While the audit industry “Big 4” (PwC, Deloitte, KPMG and EY) continues to dominate key service lines by occupying close to 60% of revenue share, evolutions in the regulatory landscape and the advent of new features are set to alter the course of how the financial services market moves ahead.
Demand for critical audit services seems as robust as ever with the market leader (PwC) enjoying an impressive year in the US, with revenues up 10% and set to cross US $12 billion with a strong performance across all lines of service. Deloitte, PwC’s fiercest competitor, came in a close second with annual global revenue of $35.2 billion for the past fiscal year, with 34.6% of the revenue coming from its consulting business, followed by 28.6% of revenues from its audit services. Market leaders focused on expanding their presence in new markets and upcoming services such as big data, analytics, blockchains, etc. In the meantime, mid-sized players sought new ways to expand their horizons while facing pressure on profit margins, via mergers and acquisitions with regional players to increase their size (BDO, Nexia, RSM, etc.) or by implementing operational improvements to generate value (Grant Thornton, Crowe Horwath, RSM, etc.).
In mature markets like US and Europe, there is a rising emphasis on ethics training due to increasing conflicts of interests for firms and their businesses, as regulations are anticipated to become more stringent. Quality control standards have become rigorous, driven by an ever-increasing need to improve audit quality and standards. The European Parliament has asked to ensure that the quality of audited data improves, as they have been incorporated into the new EU Audit Regulations. It is worth noting that firms like EY and Deloitte spent a staggering $ 300-500 million over three years to improve their audit reporting tools and enhanced reporting structure.
Emerging areas such as data integrity and privacy are tipped to take the top spot in terms of priority for audit firms that handle other firms’ propriety data and financial information. Key audit firms are working with AIG to prepare a Risk Preparedness Index (RPI) to account for cybersecurity threats, which will be reviewed by a third-party auditor regularly. Those with high RPI scores could get lower insurance rates - a key differentiator in the long run.
There is also a growing need to leverage big data and analytics in increasing complex external and internal audit functions. Analyzing data to produce actionable information is a key challenge for companies and efficiently utilizing this information will be a differentiator for forward-leaning companies. Most major audit firms have recognized this and are investing as much as $500 million in data capture and audit analytics and looking to develop deeper customer relationships by using technology, social networks and data analytics.
Increased regulation, lack of staff, labor costs and lowered fees will cause firms to diversify. The Big 4 firms are diversifying into consulting and financial services, in addition than audit and tax. Firms such as Deloitte have focused on their consulting business, which had a continued increased growth rate of 9.9% in 2015 and an over 8.2% growth in audit and assurance services. With options opening (outside of the Big 4), medium- and large-scale customers now have the leverage of negotiating suitable pricing models and perhaps look for alternative partners, as firms look to undercut each other to remain competitive.
For the immediate future, audit firms are finding ways to work around some of the newly adopted regulations such as mandatory audit firm rotation for Public Interest Entities, depending on the existing tenure of the firm and additional restrictions on the provision of non-audit services by the statutory auditor, especially in developed markets. It is important for procurement and financial functions to work together to ensure contracts are reviewed in a regular manner, to avoid heavy penalties from regional government bodies.