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Articles and news on audit, advisory and accounting

Review of current trends on the Estonian auditing market

December 2009, Kaido Vetevoog


Auditing market is undergoing significant changes. On the one hand, economic recession has forced companies to cut down expenses, including reduction of spending on auditing services, on the other hand new Auditing Act provides new challenges for certified auditors.

In my opinion auditing involves two factors that can be used to characterise and classify audit firms: revenue from auditing and number of certified auditors.

Distribution of revenue between ten major auditing firms

The analysis of auditing market is based on the indicators of annual reports prepared by ten major audit firms for financial years 2006–2008. Despite the fact that there are currently over 70 audit firms on the market, the comparison did not include smaller firms, as they have insignificant impact on the outcome of the analysis. The TOP list of auditors published by Äripäev could not be used as a basis for the analysis, because unfortunately, Äripäev does not pay adequate attention to the content of compared indicators, when drawing the top list. Firstly, the comparison of sales revenue of audit firms, as indicated in the tables published by Äripäev, involves both consolidated sales indicators revenue (which include e.g. sales revenue of Lithuanian subsidiary) and unconsolidated sales indicators. Secondly, some audit firms use separate companies to provide auditing services and consulting/accounting services, whereas other audit firms have a single company for providing consulting, accounting and auditing services. Therefore, I believe that when comparing sales revenue in income statement, Äripäev relies on absolutely incomparable indicators.

Based on the sales revenue from auditing services, the market is distributed between the following ten major audit firms:

  • three large-scale enterprises (PWC, KPMG and EY), covering 66 percent of total revenue;
  • two major medium-sized enterprises (Rimess and Deloitte), covering 22 percent of total revenue;
  • five minor medium-sized enterprises (BDO, HLB, PKF, ELSS, KMRA), covering 12 percent of total revenue.

Over the period of three years there have been no significant changes in the size of the market share held by these groups, and auditing market volume has increased annually by approximately 20 to 30 per cent during 2006-2008 (see Table 1). According to the issue of Accountancy Magazine published in June 2009 such increase (20–30%) occurred worldwide. Meanwhile, unlike the situation in Estonia, a certain group called BIG 4 has emerged on global market, whose sales revenue constitutes 88 percent of the income earned by the network consisting of 10 major audit firms. Market distribution may vary slightly by countries (e.g. in Finland the market is ruled by the BIG 3 that collects 80 percent of the income of TOP 10 audit firms), but general market distribution is similar to that of Estonia.

Year Revenue (million EEK)

2006  189
2007 244
2008 270

Table 1. Total revenue from auditing services earned by ten major audit firms

Number of certified auditors in the audit firms

There are approximately 360 certified auditors in Estonia. As much as 40 of them work in audit firms and 60% of certified auditors operate independently. Furthermore, 60% of certified auditors working in audit firms are employed at 10 major audit firms (all of which have more than 4 certified auditors, in two larger firms the number of certified auditors reached 20) and 30% of them are self-employed. According to the sales revenue, the three largest audit firms also employ the highest number of certified auditors. At the same time there is significant difference from the following medium-sized audit firms in terms of the number of auditors.

In short, auditing market is characterised by the fact that a sizable market share (majority of revenue) is held by large-scale audit firms, the number of medium-sized audit firms is low, whereas there are many so-called self-employed auditors. Concentration of revenues in the hands of large companies is also due to the fact that large companies with bigger auditing budget generally select their auditor from major audit firms.

Impact of economic recession on auditing

As far as audit firms are concerned, the economic recession means greater competition for attracting clients and reduction in income. Several large-scale audit firms (BIG 4) have already cut back on the workforce in response to dwindling income. A year ago the audit value offered to companies by large and medium-sized audit firms was twice its current value, but this gap has diminished by now. In large firms the price is higher than the price offered by medium-sized firms for two reasons. Firstly, they adhere to single audit methods prescribed for a network of audit firms, which was developed primarily in view of large-scale companies. Majority of companies in Estonia are medium-sized or small, thus large audit firms have to perform several mandatory audit activities, which may be irrelevant, considering the size of Estonian companies. Secondly, clients are willing to pay extra for a well-known trademark, i.e. the client is prepared to pay more for the services provided by audit firm that belongs to BIG 4.

Companies are searching for cheaper alternative solutions, and thus the medium-sized companies are more inclined to turn their eyes from large audit firms to medium-sized audit firms. Although the auditing market may be subject to certain redistribution in near future, the potential changes in major groups are insignificant. This is due to the fact that large companies search for cheaper alternative among large audit firms. The concerns based on foreign capital have often already established their audit firm and it cannot be changed. When switching from one audit firm to another, medium-sized company is facing a problem, namely – if they want to find a partner among medium-sized audit firms, the selection of such audit firms available on Estonian market is rather limited. Some changes are still plausible in near future. Increased demand for medium-sized audit firms has given rise to new audit firms with two certified auditors, and under the conditions of changing market situation such firms may grow into a medium-sized audit firms.

Due to elevated risk levels, economic difficulties also involve greater workload for auditors. For example idle stocks, doubtful receivables, decrease in value of assets make auditor’s work more complicated. Considering that significant increase in audit budget in near future is rather unlikely, the economic recession leaves auditors with high volumes of work at reduced audit budget.

However, audit is an obligation provided by law, and thus we may expect that there will be no significant decrease in the number of clients and that audit firms will not suffer large-scale losses.

Audit budgets will probably increase in a couple of years, when more stringent requirements provided by the Auditing Act have taken effect, and the extent of reduction in the number of certified auditors (arising from the new Act) has become clear.

Impact of the changes arising from new Auditing Act

New Auditing Act is now in the legislative proceedings of the Riigikogu. The new act is intended for a two-year transition from currently valid Estonian auditing rules to the international auditing standards. This amendment concerns mostly small and medium-sized audit firms, because large audit firms have already introduced the international auditing standards. International standards set out more extensive requirements for maintaining records of auditor’s work, which eventually leads to decrease in the difference in the value of audit performed by large and small auditing firms and increases audit expenses incurred by small and medium-sized companies. Considering that one purpose of new act is to prescribe significantly more stringent quality control over auditor’s work (pursuant to the explanatory memorandum of the draft act the auditor should be subject to quality control in every 4 or 5 years) and higher penalties in case of inaccuracies. Therefore it would be reasonable for audit firms to follow standard-based rules.

In order to meet more stringent quality requirements it would be reasonable for single auditors to join forces and merge. It is difficult for a single audit firm to build up the quality system required by international auditing standards, whereas it would be much easier to accomplish it together. However, when asking about auditors’ further plans, it appears that many certified auditors have still decided to continue on their own. The time will show whether there will be certain increase in medium-sized audit firms or not.

Change in legislation also involves new attestation of certified auditors. All certified auditors have to pass a test to show their knowledge of international auditing standards. Despite comprehensive training courses intended for auditors prior to taking such test, the compilers of the draft act predict that the number of auditors will drop by a quarter (from current 360 certified auditors to 275). This means a slight shift in the balance of demand and supply on the auditing market, which may lead to certain increase in the audit fees. But this change in audit fee will more likely affect small companies, considering that those certified auditors who give up, are more likely operating alone.

There are crucial changes and interesting times ahead of us on Estonian auditing market. Any changes on the auditing market depend to a great extent on the successful implementation of new Auditing Act. Right now companies are probably offered auditing services at a very reasonable price. However, when forcing down audit prices, the companies have to consider – similar to current situation on construction market – that extremely cheap work may reveal shortcomings in the expected quality of work in future.

Article was published in journal "Raamatupidmaisuudiserd (Acconting News)" no 7. 2009