Author: Mintel Group Ltd.
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Accounting and Financial Management - UK - January 2015
Executive Summary
 
“Growth in the UK accounting and financial management market has been restricted by the sluggish economy in recent years. However the market has started to show stronger growth in 2014 in line with the more robust economic recovery. Consultancy is expected to remain the strongest growth sector, as accountancy firms continue to strengthen their consultancy capabilities in a bid to reduce their dependence on more mature accountancy functions and to become truly multi-disciplinary professional services businesses.”
-Claudia Preedy - Industrial Analyst

The market
UK market for accounting and financial management up by an estimated 5% in 2014
Market development has accelerated in each year since 2011, from a marginal level to an estimated 5% by 2014, reaching an estimated £21.8 billion. Prospects for the sector started to improve in 2013 and further strengthened in 2014 in line with a more robust economic recovery.

Since the economic downturn the shape of the accountancy industry has started to change, with firms adopting new business models - expanding service offerings (especially in respect to advisory services), diversifying into new sectors, or becoming sector specialists. There is also evidence of increased acquistional activity in the accountancy industry, with many companies going down this route to expand their service offering or to merge with similar companies to enable them to compete for larger contracts.

FIGURE 1: Segmentation of the UK market for accounting & financial management, by type of service, 2010-14
  
Source: MBD analysis of company data and estimates

Growth in the audit & accounting sector has been hampered by the sluggish economy in recent years
The sector’s performance slowly improved in 2013 and 2014 as the economic recovery took hold. Recent growth has been dominated by the higher end of the market, where the top firms operate, as demand from larger companies has picked up and fees have started to stabilise. However, trading conditions at the lower end of the market remain challenging, partly due to the recent hike in the audit threshold, reducing the number of companies requiring annual audits.

The tax services sector started to recover in 2012 and has demonstrated growth since
In 2014, the value of the sector is estimated at £4.75 billion, equivalent to growth of 12% compared with 2010. Despite the government’s clampdown on tax avoidance schemes, demand for tax services remained undiminished.

Consultancy is now the strongest growth sector of the accounting & financial management market
The sector represented an estimated 34% of the market in 2014, up from 30% in 2010. During the recent downturn, demand for consultancy services was restricted as companies focussed on reducing costs and spending. However, demand for consultancy and advisory services has since re-emerged and now represents the strongest growth sector of the overall accountancy market. Accountancy firms are increasingly expanding their consultancy capabilities to reduce dependence on more mature accountancy functions and to become truly multi-disciplinary businesses.

Income from corporate finance and business recovery services accounts for around 12% of the total market
In the aftermath of the recession, demand for business recovery and insolvency services was buoyant, while corporate finance activity slumped - due to low credit availability and the uncertain economic conditions putting off investors. More recently, there has been a reversal of this trend, as the number of insolvencies fell in 2013 and 2014, while there is increased market optimism in corporate finance activity, largely driven by mid-market deals.

FIGURE 2: Forecast UK market for accounting & financial management, 2014-19
  
Source: MBD forecasts

The UK market for accounting and financial management is expected to increase in real terms in each year to 2019, developing ahead of anticipated GDP growth
The market is forecast to increase by a cumulative 23% in real terms between 2014 and 2019. Growth is expected to be largely driven by the consultancy sector and corporate finance activity, while the development of more mature sectors, such as audit and accounting and tax services, is anticipated to be moderate.

Consultancy is expected to continue to gain share of the overall accounting and financial management market
Consultancy’s share of the total market is expected to increase from 34% in 2014 to 37% in 2019. Strong growth in digital technology is a key driver of the consultancy services sector, increasing demand for consultants that can provide expert knowledge to companies looking to capitalise on a wider range of digital opportunities. A number of the large accountancy firms have recently undertaken acquisitions in the digital business sector to build on their capabilities in this area. Financial services (regulation and remediation work) and cyber security can be identified as further key growth areas for consultancy services.

Audit & accounting and tax services are relatively mature sectors and their share is likely to moderately decline over the next five years
The FTSE 100 audit market is expected to remain the preserve of the Big Four and this situation is unlikely to significantly change in the near future, despite reforms that aim to open the market to competition. However, the Big Four auditors are not likely to take part in some tenders over the coming years due to conflicts with their nonaudit work under incoming EU rules, which will open up opportunities for mid-tier companies in the medium-to long-term.

The reforms in the audit market also mean that firms will have to adopt to a more commercially aware and marketing-orientated approach. Auditors that previously did not have to be commercially-minded or change their product offerings are having to learn to sell their services. Competition is also resulting in audit firms increasingly using new technology to be more efficient. For example, many firms have started to adopt ‘audit automation’ software, which allows the whole process to become more efficient.

The increased use of software and technology will also commoditize some traditional tax and accounting functions. Margins from tax services are therefore expected to remain squeezed over the coming years, with the development of the sector broadly following UK economic development.

