CommBank Accounting Market Pulse Conducted by Beaton Research + Consulting

CommBank Accounting Market Pulse Conducted by Beaton Research + Consulting July 215

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Contents Foreword 2 Economic outlook 3 Snapshot of survey findings 5 Business conditions Perceived performance of the Australian economy 7 Perceived performance of the Australian economy by segment 7 Perception of business conditions present to 217 8 Perception of business conditions by segment present to 217 8 Perception of business conditions by area 9 Perception of business conditions by area and firm type 1 Business priorities Geographic expansion 11 Geographic expansion by location 11 Realised rates Expected changes in realised rates over the next 6 and 12 months 17 Expense and profitability predictions Difference between budgeted and actual expenses 18 Changes in expenses over the next 6 months 18 Changes in expenses by segment over the next 6 months 19 Changes in staffing by segment over the next 6 months 2 Change in operating margins for the next 6 months 2 Provision of non-accounting services Provision of non-accounting services 21 Revenue from non-accounting services 21 Changes in revenue from non-accounting services 22 Reasons for geographic expansion 12 Market entry by segment 12 Revenue predictions Changes in revenue from FY14 to 14 Difference between budgeted and actual revenue 15 Changes in revenue by location over the next 6 months 15 Changes in revenue by service line over the next 6 months 16 1

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Positive long-term outlook remains steady despite subdued conditions The survey also reveals the areas with the highest expected revenue growth are offshore in Asia and UK/Europe. Marc Totaro National Manager, Professional Services Commonwealth Bank Welcome to the second-half edition of the CommBank Accounting Market Pulse for the 214/15 financial year, conducted in partnership with Beaton Research + Consulting. The second half survey of large accounting firms, restructuring firms and other firms reveals short-term expectations across the sector have softened. The outlook across the next 24 months however remains squarely in positive territory, and steady when compared to the previous half s results. In a downward half-on-half shift, the economic outlook has dipped with a negative overall reading. This outlook is weighing on sentiment, but with the accounting sector often acting as a bellwether for broader business and economic confidence, it is encouraging to see the longer-term view remains positive. When looking at the split in results between the different segments, over the short-term, large firms remain more optimistic than the rest of the market with the perception of other firms building over the longer term. indicate the highest expected revenue growth by practice area has been economic and social policy advice, while sustainability and climate change related work witnessed the highest growth in the other firms category. Both large and other firms share the view that the wealth management and financial planning, and corporate finance practice areas offer significant revenue growth potential. Despite a subdued outlook, 4 per cent of firms are still planning to expand geographically, with Brisbane flagged as the top destination for expansion. The primary reasons for geographic expansion are as a result of a strategic alliance or merger with an existing firm. While negotiating prices with clients eased moderately when compared to the previous half, it remains the top challenge for firms. Client led negotiation often resulted in margin compression over the half, and firms continue to implement changes aimed at reducing costs and increasing efficiencies. This trend is evidenced by a continuation of firms seeking to leverage technology to build efficiencies within their businesses, and therefore it was not surprising to see 55 per cent of firms stating IT software and hardware expense will see the largest percentage increase over the next six months. In an ongoing trend of diversification in service offerings across the sector, the move to providing non-accounting services continued this half, with all large and restructuring firms and 77 per cent of other firms indicating they offer non-accounting services. This shift was further evidenced by the fact that these firms reported an increase in revenue from non-accounting services. Firms are seeking to increase fee earning and salary/ equity partner numbers, as firms report keeping quality staff has become substantially more difficult over the last six months. Conversely, as outsourcing and offshoring remain a prevalent trend amongst Australia s leading firms, we saw an expected decrease in hiring for shared service, secretarial and administrative staff. I trust you will find this edition of the CommBank Accounting Market Pulse informative and useful for your firm s planning and benchmarking. We look forward to continuing to monitor key financial and operational performance indicators within the industry and sharing these insights with you. Email: marc.totaro@cba.com.au Tel : +61 2 933 194 2

