Why accountants don’t compete

Apparently the Office of Fair Trading in the UK think there is a lack of competition in the audit market (link here). Is this really any surprise?

Let’s have a think about the market to see why this might be the case.

Firstly there are high barriers to entry to be an accountant, it takes years of work and there are difficult exams to pass, even then there are more years of hard work to make it to the level of partner. Once you have made it, is there really much of an incentive to drop your fees to be more competitive than your peers?

There is only so much audit work that needs to be done so lower fees won’t really generate any more work, it will just mean the companies buying the services pay less and there is less to be shared amongst the accountants. This isn’t a market which gets bigger with lower fees, audit is something required by law, not something that companies really want more of.

So it’s not really in a firm’s interest to get into a price war with its competition unless it thinks it can get a significantly bigger market share of a smaller pie. If a firm gets more business then they will have to employ more staff, but more importantly, will have to have more partners to share the profits. This is because each company being audited has to have a partner overseeing their audit, so more work means more partners.

To summarise, this is what happens if an accountancy firm lowers its fees to aggressively compete:

1 – The total pot of money to be shared amongst all accountants drops;

2 – If a firm gets a bigger share of this smaller pot it has to share it amongst more partners;

3 – All those years of hard work result in a lower hourly rate for partners in the firm;

4 – You have to work more hours than before just to earn the same income.

Seems pretty clear why accountants like the status quo then (same applies to lawyers!)

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