Author: Mintel Group Ltd.
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Accounting and Financial Management - UK - February 2016
Executive Summary 
 
“Recent growth in the accounting and financial management market has been driven by the expanding consultancy sector. Firms have been busy strengthening their consultancy capabilities to reduce reliance on more mature low margin sectors, such as audit, and to offer a broader range of services to clients. Data analytics and digital innovation are playing an increasingly important role in consultancy, with many firms focussing on strengthening capabilities in those areas.”
-Claudia Preedy - B2B Analyst

The market
The UK market for accountancy and financial management has recovered well since the economic downturn. Annual growth of 3% to 5% was achieved between 2012 and 2015, in line with the strengthening economic recovery. In 2015, the value of the market reached £22.74 billion, equivalent to growth of 4% in the year and 17% compared with 2011. 

FIGURE 1: Segmentation of the UK market for accounting and financial management, by type of service, 2011-15
  
Source: MBD analysis of company data and estimates

Consultancy is the strongest growth sector of the accounting and financial management market, representing an estimated 34% in 2015, up from 31% in 2011. Firms have been busy strengthening their consultancy capabilities to reduce reliance on more mature low margin sectors, such as audit, and to offer a broader range of services to clients. Data analytics and digital innovation are playing an increasingly important role in consultancy. 

Since 2013, the audit and accounting sector’s performance has slowly improved in line with a more robust economic recovery. 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 due to a hike in the audit threshold reducing the number of companies requiring annual audits.

The tax services sector started to recover in 2012 and has since demonstrated growth. This has been driven by the more positive economic development, and changes to an already baffling tax system increasing demand for tax advice and services. However, the government’s clampdown on tax avoidance schemes and a shift in public opinion has reduced demand for tax planning.

Income from corporate finance and business recovery services accounts for around 12% of the accounting and financial management 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 has fallen since 2013, with market conditions for insolvency practitioners turning increasingly challenging. At the same time, corporate finance activity returned to stronger growth in 2014 and 2015 alongside a more robust economic recovery. This has contributed to sustained growth in fees income in the sector.

FIGURE 2: Forecast UK market for accounting and financial management, 2015-20
  
Source: MBD forecasts

Consultancy is expected to continue to gain share of the overall accounting and financial management market. This reflects the continued trend for accounting firms to build on their consultancy capabilities in the quest to become truly multi-disciplinary businesses. The share of consultancy to the total market is expected to increase from 34% in 2015 to 37% in 2020. 

Audit and accounting is a relatively mature sector, and its share is likely to moderately decline over the next five years. The outlook for the tax services sector is more positive, as new tax rules and the clampdown on tax avoidance schemes generates demand for comprehensive and responsible tax advice. However, at the lower end of the market, fees growth in tax services is expected to be restricted due to the commoditisation of certain tax functions. 

Demand for corporate finance and business recovery is expected to develop in line with the overall market, continuing to account for between 11% and 12% of the total. Corporate finance activity is set to remain strong in the foreseeable, although the sector is exposed to increased uncertainties due to concerns surrounding the shaky global economic environment.

FIGURE 3: Forecast segmentation of the UK market for accounting and financial management, by type of service, 2016 and 2020
  
Source: MBD forecasts

Market factors
UK and EU reforms are currently being implemented to shake up the audit industry, bringing an end to the cosy relationship between large audit firms and clients, and opening up the market to competition. A new UK audit order came 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 non-audit 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 FTSE 100 market in the next five to 10 years.

In 2012, a new audit threshold was introduced, allowing more companies to become eligible for audit exemption if they meet certain small company criteria. Thresholds rose again from January 2016 as part of changes to the EU's Accounting Directive. This reduces the potential market for auditors at the lower end of the market, resulting in more audit firms, especially small practices and sole practitioners, quitting this line of work. Some firms are responding to these changes by diversifying and broadening their portfolio, with a focus on value-added services.

Recent years have seen tax avoidance schemes come under increasing political and media scrutiny. The General Anti-Abuse 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 also generate demand for tax advisory services as companies want to ensure compliance with the legislative changes.

Technology and its application has been a driving force of change in the accountancy sector over recent years. Technology has changed how accountants work, enhancing business efficiency and productivity. Accountants focus on technologies that make them more productive and bring them closer to clients - predominately cloud and mobile based. With these technologies increasingly woven into the fabric of the accounting industry, large accounting firms have started to team up with technology and software firms to develop their own cloud-enabled products. Cloud computing and digital platforms are set to remain a key investment focus in the accounting industry for the foreseeable future.

Most of the 5.4 million businesses in the UK fall into the small category, with businesses employing fewer than 50 people making up 99.3% of the total, while SMEs employing fewer than 250 people accounted for a staggering 99.9% of private businesses. SMEs account for more than half of employment (60%) and 47% of turnover (equivalent to £1.8 trillion)) in the UK private sector. The largest accounting firms have started to turn their attention to the SME sector, which has so far remained the domain of mid-tier and high street practices. The vast and expanding SME sector is seen to offer attractive opportunities for even the larger accounting firms.

FIGURE 4: Number of private sector businesses in the UK, 2001-15
  
Source: MBD analysis of ONS data

Companies
The top four firms continue to dominate the FTSE 100 audit market despite a recent rise in audit tenders, which has mainly resulted in contracts switching hands between the ‘big four’. This dominance is unlikely to change in the near future. As of January 2016, the ‘big four’ maintained a market share of 98% of the FTSE 100 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 legal services to build on their multi-disciplinary capabilities.

The accountancy industry’s mid-tier market is consolidating in a bid to strengthen and grow their business so they can compete for more lucrative contracts with large firms. The large firm accounting market has been consolidating for some years, driven by the requirements of mid-size and large global clients. With smaller networks and firms seeking to meet the increasingly international needs of mid-market companies pursuing growth markets, this is now also driving consolidation in the mid-tier sector. A number of mid-tier forms have also undertaken acquisitions to diversify their portfolio, particularly with regards to consultancy services.

What we think
Consultancy and advisory services are set to continue to represent the strongest growth potential for accountancy firms. Digital technology and data analytics are also expected to become an even bigger part of the consulting market going forward, so firms are anticipated to continue to focus on strengthening their capabilities in those areas, often through acquisitions or strategic alliances. 

Cloud computing is transforming the accounting industry and is set to remain a key investment focus for the foreseeable future. While cloud computing and data analytics are enabling accountants to become more efficient, trends like automation and self-service also pose threats to the industry as they could reduce the relevance of the accountancy profession. Accounting firms of all sizes must therefore move with rapid technological changes, even taking a lead in innovation, embracing the resulting industry shift, and investing in the right skills.

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