Fight until loss of profit

Increased competition in the Russian audit and consulting market has led to this business becoming less profitable. Customers should be happy about this because it actually means they have to pay less. Except, of course, for those cases when auditors, in pursuit of a client, resort to outright deception.

Turnover without profit
Our latest study of the audit and consulting services market showed that in 2003 this sector has changed significantly. Last year we observed a very interesting phenomenon. On the one hand, the market size has grown sharply, indicating a high level of demand for audit and consulting services. The total revenue from the provision of audit services of the hundred largest audit companies in our rating in 2003 exceeded the same figure for 2002 by 48%; For the hundred largest consulting companies, the growth in consulting revenue was even more significant - by 59%. These figures themselves, although impressive, have been largely characteristic of the Russian market in recent years. Suffice it to say that in 2002, compared to 2001, the growth was 32 and 76% for audit and consulting, respectively (see figure).
On the other hand, for the first time since we have been collecting such statistics, that is, for the first time in the last four years, the growth in market volumes was not accompanied by an increase in the profits of its participants. On the contrary, this indicator fell sharply - if formally judged by the first hundred of the rating, by 15% for auditors and by 60% for consultants.
And although this division into groups is not correct (most companies combine auditing and consulting, and sometimes some other types of activities, so their profits cannot be strictly attributed to auditing or consulting as a separate type of business), it is obvious that the general trend can be traced very clearly. Considering that the volume of the consulting market, according to our statistics, is approximately three times larger than the volume of the audit market, the average drop in profits of market participants can be roughly estimated at 50%. Accordingly, the indicator of profitability-revenue calculated in the same formal way also decreased. For auditors it was 7.6% (in 2002 - 13.5%, in 2001 - 9%), for consultants - 3.5% (in 2002 - 8.9%, in 2001 - 7). .3%).

Costs of growth
There are basically only two explanations for the phenomenon called “revenue growth plus profit decline.” First: after four years of persistent searching and tossing around, auditors and consultants finally learned how to evade taxes and began to apply their knowledge in practice. However, this seems highly doubtful. Indeed, imagine: the end of 2003, the richest oligarch is behind bars in a case of tax evasion, high-ranking prosecutors are publicly promising to punish everyone who hides even a crumb from the budget, and all the largest auditors and consultants at this time are sitting and feverishly thinking about what I would like to use a new scheme to tease the tax inspector. The script, you see, clearly smacks of paranoia.
Therefore, another version seems more logical: auditors’ business profitability actually decreases. One of the most likely reasons is increased competition, which has already led to falling prices in some market segments. Alexander Kasparov, director of strategic planning and development at Rosexpertiza: We feel that competition has really intensified due to an increase in the number of public competitions for selecting an auditor. In the public sector, this has led to a reduction in prices, at the expense of quality, to a level that means the very idea of auditing is diluted. In the private sector, prices do not fall: what is important here is the quality of services rather than their cost.
There are other explanations. Ruslan Ibragimov, senior partner at RSM Top-Audit: The competition is as it was. We don't feel it has grown (at least among the larger companies). Another thing is that costs have increased significantly due to the large number of competitions. Paperwork, couriers, etc. - we now have an entire department dedicated solely to competitions. In addition, due to the sharp expansion of the market, a lot of money is spent on training specialists. Another thing is that when growth becomes less rapid, auditors will be able to begin work on reducing costs, which will increase business efficiency.
Note that, from the client’s point of view, increased competition or a temporary increase in costs caused a drop in the profitability of the audit and consulting business - by and large, this is not so important. The main thing is that last year showed that auditors and consultants are, in principle, ready to work at these levels of profitability. And this, in turn, means that when the period of rapid growth in demand ends, prices will inevitably begin to fall - if only because the effectiveness of the already mentioned policy to reduce their own costs will make it possible for companies to achieve an advantage over competitors by reducing the cost of services. Not necessarily, of course, this will be, for example, a formal reduction in the cost of the audit. It is much more likely that competitive advantage will be achieved by offering a range of additional services. But this, generally speaking, is also a form of price reduction.

