Accountancy firm numbers have fallen sharply in the last five years – 1,335 have closed their high street operations, representing a 15.5% drop, according to finance providers Syscap, reports Chartered Accountants Northampton Harris & Co.
But smaller practices remain the hardest hit – due to changes in audit thresholds which mean fewer businesses need formal audits.
A lack of financial support from lenders has also led to the demise of firms.
In the last year alone, 136 accounting firms left the high street, a loss of nearly 2%, Syscap said, attributing to the decline in firm numbers due to the further relaxation of audit thresholds in 2012. The changes meant that an increased number of companies can now choose whether or not to be audited, which could mean a further loss of business for audit firms.
Prior to the change in October 2012, businesses could qualify for an exemption if they had a maximum balance sheet total of £3.26m and less than £6.5m turnover. Now, businesses can obtain an exemption if they meet two out of three criteria relating to balance sheet total, turnover and employing a maximum of 50 staff.
Figures from the Financial Reporting Council show an increase in the number of companies that are audit exempt, up from 69.1% in 2007/08 to 71.4% in 2011/12. This directly coincides with the decrease in the number of registered audit firms.
Philip White, chief executive of Syscap, said that the relaxation of audit thresholds means that more businesses can opt out of being audited.
‘This has been extremely problematic for accountancy firms, as auditing is a business they rely on for their bread and butter. Other areas of high margin work, like corporate finance, have been weak since the credit crunch.
"Lack of bank funding is also impacting on smaller accounting practices. According to Syscap, a continued lack of bank lending to businesses was another contributing factor to the steady decline in the number of accountancy firms.
Syscap’s research also suggests that small accountancy firms are likely to suffer more than larger firms from a lack of access for financing. Interest rates on loans to small businesses were on the rise in 2012, while interest rates on loans to large businesses fell.
Recent Bank of England data showed that lending to small businesses had fallen by £452m in May. In addition to this, the Bank of England had previously reported a £300m fall in lending by banks taking part in the Funding for Lending scheme in the first quarter of 2013.
‘The decline in the number of accountancy firms has been exacerbated by a lack of vital bank funding which has continued throughout the recession, and has hit the smallest accountancy firms the hardest.
With the added failure of government initiatives such as the Funding for Lending and Enterprise Finance Guarantee schemes, smaller businesses are running out of funding options,’ said White.