Audit Firms: Financial Performance 2011

What do we know about financial performance of accounting firms, especially the Big Four firms? I planned to do some analytics in this area and provide my readers with results this week. However, the smart guys from Big4 site have already done this work and all I want to do is to provide some additional considerations.

Thus, this blog post is going to discuss revenues of accounting firms.

Big4: Business as usual

The Table 1 represents revenues of the Big4 accounting firms and growth rates.

Table 1: Big4 Revenues and Growth Rates 

Figure 1: Combined Big4 Revenues

I would consider following points:

First, generally the Big4 firms have overcome consequences of financial crisis, i.e. revenue of 2011($103.6 bln.) exceeded the pre-crises level of 2008 ($101.3 bln.). However, E&Y did not manage to achieve pre-crisis revenues.

Second, PwC showed good performance in 2011 with 10% growth and regained dominant position in Big4 after it was given in to Deloitte in 2010.

Third, Deloitte is distinguished by the highest compound annual growth rate (CAGR) for the period of 2007-2011. Meanwhile, E&Y has reported the lowest CAGR of all Big4 firms.

Big4 Audit Services

The blog is about audit, so we can’t avoid talking about audit fees percentages in total revenue, which are reported in Table 2.  J

Table 2: Big4: Audit Fees Share in Total Revenue

Figure 2: Combined Big4 Audit Fees Share in Total Revenues

The sharp decrease of E&Y’s audit fees share in 2008 should not mislead us. The issue is that E&Y reported the combined figures of assurance and advisory services before 2008. That is why, for illustration purposes I depicted tendencies in audit/assurance revenues starting from 2008 year.

The tendency of decline in audit & assurance services might indicate two issues. First, the accounting firms are eager to provide consulting/advisory services, especially in economic crisis time, when clients need some advice on how to improve their businesses. Second, clients might be dissatisfied by the level of assurance services provided: accounting firms can not provide in this area something special because of strict unification of reports, or e.g. some clients wanted to delist themselves from stock exchanges. Anyway, this is a very deep and serious issue, which deserves to be discussed separately.     

Non-Big4 Accounting firms

I decided to compare information about Big4 firms with 2 big accounting global networks, BDO and Grant Thornton International (GTI). I picked up these 2 firms because they publish their reports online and information was rather accessible. According to Accountancy Age global ranking BDO and GTI, occupied 5^th and 7^th places respectively in 2010.

Table 3: BDO and GTI Revenues and Growth Rates

Figure 3: Combined BDO and GTI Revenues

Remarkably, the combined revenues of BDO and GTI are 2.4 times less than their closest Big4 rival, KPMG! BDO has shown good CAGR for 2007-2011, and what could be also mentioned is that the decline in revenues of -2% in 2009 was the lowest comparing with Big4 and GTI. Regretfully, GTI was not able to achieve pre-crises revenues ($4 bln.)

Non-Big4 Audit Services Share

I made the same exercise here as in case with Big4 to provide information about audit revenues, see Table 4 and Figure 4.

Table 4: BDO and GTI: Audit Fees Share in Total Revenue

Figure 4: Combined BDO and GTI Audit Fees Share in Total Revenues

Quite interesting is that the tendency for audit and assurance services growth in BDO and GTI differs from the one shown by Big4 firms. Both firms increased share of audit fees in structure of their revenues in 2009 (from 50% to 53%), and were able to keep these fees on the same level.

Unfortunately, the picture here could be distorted by BDO reporting. The firm reports audit and accounting under the same line. Though report does not specify what sorts of “accounting” services are provided, it might be suggested that these are the services related with help to clients in financial statements compilation, i.e. having non-assurance nature.

Comments are welcomed!

If you have anything to add about performance of Big4 or the other global accounting firms, please feel yourself comfortable to leave a comment. Maybe you have some insightful information about accounting firms’ balance sheets or cash flows J

PS Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. The rules and explanations regarding subject are here.

