BDO chief warns of 'challenging' audit season ahead

BDO Stoy Hayward’s managing partner has warned that the year-end reporting
season will be a tough period for auditors and their clients, because jittery
investors could take drastic steps in response to ‘going concern’ warnings.

Auditors are preparing to sign off annual reports as the year-end for many
companies draws closer, but Simon Michaels said that the effect of adverse
opinions would be even more marked as the hostile economic conditions continue.

‘There’s clearly going to be a challenging season of audits, with more
uncertainty with the financial market where it is, about “going concern,”‘ said
Michaels.

‘It really is incumbent upon the profession to do everything they can to help
management teams provide the clarity with regards to disclosures and reporting,
but also working with the banking industry so that where there are committed
facilities, which remove a degree of uncertainty around going concern, it
doesn’t create a downward spiral which is compounded as investor confidence,
supplier confidence and credit insurer confidence is affected by a greater
incidence of going concern qualifications.’

His comments came as BDO released its annual revenues for 2007-2008. The firm
posted 11% growth in revenues to £353.1m for the year ended 4 July with profits
of £65m. The firm has also been boosted by winning a number of high profile
assignments including the valuation of Northern Rock and the receivership of
financial heavyweight Dawnay Day.

However Michaels predicted that revenue growth would tail off next year and
the firm would post single digit growth. ‘I think [the growth] will be steadier
next year, probably nearer single digit than double digit growth and I think
that will be a profession-wide trend.’

The firm has been pushing for more transparency in the audit market and
Michaels welcomed the FRC’s audit inspection unit reports which are due out next
month.

‘Its about giving the market confidence in what the profession is doing, but
it’s more about challenging the institutional prejudices that exist where people
think it’s a safer bet to buy Big Four and our view is that there is more choice
out there.

‘The position is compounded by Big Four only clauses [in audit contracts] and
we will lobby to have those removed, because that does limit our ability to
drive the practice forward.’

Simons added that he relished the challenge of taking BDO forward as the
hostile financial conditions continued.

‘When I was appointed managing partner, I couldn’t have predicted that the
financial markets were going to completely collapse, but that’s where the
challenge is. A real test of leadership is how you work with your colleagues to
navigate a way through more interesting times. I wouldn’t have wanted it any
other way, in some respects.’