
The firm set up the Henderson Loggie Academy in 2018 to develop talent internally. It also recruits school leavers into a chartered accountancy training programme.
During the pandemic, the firm said it grew its workforce by more than 20%, thanks, in part, to a virtual induction process for new recruits that Smith says, “works even better than our office-based approach”.
In toughening economic conditions, Smith said businesses would have to “be more agile than ever” and “do more with less”.
This includes, “saying yes to the right growth opportunities while embracing emerging trends”.
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