Noteworthy changes are taking place in auditing activities in Estonia, both in connection with the quality of auditors and the development of the entire sector. How has the auditors’ market changed and why is it hard to find sufficiently qualified specialists? What sorts of trends will global competition, workforce shortage and sustainability reporting requirements bring about?
Attending the 2024 Pärnu Accounting Conference, Mart Nõmper, member of the board of the Auditors’ Association and partner and Head of Audit Services at Grant Thornton Baltic, provided a thorough overview of the current state and future perspectives of auditing activity.
Audit sector in Estonia is quite small but important. For example, 53.2 million was the sales revenue for all Estonian audit companies combined in 2022, which is not a major amount compared to other European countries. Estonia has 116 audit firms, and that number has remained relatively stable over the years, despite a slight declining trend.
Estonia has 341 sworn auditors, but in spite of that, it’s increasingly heard that companies can’t find themselves a suitable auditor.
“Each year, Estonia has about 9845 companies who need to have their annual report audited or reviewed, yet finding an auditor is a big problem for many companies,” says Mart Nõmper.
How has the deficit in Estonian auditing sector arisen, if the quality of service is high? Nõmper gives three main reasons.
For one thing, the audit volume has increased. In recent years, the number of companies that require an audit has grown while the number of auditors has remained the same. “If you do the same thing you were doing three years ago but the inflation and asset volume have grown, the audit market is also simply expanding,” says Nõmper.
Second, the changing of the guard in the auditor profession. “Auditing activity in Estonia is more than 30 years old. The ones who became professional in the late 1980s and early 1990s will one day leave the market.” When such companies go out of business, it will mean a large influx of new clients to the market, which in turn leads to a deficit in auditors.
Third, the audit thresholds are too low. “Today’s thresholds where companies need to look for an auditor are out of date. These were set in 2016 but are too low for now. A total of 88% of Estonian companies’ assets have already been audited and the load has become too heavy; the optimum level should be 80%, not more,” says Nõmper.
First – reconsider your company’s financial year dates.
“Most Estonian companies’ financial year ends on 31 December, but choosing a different time span can reduce the workload and better plan the volumes of work that require an audit,” says Nõmper, citing the example of one retailer.
“Their financial year ends on 31 January. At first I thought it must be a mistake, but when I looked into it, I realised why they were out of phase like that. A financial year should end in the quietest period when there is a “gap”. All of their Christmas sales end in January, the New Year’s discounts are over by that time and they haven’t released their spring collection yet. Warehouse stocks are at the lowest levels and it is the easiest time to conduct a year-end stock-taking. That places the least burden on the company and people have resources to deal with it versus doing everything on 31 December when actually only sales are important,” says Nõmper, who recommends thinking harder about whether using the calendar year is ideal.
In addition, using the calendar year places more pressure on auditors, since if all Estonian companies want to order audits during the first six months of the year, it will be very hard for auditors to service all that volume.
The second recommendation is to review your company’s accounting policies. It isn’t always necessary to audit the whole company’s balance sheet. “Think through how your company’s accounting policies have been laid down and whether they’re necessary. Sometimes you can reduce the need for review if you ask yourselves if all accounting policies are still the right ones,” says Nõmper.
Third, review the company’s legal structure. Nõmper says it sometimes might be expedient to merge a couple of smaller companies into one to avoid having to perform a separate audit for each one.
Auditor activities will be more of a burden already in the near future and sustainability reporting – ESG reporting – is a big reason why. “Public interest entities or large publicly listed companies will have to prepare a sustainability report in connection with their annual report for the current financial year, 2024. Auditors will have to audit these reports, which are filed as part of the annual report. There are currently 6-7 large publicly listed companies like that in Estonia.”
Nõmper says in 2025, their ranks will be joined by other large companies, and from 2026, all other companies listed on exchanges, including the smaller ones. So the work volume, reporting volume and number of reports to be audited will grow significantly quite soon. All of that means more work for accountants and auditors, but there’s still no queue of employees extending out the door to handle the workload.
Nor is the Auditors’ Association thrilled about the workload, which is why they proposed to the government two and a half years ago to raise the thresholds for the audit requirement. It is still being deliberated and the latest word is that the government will send the bill to the parliament before the close of 2024.
That might be a mitigating factor, says Nõmper, who says the current trend is one of overcontrolling; reporting is simply becoming a burden on society, and the value-added effect is lost.
Nõmper says there is nevertheless hope that new thresholds will come into force as early as for 2024, but there is no certainty yet. “We hope that the business community will however get some relief but it should be borne in mind right now that the levels will rise, they just aren’t codified in legislation yet.”
Asked why auditing is necessary in the current economy, Mart Nõmper’s answer is forthright: “We are the little engines of economic growth who ensure there is trust and economic growth. For the economy to grow, its substance must be trust. If there’s no trust, interest rates and risks are very high,” explains Nõmper.
As to the future of auditing activity, Nõmper has a clear vision. “The trends are diverse. All auditing companies, both the bigger and smaller ones, want to use artificial intelligence to automate the simpler jobs,” he says. “But AI also allows to perform much more sophisticated tasks such as analysis of huge sets of data and detecting anomalies that would be a real challenge for humans.”
Nõmper says AI will help not only speed up audits but allow them to go into greater depth. “That is the future, but currently we are still talking about potential developments. In practice, Ai is not completely workable in the field of audits, but the potential is great.”
“Globalisation is another factor that will determine the future of auditing activity,” says Nõmper. “Large companies are getting bigger and the stronger ones are becoming even stronger. The overall trend is consolidation – small companies have a harder time remaining as they are. If you want to be successful, you have to be prepared to keep up with changes – there is no point in resisting changes. Those who want to put trends to work for them will be successful. If you remain stationary, you will fall behind.”
In closing, he says that the auditors who will be successful are the ones with better staff and smarter solutions. “If you’re able to make your company flexible and fast, you will be successful. How a professional auditor stays in the hunt in the changing world depends on their ability to adapt and think a step ahead.”
Two questions for Mart Nõmper
Is there a sufficient supply of new auditors entering the workforce? There has been a change in the labour market. Now we are indeed seeing new auditors enter the profession. For example, on 16 September, 18 new auditors started work for us, which is a big number in the auditing world. But it should be kept in mind that really maturing into an auditor still takes a lot of time.
If an auditor is clearly incompetent in a client’s field or is in breach of a contract, where should it be reported? Breaches of contract have to be resolved mutually or if that is impossible, one should go to court. If there are questions about quality of an auditor or their competence, AJN should be contacted – that’s the Organisation for the Oversight of the Audit Profession – and violations or suspicious activity can be reported to them.
This article was first published on raamatupidaja.ee.
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