Sources: 

1. Reports and press-releases placed on the web-sites of the mentioned firms.

2. Big4.com analysis. 

Week-End: Hero Accountants

I like to read books about history and sometimes notice the role, which accountants played in our daily live, not just in a professional field. Recently I have read an interesting book by Andrew Marr “The Making of Modern Britain”. The author described an interesting episode in the chapter about World War II, or the Peoples War like it is also  named in the UK. Here is the small passage:

“In the Atlantic, which mattered most to Britain, the capital surface ships became a sideshow. The life or death struggle was led from Brittany by Admiral Doenitz, the leader of the U-boat fleet, based in a sardine-merchant’s château; and in Britain by a polio-stricken civilian lawyer, Rodger Winn, who, along with a chartered accountant, ran the Royal Navy’s Submarine Tracking Room in an ugly concrete building near Downing Street. Their game of bluff, counter-bluff, changing tactics and secret intercepts was an important fight as any other part of the war.”

The British Submarine, Triton Class

Thus, a chartered accountant helping to navigate Royal Navy’s submarines contributed to the victory over Nazi Germany!

It is interesting which accounting skills did he applied to do this glorious job? I would suggest that he had good analytical skills, could have analyse trends in the movements of U-boats, accurately measured the balance of power at the point of time in the Atlantic…

Unfortunately, the book does not tell us anything about this hero. Who was he? Why did he decide to take this job? What was his fate? It would be nice to get know about this man.

PS If you know any analogous stories about brave, heroic or simply good deeds of accountants which influenced our live, please leave a comment – share your knowledge.

PS2 Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. The rules and explanations regarding subject are here.

Audit Method: Audit Approach

Audit planning is one of the most interesting steps in the audit process. It requires to apply audit specific knowledge, business skills, understanding of the own resources and velocity of their usage.

In this post I am going to make the brief overview of some audit approaches and their applicability in real life.

Audit Process

The audit process could be depicted very simply, but work done and time spent on each stage of audit process have crucial effect on audit efficiency and effectiveness (audit risk). The illustration demonstrates that basically we have two types of approach: business risk approach with controls testing and substantive approach.

Audit Process

The approach in strategy should not be confused with approach in tactics regarding the concrete account connected with business process. In any case, we have to detect most risky and material areas of clients’ financial statements, i.e. substantive testing of all accounts is not reasonable.
         The second step is to identify our tactic regarding concrete type of account and assertion. For example, account is “fixed assets” (FA) and assertion is “valuation”. The process which is reflected by these two elements is “FA purchases” process. So at this point we might decide to test value of FA items substantively or do some preliminary purchases tests of controls to reduce substantive work in later stages. 

To test or not to test?

The outcome of control testing should be combined risk assessment of financial statement risk and audit risk, i.e. the result per well-known models:

         Audit Risk = Inherent Risk x Control Risk x Detection Risk (1);

Audit Risk = Financial Statement Risk x Detection Risk (2).

The audit firms try to formalize risk assessments (low, moderate, high) and spot the point at which it would be reasonable to reduce substantive procedures. However, there is still a problem: test of controls is time and money spent on procedures. And how do we know whether we should even start testing controls? What if after extensive control testing they proved to be ineffective? The mistakes might lead to inefficient audit, harming auditors’ profit margin. Unfortunately, I might say in majority cases the decision is made based on common sense and subjective opinion, i.e. there is no 100% proven scientific way to figure this out. Admittedly, to facilitate a right decision auditors should understand client’s business process, document suggested controls, and do process walk-through. There are also some rules of thumb, e.g. if there are lots of small routine transaction, then tests of controls are likely to be the right option.

Additional factors

The audit with accurate planning stage, through understanding of business processes and risk detection would require highly proficient audit team. However, we live in a real world and we do not always have access to the best dream audit teams J . The point is that the audit approach should be understandable by team members and fit their abilities: for someone it would be easier (time/budget factor) to vouch 1000 transaction than make decision based analytical job of connecting facts from process narrative, walk-through, initial strategy, and audit methodology. I mean, that process need not be overcomplicated. I would suggest following basic principles for establishing strategy:

1. Efficiency (budget);
2. Effectiveness (prudence, audit risk);
3. Complexity/easiness to bring about;
4. Understandability (and acceptability) for all members of team: from partner to audit staff.

In the future blog posts, it would be interesting to elaborate each of the above principles.

Conclusions

This is only outline of audit approaches. The topic is enormous and I will try to cover most arguable areas. Your comments are welcome as usual.

PS Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. 

