BDO may hive off audit practice to ensure profitability

Mid-tier firm BDO has confirmed that it is considering various options to hive off the audit practice from the rest of its accounting, tax and business advisory activities to ensure profitability and remove potential conflict, reports Sara White

This follows criticism of the lack of competition across the listed audit sector by the influential BEIS [Business, Energy and Industrial Strategy] Committee, chaired by MP Rachel Reeves, which published a damning report on the state of the audit market and called for wholesale review of the leading audit firms to increase competition and the rapid disbandment of the current audit regulator, the Financial Reporting Council, and its replacement with a new regulator with a totally different leadership team.  

BDO is currently scenario planning for a variety of potential outcomes – one of which includes moving the audit practice to a separate subsidiary within the BDO LLP Group – so it can demonstrate it is sufficiently profitable and operates within a controlled environment focused on quality.

These plans remain at a very early stage and will require detailed consultation with the partnership, so no separation is about to be announced imminently.

Currently BDO has one FTSE 100 listed audit – mining company Randgold Resources, which it has held for a number of years, and a handful of FTSE 250 audits, with a sub-1% share of the primary listed audit market. However, it does have a strong AIM and FTSE tax and advisory business.

Scott Knight, head of audit at BDO, said: “The BEIS Select Committee is right to identify a lack of competition, quality and trust in our audit market.  Above all else, we believe a market cap should be introduced to limit the number of FTSE 350 audits that any single firm can take on, alongside improved oversight from a beefed up regulator.

‘While the Committee’s recommended operational split of the Big Four doesn’t apply to us, separating out an audit business which is focussed on quality, sufficiently profitable to attract and retain talent, and has the money to invest in technology and other necessary innovations is an interesting business problem. We are adding this to our scenario planning process. One potential route would be separating the firm’s audit arm into a subsidiary LLP with the members being audit partners alone.

‘This isn’t a proven path, but if the audit profession is genuinely committed to addressing the concerns which have been raised by four high-profile industry reviews, it must demonstrate this with bold action.’

BDO is ranked 6th in the Accountancy Top 75 Firms 2019 league table with annual fee income of £468.7m and recently merged with part of Moore Stephens LLP pushing it closer to its nearer competitor Grant Thornton in terms of fee income at £490.8m, currently ranked fifth in the UK. Both firms are dwarfed by the Big Four with combined revenues of £12.09bn.

Last year Grant Thornton pulled out of the FTSE 350 audit market, stating that the investment costs for tendering outweighed any chances of winning new audit business when the firm was competing against the Big Four giants – PwC, Deloitte, EY and KPMG.

In a separate move, media reports hinted that KPMG may also split up the firm with the creation of a standalone audit division, although these reports were denied by the Big Four firm. Since the appointment of chairman and senior partner Bill Michael in 2017, KPMG has been conducting a major review of the professional services firm and has moved its focus back to core business, selling off the SME accounting division earlier this year and ending its AI technology partnership with FI’s McLaren.

Report by Sara White

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