Mid-tier audit firms seen further consolidating

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Kwanele Sibanda - Financial Mail

For some time now, mid-tier auditing firms have formed part of the industry's 'long tail' but recent merger activity in the profession mean things are changing in SA, says Olivier Barbeau, chief operating officer at BDO South Africa.

Barbeau says that the steady growth of larger mid-tier firms is a clear indication that the market is demanding greater choice and expertise, as well as a fresh perspective to business challenges. In response to these changing requirements mid-tier firms are well poised to offer credible, professional services at a reasonable price.

"The growing complexities of International Financial Reporting Standards (IFRS) and other forms of regulation (such as audit firm regulations prescribed by the JSE Securities Exchange SA), have created an increased demand for high numbers of technically strong accountants, and many mid-tier firms now find themselves competing directly with the 'Big 4' on this front.

"In light of this increasingly competitive environment we foresee an era of further consolidation in the mid-tier sphere, which will ultimately culminate in 2 or 3 large mid-tier firms, unlike the 10 or so that we have at the moment," says Barbeau.

This consolidation has already begun and should it continue as expected, recent changes in legislation will not spell doom and gloom for the industry, but will rather lead to an industry sector willing and able to provide a wider range of viable service options outside the 'Big 4' oligopoly.

"Further consolidation is expected both domestically and abroad. There is a strong demand for alternative auditing and advisory services and we may see firms introducing new products and service alternatives in the fields of corporate finance, risk advisory, and other business advisory services.

"Finding it harder to compete with limited service offerings, small firms who have not developed critical mass might drop off the scene. As the long tail shrinks, opportunities for trainee accountants (60% of whom obtain their training at small firms) could start to dry up. The impact of this has, in my opinion, not been fully understood." Barbeau continues.

In SA, BDO's recent corporate activities mean that national revenues will exceed R500 million next year, placing it at the top of the mid tier market.

Barbeau says that merger activity is critical to the survival of the auditing profession, more than ever if SA is to maintain its current level of international competitiveness.

"What is needed now is decisive leadership from regulators, financial institutions and stakeholders. It must be regarded as disappointing that we need regulatory and or legislative intervention to address the long standin concern of the concentration of auditing services and that the profession has been not been able to find a 'voluntary solution' to the challenge.

"Indeed it is even more disappointing that many in the auditing profession still seem to think there is no issue and have failed to properly engage in the debate. Perhaps worse is that some continue to deny the prevailing facts about the dominant position of the largest firms and the distorting effect this has on the market," Barbeau concludes.