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Economic outlook 3 Diana Mousina Associate Director Economics Commonwealth Bank The Australian economy is expected to grow by 2.5 per cent in 215, marking a record 25 consecutive years of growth. While an expanding economy is good news for accountants and their clients, there are some caveats. Not only is the rate of growth set to remain well below the long-term historical trend of 3 per cent, but the ongoing transition from mining to non-mining growth continues to create highly variable conditions across industry sectors. Both businesses and the economy as a whole need to find new sources of revenue as mining investment tails off. Some elements in the transition are on track, with a surge in resource exports set to be a significant new source of income growth over the next two years. The residential construction upturn is also firmly entrenched, and consumer spending is growing at a faster rate than before. However, non-mining business capex growth has been faltering. The unemployment rate remains elevated because the growth transition is patchy and is expected to rise a little further, putting consumer spending growth at risk. Looking beyond Australia, global growth seems set to strengthen, although volatility will remain an issue in financial markets, potentially denting consumer and business confidence. The US recovery has helped drive activity, despite uncertainty surrounding the timing of the first US Federal Funds rate hike. However, lower growth rates in China will remain a topic of concern, particularly for Australian exporters. At home, the 215 Federal Budget small business package is likely to prove positive for many accountants and their small business clients, helping to support business confidence. There are already some signs consumers have responded positively to the budget measures, although it remains to be seen whether higher consumer and business confidence will translate into increased spending. Although the Reserve Bank of Australia (RBA) left rates untouched at their last meeting in June, the.25 per cent cut to the cash rate in May to a new low of 2 per cent reflects a more uncertain view of the non-mining capex transition. Fortunately, a low-inflation environment gives the RBA the room they need to adjust rate settings, while concerns about an overheated housing market are really confined to Sydney. While the RBA has provided little forward guidance around the interest rate outlook, below-trend growth and inflation, plus expectations unemployment will trend higher probably mean it is too soon to call the end of this rate-cutting cycle. Readings of key data, particularly employment data, will be key to gauging upcoming RBA policy deliberations. For accountants, question marks surrounding nonmining business investment continue to impact perceptions of business conditions. While the latest CommBank Accounting Market Pulse indicates firms are positive about the short to medium-term outlook, sentiment has softened over the last six months. Similarly, firms perceptions of economic conditions are weaker, with one in four expecting the economy to perform negatively over the next 12 months. However, the long-term outlook for business conditions remains unchanged, suggesting most practice principals still see this as a period of transition, rather than the beginning of a period of subdued growth.

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Real GDP (annual % change) 6 4 2 Sep-98 Sep-1 Sep-4 Sep-7 Sep-1 Sep-13 Trend Labour Market Trends 6.5 9 6. 6 Unemployment rate 5.5 5. 3 Employment growth (')' 4.5-3 4. Jan-8 Jan-1 Jan-12 Jan-14-6 Trend 4

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Snapshot of survey findings Perception of business conditions Provision of non-accounting services 15% 1% 5% 35% 55% 55% W1 W2 W1 W2 W1 W2 At the moment In 12 months In 24 months 1% 1% 77% (challenging - easy) Perceived performance of the Australian economy over the next 12 months Geographic and practice areas with highest expected revenue growth (increasing-decreasing) 4% -1% W1 W2 Large firms (positive-negative) Restructuring firms Top 3 challenges for accounting firms 75% Negotiating price with clients 5 65% Competing with other firms (challenging - easy) 1% UK / Europe 1% Northern Territory 67% Victoria 67% Economic and social policy advice 1% Wealth management and financial planning 1% Corporate finance 1% Business advisory services 1% Business advisory services 5% Forensic and fraud accounting 5% Sustainability / climate change 6% Winning new business Asia Other firms Wealth management and financial planning 1% 71% Corporate finance 6% Superannuation 6% 5

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Operating margins forecast Geographic expansion 1% 4% 8% 8% of firms considering expanding (increasing-decreasing) Changes in revenue from non-accounting services Top cities for expansion 38% Brisbane 1% 5% Restructuring firms (increasing-decreasing) 9% Canberra 25% Melbourne 25% Sydney 25% Changes in staffing Junior to mid-level accountants Fixed share / salary partners Top 3 expenses with the highest net increase over the next 6 months Equity partners Directors / managers 55% IT hardware and software 45% Knowledge management 45% Staff training and development Shared service staff Secretarial and administration staff (increasing-decreasing) 6

