External Audit Services
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External Audit Services market report transcript
External Audit Services Global Market Outlook
The demand for external audit services increased by 5 percent in 2022, due to economic uncertainty caused by COVID-19, growing rigorous government policies/regulations, and surge in acquisitions
The M&A activity is expected to rise in 2023, as there is an increase in business optimism. This will increase the scope of external audit. The scope of External Auditor has also expanded, amid the emergence of new requirements, such as reporting ESG practices
Thus, the external audit services market is expected to grow at 5 percent to reach $115 billion in 2023
Global External Audit Services Market: Drivers and Constraints
Audit services are a dependable source of revenue for most of the accounting firms, as these services are required by law. Consequently, the audit industry is expected to retain its steady growth. The pandemic has increased the dependency on audit firms, as financial reporting has become more complicated.
Legal requirement: Statutory audit is a mandatory legal requirement for all publicly traded companies by market regulators across all countries.
Regulatory reforms: Regulatory reforms and stringent policies increase the demand for quality audit.
COVID-19 has increased the dependency on audit firms, as financial reporting capturing all the implications of the pandemic is complicated.
Downward pressure on price: Commoditized nature of audit services exerts downward pressure on audit price.
Supplier Focus on NAS: Accounting firms are channeling relatively larger investments into consulting than traditional audit service line.
Talent Retention: Audit firms face challenges in hiring and retaining talent in senior roles compared to junior roles.
Procurement Centric Five Forces Analysis: External Audit
Corporate buyers, which have audit fee to revenue ratio ≥0.06 percent, have significant purchasing power, while procuring audit services, which would enable them to negotiate and get discounts from suppliers.
Factors increasing supplier power: High auditor switching costs & dominance of Big Four Firms increase the supplier power
Factors that limit supplier power: Presence of alternatives, such as tier 2 and regional accounting firms, and commoditized nature of audit services limit the power of suppliers
Barriers to New Entrants:
External audit is a highly regulated industry. Key entry barriers: capital investment, intense industry competition, existing buyer–supplier relationships, and experience/reputation of existing suppliers
Mandatory auditor rotation regulation and upcoming economic reforms in the developing economies are expected to reduce the entry barrier
Intensity of Rivalry:
Intensity of rivalry is high, due to concentrated nature of the industry, commoditized nature of services, and two-third market share of Big Four Firms. Product differentiation via technology and client service can help the suppliers
Threat of Substitutes:
Audit is a legal requirement for all public companies, government institutions, and privately owned companies by all jurisdictions (and regulators) around the world. Globally, there is no substitute available for external audit
Factors increasing buyer power: Buyer that have considerable audit spend and internal control procedures will have higher power, and hence, tend to get differential pricing (discounts) from the suppliers
Factors limiting buyer power: High auditor switching cost and Big Four brand benefit result in lower buyer power
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