Demand for corporate finance and business recovery is expected to develop in line with the overall market
The sector is expected to continue to account for around 12% of the market over the next five years. If the economic recovery remains robust, growth in the sector will be driven by corporate finance activity as a more positive economic climate will result in more corporate transactions, while a slowdown in the economy would lead to increased demand for business recovery services.

FIGURE 3: Forecast segmentation of the UK market for accounting & financial management, by type of service, 2014 and 2019
  
Source: MBD forecasts

Market factors
New UK and EU regulatory framework for audit market
UK and EU reforms are currently being implemented to shake up the audit industry, bringing an end to the cosy relationship between the large audit firms and clients, and opening up the market to competition. A new UK audit order will come into force on 1 January 2015, while the EU regulatory framework for the audit market will come into effect in June 2016.

Key changes include a requirement for FTSE 350 companies to put their statutory audit engagement out to tender at least every 10 years and a restriction on revenue from nonaudit services to audit clients, such as tax services, valuation services, services relating to the internal audit function and services promoting, dealing in, or underwriting shares. Although the market is set to continue be dominated by the Big Four for the foreseeable future, the largest mid-tier companies are expected to start making in-roads into the FTSE100 market in the next five to 10 years.

Rise in audit threshold shrinks market for auditing small company accounts
In 2012, a new audit threshold was introduced, resulting in more companies eligible for audit exemption if they meet certain small company criteria. Thresholds are likely to rise again in the near future, as part of changes to the EU's Accounting Directive. This reduces the potential market for auditors at the lower end of the market. Firms are responding to these changes by diversifying and broadening their services.

Government clampdown on tax avoidance schemes
Recent years have seen tax avoidance schemes coming under increasing political and media scrutiny. The General AntiAbuse Rule (GAAR) came into force in July 2013, which is intended to stop taxpayers from reducing their tax bill by any lawful means. Despite eroding demand for tax avoidance schemes, the tighter regulations are also believed to generate demand for tax advisory services - as companies are trying to understand and comply with legislative changes, without falling foul of the GAAR.

Rise in private sector businesses and self-employment provide opportunities for accountants
In 2013, the number of private sector businesses active in the UK showed the strongest growth in 10 years - rising by 7% - reflecting the more stable economic recovery. Recent years have also seen a strong rise in the number of people self-employed. Although the market for large corporations is dominated by just a small number of accountancy firms, there is a plethora of firms that focus on serving the SME market, as well as sole traders, contractors and freelancers. The recent rise in self-employment therefore provides a positive impetus for this sector of the market.

FIGURE 4: Number of private sector businesses in the UK, 2001-14
  
Source: MBD analysis of ONS data

Companies
The top four firms continue to dominate the FTSE100 audit market despite a recent rise in audit tenders, which has mainly resulted in contracts switching hands between the Big Four, with their dominance unlikely to change in the near future. As of December 2014, the Big Four maintained a market share of 98% of the FTSE100 audit market, with mid-tier companies still struggling to penetrate the sector.

Many accountancy firms now operate as truly multi-disciplinary professional service companies. Firms are expanding functions to provide a broader service offering to clients and to reduce their reliance on more traditional, low margin accountancy functions. A number of the larger accountancy firms - including PwC, EY and KPMG - also recently started to branch out into the provision of legal services to build on their multi-disciplinary capabilities.

The accountancy industry’s mid-tier sector is currently consolidating to strengthen and grow businesses so they can compete for more lucrative contracts with large firms. With smaller networks and firms seeking to meet the increasingly international needs of midmarket companies pursuing growth markets, this also drives consolidation in the mid-tier sector. Recent high profile mergers in the mid-tier sector include Baker Tilly’s acquisition of RSM Tenon in 2013 and BDO’s merger with smaller rival PKF in the same year.

What we think
Despite the more positive economic climate in 2014, a cloud of uncertainty has shifted over the UK’s economic outlook in recent months. A potential slowdown in UK economic growth would have a direct knock-on effect on demand for accountancy and financial management services so the outlook for the market carries a degree of uncertainty. Nonetheless, with economic growth expected to be sustained, the trading conditions for the accounting and financial management market are anticipated to remain positive for the foreseeable future.

Consultancy and advisory services are set to continue to represent the strongest growth potential for accountancy firms. Cost cutting and efficiency savings have played a big part in the need for consulting advice in recent years, and are expected to continue to do so. Over the coming years, strong growth in digital technology is also set to be a key driver of the consultancy services sector.

Technology and its application will also continue to be a driving force of change in the accountancy sector, with firms increasingly adopting new technologies to become more efficient, flexible and responsive to clients’ needs. The key focus is on technologies that make accountants more productive and bring them closer to clients - with these technologies predominately cloud and mobile based.

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