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Business conditions Perceived performance of the Australian economy The perceived performance of the Australian economy has declined in this report period, with one in four accounting firms believing the economy will perform negatively in the next 12 months. 1 8 6 4 5 15 4 2 4 6-2 -1-1 -25-4 -6-8 -1 Positive Neutral Negative Perceived performance of the Australian economy by segment Of the three segments, are the least optimistic about the Australian economy s performance. 1 8 6 4 2-2 4 6 4 58 33 5 34 34-8 -33 2 6-2 1 15 54-15 -31-4 -6-8 -1 Positive Neutral Negative 7

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Perception of business conditions present to 217 While business confidence remains positive across both the short and long-term, accounting firm leaders are less positive compared to six months ago. 1 9 8 7 6 5 5 55 55 4 35 3 2 1 15 1 At the moment Likely to be in 12 months time Likely to be in 2 years time Perception of business conditions by segment present to 217 Over the short-term, large firms remain more optimistic than the rest of the market. 1 8 6 4 2 8 6 6 6 5 31 4 33 67 2 5 69-2 -4-6 -5 At the moment Likely to be in 12 months time Likely to be in 2 years time 8

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Perception of business conditions by area Price negotiations, revenue generation and competitive activity continue to be the primary challenges faced by accounting firms. 4 2-2 25 5-5 -2-15 -4-25 -3-35-35-35 -35-4 -6-8 -1 Accessing capital Keeping staff fully utilised Keeping expenses under control Finding quality staff Keeping quality staff Collecting invoices -6-55 -6-6 Competing with other firms Winning new business -75-85 Negotiating price with clients 9

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Perception of business conditions by area and firm type are finding it more challenging to control expenses, retain quality staff and compete with other firms. 1 8 6 4 2-2 -4-6 -8 67 4 4 8-8 2-67 -2-5 -15-2 -17-67 -6-23 -2-4 -33-38 -5-25 -4-38 -1-12 Accessing capital Keeping staff fully utilised Keeping expenses under control Finding quality staff Keeping quality staff 1 8 6 4 2-2 -4-6 -8-1 -12-2 -67-33 Collecting invoices -5-54 -6-33 -5-1 -1-1 -67-8 Competing with other firms -46-6 -5-6 Winning new business -54-1 -75-8 -69 Negotiating price with clients 1

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Business priorities Geographic expansion Two in five accounting firms are looking to expand geographically in the next 12 months. 8 7 6 5 4 3 4 5 2 1 1 Yes No Don t know Geographic expansion by location Of those looking to expand, the majority of firms will do so within Australia as opposed to Asia or the USA. 5 45 4 35 3 25 2 15 1 5 38 25 25 25 25 13 13 13 13 13 Brisbane Canberra Melbourne Sydney Adelaide Perth Singapore Hong Kong USA Other 11

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Reasons for geographic expansion The reason for expansion is primarily due to a strategic alliance or merging with an existing firm. 1 9 8 7 6 5 4 5 5 3 2 1 12.5 12.5 12.5 12.5 Strategic alliance with an existing firm Merger with an exisitng firm Establishing a completely new office Recruiting partners and staff from competitors in the new location Relocating partners and staff from exisitng offices Other Market entry by segment are focused on growing their management consulting services, and restructuring firms are looking to grow their business advisory services as well as forensic and fraud accounting. % yes 1 8 6 4 2 67 6 42 1 1 54 4 4 4 33 17 15 8 8 33 25 8 4 31 33 38 33 15 17 2 2 23 Business advisory services Forensic and fraud accounting Management consulting services Tax consulting Wealth management and financial planning Superannuation 12

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Market entry by segment (continued) % yes 1 8 6 4 2 2 17 Tax compliance 5 5 31 33 33 2 23 17 15 2 17 15 8 8 Corporate finance (including M&A) External / statutory audit Property advisory Business recovery and insolvency % yes 1 8 6 4 2 33 2 17 2 2 2 2 8 8 Risk management Internal audit Sustainability / climate change Economic and social policy advice Private equity 13