Polls on 2012 Top Interesting Subjects

This blog post is aimed to notify my readers about the ability to vote for the subjects, which would interest you in 2012. As I promised I summarised all topics into groups and provide you with opportunity to choose the most interesting. The results of polls would be reflected in my articles, i.e. I am going to write posts on topics preferred by the readers of my blog.

The subject groups are as follows:

1. Scrutiny of ethical issues, audit scandals and relation of the audit political issues. Sample posts are Ethical Auditor; Audit in Politics; The Role of Big4.
2. Audit methodology and technique. Sample articles are Final Stage; Subsequent Events; Group Audit. 
3. Audit education, exam preparation. Sample post is Audit Exam.
4. Business, professional issues and changes regulation in audit area. Sample articles are New Regulations for Auditors; Pure Audit; Shamrock Audit.
5. Audit studies overviews; interesting analysis and observations. Samples of reviews are Audit Opinion and Share Prices; Some Colour to Fraud;  Auditors’ turn to needle Greece.
6. Entertaining posts related with audit, i.e. audit is popular culture, videos, literature etc. Sample posts are Sketches by Monty Python; Commercials; Accountancy in Literature.

Voting Rules

As proud and accurate auditors J we should agree on voting rules:

1. The polls are placed on the right hand side of the blog, right above “about me” section J;
2. The polls will be open for 4 weeks starting from today, 18^th of January. Thus, the polls will be closed on the 15^th of February;
3. There is possibility to vote more than once. I recommend to vote for your top 3 favorite subjects: the averaged percentages will show us preferences of auditorium;
4. The results of polls would be immediately published within the week after the closure date, i.e. till the 22^nd of February.

Comments

Dear readers, once again I would like to ask to you to vote only for your top 3 favorite topics otherwise the picture could be distorted.

If you have any additional suggestions regarding subjects, which we need to discuss in 2012 year,  you are welcome to place comments in my blog or contact me via LinkedIn.

Thank you very much for following “Audit-is-Cool” blog!

2011 Top Audit Events and Hot Topics

My congratulations to all accountants that 2011 year finally ended. I wish you all the luck in 2012 year, hope it would not upset you.

In this post I would like to summarise some hot issues in audit area for 2011 and the most read topics of this audit blog. I don’t claim to be ultimate truth oracle, and, of course, you are welcomed to share your opinions regarding most significant events in audit world for 2011.

Top 3 events of 2011 affecting audit profession

1. The discussions regarding changes in legislation for auditing firm. I think, that this was one of the hottest topics in audit in last year and it has potential significant impact on our industry. European authorities are aware about ethic issues, lack of competition and quality, and expectation gap in our industry. Thus, proposed changes are related with audit firm rotation, creation of pure audit firms, supervision of audit, services provided by auditors.

2. Olympus scandal in Japan. The scandal in audit industry are drivers of changes, just remember what effect had Enron and Arthur Anderson problem. Admittedly, the occurrence of significant change depends on the place where a scandal occurs, to have real effect it should be probably in USA or at least Western Europe. Olympus case involves several Big4 audit firms and is very interesting: strange and costly acquisitions, inflated consultancy fee, not clear intentions of management.

3. Problems in World Economy. We can’t ignore macroeconomic factors affecting audit clients. The news from Europe are murky and there is risk that slow recovery and high indebtedness might result future bankruptcies. Of course, the auditors in the public opinion would be partly responsible for weak balance sheets of their clients J

Top 10 topics of “Audit-is-Cool!!!” Blog        
The process of topic selection is simple and transparent. I just monitor “post” section of Blogspot, which gives me statistics of most popular posts. The chart of top posts is published below.

What can I say about these selection of my readers?

Generally, top 5 positions show that people are interested in: 1) ethics and ethical scandals, 2) self-education, 3) business ideas, 4) politics, and 5) audit technical issues. I am glad that scientific issues in audit area are also appealing to readers: my overview of papers investigating effect of audit opinions on share prices got place in top ten.

What next?

In my next post I am going to ask my readers what topics you would like me to discuss in this blog in 2012. I will try to arrange polls for this purposes.

Again, dear readers if you have your personal opinion regarding most significant or may be most interesting events for 2011, please share them in comments. I would be glad to discuss it with you.              

