This article first appeared on the IFAC Global Knowledge Gateway

Any business must adapt as the world changes around it, and accountancy practices are no exception. The environment in which firms operate has been transformed in the past few years by deregulation, rising audit thresholds and IT innovation.

The larger firms have adapted by widening their range of services. Until now, though, there has been little solid evidence of how smaller and medium-sized practices (SMPs) are adapting their business model.

According to the ACCA report The global SMP business model survey: understanding a changing profession, which looks at the services offered by smaller practices around the world, SMPs globally remain highly focused around core services. Tax and compliance account for 42% of SMP income, while assurance (including internal audit) accounts for 40%.

However, the report, produced in partnership with the Institute of Singapore Chartered Accountants, CECCAR in Romania, the Malaysian Institute of Accountants, the Chinese Institute of Certified Public Accountants and the Vietnam Association of Chartered Public Accountants, also found that the loss of audit income as a result of deregulation has been substantial in Western countries. In the UK and Ireland, audit now contributes just 12% to SMPs’ income, while in Asia Pacific it accounts for 50%. Affected firms are making up the shortfall with other offerings, such as tax-related services.

Non-core services accounted for 16% of practice income across the firms sampled. The highest-earning non-core services are risk management and the design of management controls (4% of income), growth-related services (3%) and financial management (2%). Even so, the report points out that practitioners are ‘aware of the contribution of non-core services to demand for their core offering in the long run; the proportion of SMPs providing such services is far greater than what one would infer from their share of practice income’. For example, 46% of firms sampled offer payroll services even though on average this makes up less than 6% of a practice’s income.

The benefit of transferability of technical skills and the need to explore other services and other revenue streams are clear messages in the report. This is already happening: over 70% of respondents were planning to introduce a new service over the next two years, such as helping clients monitor internal controls.

Deregulation has been a big incentive for SMPs to innovate. In countries where the impact of deregulation has been greatest, SMPs have expanded service offerings to SME clients rapidly and are exploring partnerships with other organisations. Deregulation is more advanced in Europe but the rest of the world is following suit.

This suggests that diversification of services will continue globally – but SMPs will need to be strategic about their investment in new services if diversification is to be sustainable; there must be an emphasis on generating client growth, referrals and repeat business.

Value-added services

So what does the research mean for SMPs around the world? The report concludes that SMPs in the most rapidly evolving markets have survived and thrived by transferring technical skills to higher value-added services, and forming partnerships with other organisations to give their own practice and their clients access to a wider set of skills. Among the recommendations from firms, professional bodies and regulators, one of the most important for SMPs is to ‘close the loop that makes value-added services sustainable’. They rarely make money in themselves but are an investment for greater, more regular income in the future.

The threat from unregulated advisers remains very real, but greater automation provided by cloud services means that large practices are beginning to find the SME market more attractive. SMPs have several weapons up their sleeve – their ability to offer a personal service, consistency of staff and a lower cost base to name but three – but with the world changing so rapidly, this is no time for complacency. 

Rosana Mirkovic, ACCA head of SME policy