Home » Growing Pains: Mid-Sized Auditing Firms Are Seeing an Influx of New Clients, But at What Cost?

Growing Pains: Mid-Sized Auditing Firms Are Seeing an Influx of New Clients, But at What Cost?

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We are approaching an era of exponential growth for medium-sized accounting firms. This is largely due to the trend of leading companies driving the expansion of their advisory/consulting business. To control the number of audits that could pose an independence barrier across their service line, they have taken steps to eliminate the bottom 10% to 20% of their audit clients. Meanwhile, middle-tier companies suddenly find themselves the beneficiaries of these new business opportunities. Chances must be managed carefully, writes Intapp’s Jey Purushotham.

Midsize businesses can face many challenges in scaling to support such exponential growth. Among these challenges is the inability to manage the welcome but unexpected influx of new business from a compliance perspective. Risk and compliance processes that were once sufficient fail to adequately detect independence failures and conflicts before making new business decisions when partners suddenly influx, exposing the company to relevant regulatory consequences. There is a possibility.

At the same time, changing and increasingly stringent auditing and regulatory requirements around the world are putting pressure on companies to modernize their dispute resolution processes. Some large forward-thinking companies have already designed systems that enable compliance with current regulations and incorporate the ability to scale as regulations evolve, such as through the use of automation. However, many midsize businesses are plagued with compliance risks as they try to run new business using old systems.

5 key risk triggers

The landscape for midsize accounting firms is changing rapidly and, perhaps for the first time, introducing business triggers that force them to answer difficult questions about their risk processes.

Finding Independent Disorders at Different Stages

Historically, midsize companies have not focused on automating conflict of interest clearance and waiver assessments. Some of the independence check processes were just emails asking if any partners had independence issues with new clients the company wanted to sign.

These processes may have been sufficient when the company was small. But the old ways fall apart when customer windfall occurs, with customers being rejected or eliminated by the Big 4 requiring industry splits, M&A, and audits.

The idea that the risk process should be automated rarely occurs until the conflict begins. From trivial things like general anxiety about current processes to traumatic things like finding problems with regulators and forcing change, conflicts play a central role in rapid growth. . Midsize businesses are starting to ask:

Increased client private equity ownership

The challenge posed by private equity is reflected in its name. This is a private market. This private nature creates difficulties when trying to obtain all relationships and ownership across a particular PE fund.

And as private equity funds continue to buy stakes in more companies, it becomes increasingly difficult to comply with the independence rule (which applies to all portfolio companies within a PE fund). Finding, tracking, and monitoring complex private equity ownership data has long been a challenge for mid-tier accounting firms trying to maintain independence with respect to their growing audit client base.

Forward-thinking midmarket companies are beginning to adopt third-party data sources to ensure structure on how PE data can be incorporated into risk management processes. Other companies have adopted the practices of the big companies. That means we have quarterly phone calls with the PE funds themselves to understand changes in the structure of their portfolio companies.

Steroid Growth Through Acquisitions

In some cases, accounting firms feel the need to expedite the review process to initiate billable work on the influx of new customer opportunities from buyouts. Without automated risk processes, exponential growth can quickly overwhelm a company’s traditional manual risk management processes. It also hinders your ability to make well-informed decisions about which customers to keep and which to abandon in newly acquired companies.

Companies may even expand into new industries and new geographies with their own considerations, both from a risk and regulatory perspective. If your risk processes cannot scale to handle the current flow of acquisitions, you will not be able to reliably manage the growth rate of tomorrow’s acquisitions.

Audit firm threshold reached

Accounting firms increase their level of scrutiny when they have more than 100 public audit clients. For example, regulatory inspections will increase from once every three years to once a year. Accounting firms therefore try to balance their business between public and private companies.

They want constant visibility into the growth of audit clients so they can make informed decisions about which audit clients to accept. These decisions will depend in part on the company’s willingness to audit public companies and its ability to address additional scrutiny.

Accept the wrong client

Without robust risk processes, accounting firms may inadvertently accept the wrong client, leading to malpractice lawsuits. Accounting firms often have high malpractice premiums, but by demonstrating that companies have robust, centralized risk processes in place to ensure that only the right clients are hired. There is an opportunity to reduce costs.

Automation helps answer the following questions: correct client?

An effective process helps you confidently answer the big questions at the heart of your acceptance problem. teeth The “right” client? To be able to answer this question more easily in the future, companies should define multiple factors. What is the firm’s risk appetite? What industries or geographies does the firm want to engage in? Do industries (such as cryptocurrencies or cannabis) or geographies have inherent risks or unknowns? is unclear or cannot be adequately answered, the company is opening the door to unidentified and unmanageable risks.

A risk process is only as good as the data that feeds it. Unfortunately, for many companies, data siled by multiple sources of truth, legacy databases from past acquisitions, and a growing number of internal systems without associated data strategies are becoming a unified approach to risk management. approach. Therefore, accounting firms should also develop a data strategy alongside their risk and compliance strategy. Companies need to centralize their own client and engagement data (often stored in separate siled systems) and develop a plan to maintain and update this data over time I notice that.

Process automation also creates a competitive edge in the talent war. Young people hired today expect an easy experience with technology and are becoming less and less tolerant of manual processes and data entry. When companies lack modern, automated risk processes, they face a different kind of risk. Loosing new talent before they have the opportunity to grow into tomorrow’s top talent. Worse, if employees report to their alma mater that their tech stack is outdated and inefficient, companies may miss out on the next class of talent.

Take advantage of the opportunity

Forward-thinking midsize companies use simple equations to drive process thinking. More business + legacy systems = more compliance and reputational risk. The smartest risk manager sees the current accounting firm landscape as a major driver for transforming data management and competitive processes without losing new business opportunities, and his business counterparts agree. 

The right transformation changes the growth and risk equation by meeting the challenges and compliance demands inherent in rapid growth and creating effective independent processes. Only then can mid-tier firms acquire newly available audits, consolidate clients from merged firms, and move into new areas of success without facing existing risks. 

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