Week-end: Big4 Audit Career Commercials

How would you assess the creativity of accounting firms? This question is especially relevant in the field of attracting young specialists as new hires.In this post I've decided to pick up career commercials addressed to graduates and potential junior employees made by industry leaders, Big4.

Why Deloitte? I think Deloitte's ad was rather dynamic, with good music, but a bit of trivial.



Why EY? EY has actually disappointed me, I found nothing creative which would look like this remarkable video. Finally, I picked up this video with interview of a nice girl with interesting accent J



Why KPMG? I decided to take KPMG Singapore's ad. The background music really touched me, it's style differs from music which other accounting firms place in their ads. Meanwhile, image could have been more clear.



Why PwC? In my opinion, there was not anything interesting among new PwC's commercials. So I end up selecting relatively old commercial: it might be viewed as pompous and pretentious one, but sometimes I find such kind of creativity rather appealing. I do not know why, but it has reminded me Ayn Rand's "Atlas Shrugged".



What commercials related with graduates hiring do you find interesting? Are there any appealing ones or real masterpieces? Please share information in comments.

Audit Exam Ultimate Pass Key

Last summer I successfully passed ACCA exam, P7 “Advanced Audit & Assurance”. While preparing for the exam, I designed succinct and universal “question tackling plan”, which helped to structure my ideas on auditing. In this post I would like to share my knowledge just before coming ACCA examination session.  

I believe it would be useful for all exams related with financial audit. So the candidates for qualifications like CPA or ICAEW are welcomed to utilize it as well. J

The logic is simple: the plan consists of common subjects/questions and points suggested to be addressed.

Question Tackling Plan

1.      Ethics area question

1.1.   Technical competence;

1.2.Objectivity/Independence (possible threats: self-review, familiarity, intimidation, self-interest, advocacy)

1.3.   Professional behavior;

1.4.   Integrity;

1.5.   Confidentiality.

Mnemonic: TOPIC

2.      Professional (audit business) area question

2.1.   Competence;

2.2.   Resources/costs;

2.3.   Reputation;

2.4.   Staff quality;

2.5.   Quality control: Acceptance; Directorship; Supervision; Review; Consulting; Disputes.

3.      Audit Opinion related question

3.1.   Clarity;

3.2.   Details (standards, amounts, scope);

3.3.   Structure (is heading on the right place?) of opinion and its Consistency (starts like “except for” and finishes like adverse opinion);

3.4.   Types of appropriate opinions. This depends on evidences (sufficient, mistake material and pervasive?);

3.5.   Prior year opinion.

4.      Audit Matters (audit evidence/process) question

4.1.   Materiality;

4.2.   Standard breached (IFRS, recognition, valuation criteria etc.);

4.3.   Risks of misstatement;

4.4.   Impact on Audit Opinion;

4.5.   Reliability (source of evidence).

5.      Audit Evidence question

Mnemonics:

Sources of evidence -  DADA3: Document Asset Director (interview/representations) Accounting record 3rd Party

Procedures AE IOU: Analytical (plausibility/predictability)   Enquiry & Confirm (written/verbal)     Inspection (documents/assets)       Observation (assets, process) RecalcUlation (opening balance check)

Elements of evidence:

5.1.   General: budgets/plans, accounting policy;

5.2.   Calculations: rates, models, risks, probabilities, impairment reviews, useful lives, assumptions reasonableness explanation;

5.3.   Disclosure: draft notes;

5.4.   Documents types:

5.4.1.      Bank statements, invoice, bill, dispatch/delivery note;

5.4.2.      Contract, agreement, insurance policy, title deed;

5.4.3.      Claim litigation copy, insurance claim;

5.4.4.      Log books, time-sheets;

5.4.5.      Minutes, orders, policies;

5.4.6.      Correspondence, letters;

5.4.7.      Tax returns;

5.5.   Reconciliations (with tax authority, debtor), confirmations;

5.6.   Record of discussion, interview, talk with employees;

5.7.   Valuation reports, surveys;

5.8.   Breakdowns (check for misclassification), samples.

Golden Rule:

Your answer should be always close to the question scenario: (1) the answer should be relevant; (2) the question text contains hint for answer.

You are welcomed to share your tips for audit exams. Good Luck! J

          Disclaimer:
"This group is not associated with or approved by ACCA and the views expressed on this page do not necessarily reflect the views of ACCA".