Financial statements are essential to everyday investment decisions, and investors rely on external auditors to confirm their accuracy.[1] Our recent research highlighted challenges impacting the global audit industry, including overreliance on a small group of audit clients.[2] An emerging threat — a decline in practicing chartered accountants[3] amid falling interest in accounting as a career — may exacerbate these problems. For this blog post, we looked at audit firms across both developed and emerging markets to assess the current state of play in the industry, and to identify potential areas of concern and the impact these could have on investors.
In the U.S., roughly 75% of certified public accountants are at or approaching retirement age.[4] Simultaneously, interest in this career appears to be tumbling, with the American Institute of Certified Public Accountants missing membership targets in four of the last five years.[5] This shortage is not specific to the U.S. and is made worse in some jurisdictions by stricter reporting rules in both public and private accountancy.[6]
Audit-fee concentration
Overreliance on a single client may impede an audit firm’s ability to conduct an independent audit, potentially preventing problematic accounting practices or outright fraud from being discovered.[7] We found that 36.3% of audit firms included in our study relied on a single client for all revenue from public-company audits, while a further 9.5% of audit firms relied on a single client for 50% or more.[8]
Stiffening competition for talent may further hinder these highly concentrated audit firms from exercising independence in their engagements. Some may hesitate to jeopardize existing relationships with companies by providing anything other than a clean audit opinion.
Audit firms in emerging markets were significantly more concentrated than in developed markets. Brain drain, or the efforts by audit firms in developed markets to attract chartered accountants from developing markets, may make this situation worse.
Audit-fee concentration in developed markets
Audit-fee concentration in emerging markets
Auditor size
Chartered accountants are essential to the audit process but, as their number falls, audit firms could struggle to meet their engagement obligations. Those unable to adequately meet their staff requirements may not be able to consistently complete quality audits across their portfolio.[9]
Determining if an audit firm has the right staff to successfully address its engagement portfolio is challenging. Total dollars of assets and revenue audited across an audit firm’s entire book of work may serve as a proxy for the complexity of the assessment process.[10] This value can then be compared against the audit firm’s total number of employed chartered accountants.
Based on this, we found that 8.6% of audit firms in our universe were extreme outliers for understaffing relative to peers.[11] The interactive exhibit below highlights markets and specific audit firms that may be particularly susceptible to the talent crunch.[12]
Audit-firm chartered accountants vs. engagement portfolio
Moving forward
Investors may be exposed to additional risks as audit firms navigate this human-capital challenge and thus may wish to expand audit-related diligence. Our proposed framework of audit-quality scores may be leveraged to identify companies for which audit quality may be compromised due to characteristics of their audit firm. Audit quality may be assessed by considering an audit firm’s expertise, capacity, track record and relationships with its clients. Investors may use this approach to support engagement with portfolio companies on the basis of audit and risk oversight, or to provide further insight when considering an audit firm’s (re-)appointment.