Auditing holds accounting firms intact as consulting demand weakens

Auditing services remain their strongest suit, but the way they do it drastically changed.

As businesses shift their financial plans to make sure that their cash flow will be able to withstand another few months of impact from the COVID-19 pandemic, accounting firms are still lucky enough that some services, such as auditing, remain essential and are enough for them to stay strong amidst the storm. However, as their clients’ growth plans are thwarted, the demand for other services has taken a severe hit.

In Singapore Business Review’s 2020 edition of the annual Accounting Rankings survey, PwC continues to take the helm in terms of having the largest number of employees in the industry, with around 3,700 employees as of 31 March, compared to 3,300 employees in the same period in 2019. EY came in second place with about 3,500 and outranked third placer KPMG with 3,164 employees by one spot. Deloitte ranked fourth with around 2,900, and rounding up the top five is RSM with 1,005.

Overall, the 32 largest accounting firms in Singapore have over 18,000 employees in 2020, higher than the 16,400 recorded last year.

Late to recover
Even as most of these firms saw an uptick in staff numbers, the future is not as sunny, as the accounting sector is projected to recover later than the economy itself, Deloitte’s CEO Cheung Pui Yuen told Singapore Business Review.

“The cycle of the professional services sector often works on a different timing to that of the economy—as we are engaged in advance, meaning that when the slowdown hits we still have engagements to complete. But during the slowdown, organisations reduce their spending on professional services, and as a result, the professional services sector often recovers later than much of the economy. Even as businesses open up in Singapore and around ASEAN, we therefore continue to plan cautiously,” Cheung explained.

Apart from this cycle, accounting firms are facing a lot of changes as the demand for accounting services have also shifted. Max Loh, managing partner for Singapore and Brunei at EY, stated that clients are curtailing discretionary spending in transactions and certain segments of consulting. As a result, Cheung added that some organisations chose to defer consulting projects, whilst some chose to carry out transformation projects during the time of low demand. However, as some businesses are entering their recovery modes, he expects increasing demand on assurance, restructuring and insolvency, risk, technology (especially digital and ecommerce) and human capital consulting.

“The type of deals start to change. Now we're working on more things involving restructure or capital raising as opposed to an M&A type of deal. There'll be plenty of businesses that will be sort of forced into recapitalisation transactions or consensual restructuring,” said Andrew Thompson, Asia Pacific head of private equity and head of deal advisory at KPMG.

Comprehensive auditing
On the other hand, compliance services, like audit and tax, are keeping these firms afloat given that these services will always be required. However, firms revealed that there have been a lot of struggles in this area as well.

Accounting work has always been a mix of digital and physical elements prior to the events of the pandemic, despite the push on digitalisation. Deloitte’s Cheung said that, even if much of their professional work and the execution of audit procedures can be done remotely, there are still some that cannot be digitalised.

“For example, audit fieldwork such as inventory observation of our client sites and systems still requires physical presence and this poses a lag in our response to completing engagements during the current COVID-19 pandemic. For some of our technology projects in areas like cybersecurity or digital strategy, access to the client’s systems onsite is also a critical requirement,” Cheung said.

Some firms have imposed measures for clients requesting for a face-to-face interaction. EY’s Loh shared that for in-person meetings in the office, they are encouraged not to exceed 10 persons and the duration should be limited to 60 minutes. Meanwhile, teams working at client premises are expected to continue to observe the client’s protocols.

Meanwhile, smaller accounting firms are likely to struggle more, unlike the Big Four who are consistently creating technology to ease their operations. Wayne Soo, managing partner at Fiducia, stated that clients still do it the old school way where they would bring all of the supporting documents to their office. And now, their clients capture the documents through their smartphones and source documents using optical character recognition (OCR technology), upload it into their cloud accounting software and grant accountants online access into their accounts to review, amend and finalise the accounts.

Aside from tech adoption, auditors are expending more effort in the areas of management judgement.

“Impairment and going concern assessment to ensure that the financial information presented by companies to their investors and stakeholders is reliable, and comprehendible. When information is not readily available or reflective of market conditions, additional corroborative evidence would need to be obtained,” Lee Sze Yeng, head of audit at KPMG, said.

Lee also noted a couple of things that auditors need to adjust to. First is the fact that it’s no longer business as usual with restrictions pertaining to carrying out physical stock takes and sighting of physical documents, as well as greater estimation uncertainties. Whilst alternative procedures involving digital procedures made it possible, this also meant that robust analyses are to be performed by the companies, and greater challenge is to be posted by those charged with governance and the auditors over matters such as impairment and going concern assessment.

Setting realistic timelines are also a must, especially when clients are experiencing delays in closing their books, coupled with the additional procedures that the management and auditors have to perform. “All parties involved need to be understanding and willing to flex their processes where it allows,” Lee said.

Lastly, Lee stated that investors need to view and review information with a balanced and objective point of view. “For example, it is understandable that financials will need to draw attention to the uncertainties faced at present, and it is equally important to not overreact or sound false alarms if the companies have sound fundamentals.”

More risks to come
Accounting firms understand the financial strain their clients are facing. For instance, EY has created an “Enterprise Resilience Framework” where they identify nine areas that businesses can address to build a structured and comprehensive approach to business resilience, Loh shared. These include employee health and well-being, talent and workforce, supply chain and global trade, customer and brand, financial and investor, risk, government and public policy, technology and information security, and insurance and legal disputes.

“Whilst companies are looking to cope with the immediate demands of the pandemic, it is important that they look beyond the ‘now’ and into the ‘next and beyond’ phases and reposition themselves for growth when the economy eventually picks up. For example, besides the more visible disruption of production and supply chains, as well as customer uncertainty, there are more risks and ​challenges regarding crisis management and people,” Loh added.

Meanwhile, smaller firms like Fiducia are willing to make adjustments on fees. Soo shared that they have already reduced their fees to accommodate clients whose businesses were impacted. “As for auditing, the fee review will be done in 2021. Apart from this, we have not done much for our clients as we too have manpower and other costs to pay during this time,” he added.