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The Financial Reporting Council (FRC) issued its key facts and trends report in June which has highlighted that in 2014 almost 1 in 20 firms registered to carry out audit work have withdrawn from the audit market and given up their audit registration.

According to the FRC report the number of registered audit firms fell from 6,962 to 6,635 between 31 December 2013 and 2014, a reduction of 4.7%.  This is on top of a fall in the number of registered firms of 3.8% in 2013.  Since 31 December 2010 the overall number of firms quitting the audit market amounts to 11%.

These falls follow changes in the levels of audit exemption introduced over the last decade.  Audit thresholds increased dramatically in 2004 with the turnover threshold increasing £1m to £5.6m and further changes followed in 2008 and 2012.  The decrease in the number of registered audit firms has coincided with an increase in the proportion of companies filing annual accounts at Companies House that are audit exempt, from 70.2% in 2009/10 to 73.5% in 2012/13.

Following the EU Accounting Directive issued in July 2013 and the consultation by the Department for Business, Innovation and Skills (BIS) it is proposed that companies with turnover of below £10.2 million and a balance sheet total of below £5.1 million could be exempted from audit regulation.  Whilst these companies could be exempted some will undoubtedly opt to retain the audit on a voluntary basis.  A recent survey by mid-tier accountancy firm Baker Tilly showed 46% of businesses did not want to be released from the audit requirement, however once these changes go ahead there will be further contraction of the audit market.

The FRC report highlighted that more than 50% of audit registered firms are sole practitioners; however, the number of sole practitioners fell by 5.6% in 2014 and the number of sole practitioners has declined each year since 2003.  The changes to the audit market means smaller firms and particularly sole practitioners are finding themselves with very low numbers of audit clients and are finding that the cost of audit regulation and training are making it uneconomical for them to maintain their audit registration.  In these cases these practices are potentially having to resign from what could be some of their best clients.

One solution to this problem is for the practices to outsource the audit to one of a growing number of pure audit practices, such as ourselves, which then allows the practice to retain the none audit work which are potentially the most profitable parts of the assignment.

Is your practice considering giving up your audit registration?  If so then please do get in touch.

Full details of the FRC report can be found here.