Audit: The unexpected challengers?

Despite living in London, my family tries to maintain some of the traditions of a Polish Christmas. Mostly, this involves cooking and eating ridiculous quantities of food, some of which is—how shall I put it?—an acquired taste. One of the loveliest traditions, though, is to leave an empty chair for the unexpected guest, an idea that typifies Eastern European hospitality at its best.

If interest in our recent report about the opportunity for “challenger” brands in the audit market is anything to go by, there are going to plenty of unexpected guests, and none of them welcome. Our report specifically highlighted the potential market for technology firms. Clients, who think that it’s possible to break the audit process up into at least two parts—data-gathering, and insights/opinions—may choose to use technology firms for the first, data-gathering part because they expect almost all the work involved to be automated. However, this disaggregation of the audit service potentially opens the door to other players as well, largely because clients’ desire to demonstrate their financial strength by using one of the Big Four firms matters less, the further you go from insights and opinions.

The most obvious contenders are the mid-sized audit firms. One of the reasons why they struggle to be credible where very large corporate audits are concerned is that they don’t have the scale and level of global integration the Big Four have and which these clients, who are themselves global businesses, usually need. Greater automation may allow them to cover the same ground as their larger rivals, but more consistently than they can do at present, and certainly more cost-effectively. Arguably, with far fewer people in their audit practices, these firms may have less to lose from automation, and for this reason they may be more willing to partner with a technology firm that’s looking for audit expertise. The Big Four, by contrast, will want to retain their grip on the data-gathering part of the audit, as well as the insights/opinion phase, so it won’t make sense for them to work with technology firms that are essentially trying to take their market share.

However, this scenario assumes that the key to winning data-gathering work is technology, and that may not be the case. AlixPartners, Alvarez & Marsal, and FTI all have a significant presence in forensics and discovery work: Tending to rely on senior people with deep expertise, rather than armies of junior analysts, they’ve already invested in specific tools which could be reconfigured to do more conventional audit work. But the real opportunity for them will stem from seeing the first part of the newly-disaggregated audit process as primarily about data, rather than technology. In theory, they could be joined by the mainstream strategy firms, all of whom have heavily invested in analytics, but the latter don’t have the same depth in forensics.

Success here will hang on how clients see the first phase of audit work. If it’s not an empty audit “chair” that they draw up to the table, will it be a technology or a data “chair”? The challenge for the potential challengers is not to wait until clients make up their minds, but to influence their decision.

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