By-effect
The compilers of the “Money” rating observed another effect, indicating increased competition in the market, during the period of collecting questionnaires. This year, the number of participants who decided to announce the creation of alliances and sent aggregate data on groups of companies to the editorial office has sharply increased. Some of these alliances were, of course, created to consolidate businesses in order to gain competitive advantages. However, there are also those that seem clearly far-fetched, created specifically for the rating. Let us note that the market regulator, the Ministry of Finance, agrees with the existence of this problem, but believes that professional associations of auditors should identify such artifacts (see interview).
The opinions of the audit associations themselves were divided. Daria Dolotenkova, President of the Institute of Professional Auditors: This is clearly misleading clients, and we really intend to fight inflated associations in cases where we are talking about members of our association. Methods may vary. For example, analyze your rating and, if facts of dishonesty are revealed, consider them at the ethics, quality control or disciplinary committees. Sanctions for violators can vary from disclosure of information about unethical behavior to a fine.
Alexey Ruf, Deputy Chairman of the Board of the Russian College of Auditors: The audit community itself should not and will not fight this. This is a business, and everyone strives to be higher in ratings and more attractive in the eyes of clients. Not to mention that it is difficult to draw the line between those who are outright bluffing and those who are actually expanding their business. Theoretically, of course, a situation is possible when the audit association will monitor the correct behavior of its members in this area. But in the current conditions, when market participants are constantly moving from one association to another, this is unrealistic.
Thus, it is clear that in practice it is far from easy to distinguish pseudo-alliances from cases of real association of business interests. Therefore, we decided not to exclude such alliances from the rating, even if they seem dubious to us. At the same time, we draw the attention of potential clients (especially those for whom a high place of the auditor in the rating is a prerequisite) that when using the rating it is advisable to pay attention not only to the place, but also to the column “Degree of affiliation of companies”. This will allow us to get at least a general idea of the purity of the intentions of the creators of the alliance.
PETER RUSHAILO

Audit companies are leaders in regional markets

Consulting companies are leaders in regional markets

Companies are leaders in types of audit

Leading companies in main types of consulting

100 largest audit companies in Russia

100 largest consulting companies in Russia

EXPERT REVIEW
"We can talk about misleading the client"
Deputy Minister of Finance Andrei Petrov believes that increased competition in the audit services market has led to the fact that methods of fighting for clients began to go beyond the ethical standards of doing business. He spoke about this in an interview with Dengi correspondent Pyotr Rushailo.

— In your estimation, has competition in the audit services market increased over the past year?
— If we analyze how the market behaves even throughout the current year, we should note a clear tendency towards increased competition. We, as a state regulatory body, see this primarily by the significantly increased number of applications from audit organizations to participate in competitions to conduct mandatory audits of state-owned enterprises. If, say, last year, as a rule, three or four companies applied for such competitions, now the average is 11-13.
— What methods of competition are used and which of these methods do you consider incorrect?
— First of all, the pricing policy. Last year, we noted dumping during competitions as a very negative aspect. There were times when companies that provided proposals that were of insufficient quality in terms of technical specifications, but extremely attractive from a financial point of view, won. Therefore, in order to prevent such a negative influence of the price factor when selecting the winner, we intend to make appropriate changes to the principles of scoring during competitions, strengthening the role of the technical specifications.
If we talk about normal methods of competition, this is, first of all, improving the quality of the services themselves and expanding the range of services provided. In addition to the mandatory audit of financial statements, there are also consulting services, in particular, tax consulting, accounting, and services related to the analysis of financial statements of subsidiaries. And serious companies are precisely following the path of expanding their offerings for the client.
— Recently, we have seen a massive emergence of alliances, many of which, according to our estimates, exist only on paper...
- Today we do not have legally established rules, forms and methods of such associations and their use by the authorized federal body when conducting a mandatory audit and involving them in a number of other works for which the customer is an executive authority, and to discuss the legality or illegality of such actions difficult. One can, of course, talk about misleading a potential client, but only until the contract is concluded, since at this stage it will become clear who will conduct the audit and with what forces.
So this remains on the conscience of those auditors who position themselves in this way. There are companies that do this based on the right goals, in order to provide the highest quality services, pool their capital, client base, and create networks that work according to uniform methods and rules. This is normal, this is civilized work in the audit services market, but, indeed, there are also companies that purely formally show an association in order to present themselves in a more favorable light, for example, in ratings. But it seems to me that all this fog immediately dissipates after the provision of the service itself begins, and, probably, for the next period such a company will not be of interest to the client.
— Is it possible to somehow recognize such fraud before concluding a contract?
— The market for audit services has existed in our country for ten years, and this allows us to see how conscientious this or that audit company is. In addition, we will encourage, I don’t know exactly how, professional audit associations to carry out appropriate checks or pay attention to cases of non-compliance with ethical business standards in such situations.

Magazine "Kommersant Money" No. 13 dated 04/05/2004, page 120

Authors:

Petr Rushailo