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Revenue predictions Changes in revenue from FY14 to have seen an increase in revenue this financial year, whereas restructuring firms revenue has decreased. 1 8 5 8 6 4 6 1 54 2-2 15-2 23-15 -4-6 -1-8 -1 All firms Stayed about the same Decreased by 2-1% Decreased by >1% Increased by 2-1% Increased by >1% 14

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Difference between budgeted and actual revenue Firms revenue is slightly below budget, largely driven by restructuring firms. 1 8 6 4 2-2 -4-6 -8 4 2 15-4 2 1-1 -5-4 -5-15 -5 15 16-4 -54-15 -1 All firms On budget Under budget by <1% Under budget by >1% Over budget by <1% Over budget by >1% Changes in revenue by location over the next 6 months The primary locations for revenue growth are forecast to be Asia, UK / Europe, Victoria and the Northern Territory. 1 1 1 1 8 6 4 2-2 75 75 67 Asia UK / Europe NT VIC NSW New Zealand 47 67 53 5 43 5 47 38 43 43 25 1 11-11 -8 QLD ACT SA TAS WA 15

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Changes in revenue by service line over the next 6 months Large firm leaders are more optimistic across most service lines except private equity, sustainability / climate change, and forensic and fraud accounting. 1 8 6 4 2-2 -4-6 -8-1 1 1 1 1 1 1 1 8 8 67 67 71 71 6 6 64 58 56 4 4 25 5 Economic and social policy advice Wealth management and financial planning Corporate finance (including M&A) Business advisory services Tax consulting 8 57 Management consulting services 1 8 6 4 2-2 -4-6 -8-1 -33 75 67 56 6 6 67 67 6 5 5 5 5 33 25 25 14 2 Superannuation Private equity Sustainability / climate change 1 Forensic and fraud accounting 1 Property advisory 16

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Realised rates Expected changes in realised rates over the next 6 and 12 months are more optimistic about forecasted changes in realised rates over the next 6 months, compared to results in our previous report. 8. 6. Mean % 4. 2.. -2. 1. 1. 1. 2.5 2.5 -.2-1.3 1.9 2.5.5.2-4. -6. -5. -8. Next 6 months (compared to last 6 months) Next 12 months (compared to last 6 months) 17

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Expense and profitability predictions Difference between budgeted and actual expenses actual expenses are under budget as they continue to tighten their spending. 1 8 6 4 2-2 -4 3 25-2 -35-1 6 2-4 23 38-14 -2-31 -5-8 -6-8 -5-1 All firms On budget Under budget by <1% Under budget by >1% Over budget by <1% Over budget by >1% Changes in expenses over the next 6 months There is an expectation of a significant increase in IT and knowledge management expenses over the next 6 months. 1 8 6 4 2 1 55 15 45 45 25 45 35 25 1 5 5 15 5 IT hardware and software Knowledge management Staff training and development Marketing and business development Professional indemnity insurance Telecommunications Occupancy 18

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Changes in expenses by segment over the next 6 months are controlling expenses in the areas of staff training and development, occupancy and professional indemnity insurance. Conversely, other firms are looking to improve across IT and knowledge management. 1 8 6 4 2-2 -4-6 -8-1 69 62 4 2 25 17 2-33 -33 62 5 4 4 4 46 33 33 2-5 IT hardware and software Knowledge management Staff training and development Marketing and business development 1 8 6 4 2-2 -4-6 4 4 25 25 23 15-2 -33-4 33 17 4-5 -15-8 -1-1 Professional indemnity insurance Telecommunications Occupancy 19

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Changes in staffing by segment over the next 6 months are likely to reduce staff numbers across all levels. 1 8 6 4 2-2 -4-6 -8-1 -12 8 8 5 4 42 4 33 38 25 25 2 17 2 8 8-1 -1 8 8-17 -2-33 -33-4 -4-5 -5-5 -5-67 -67-67 Equity partner numbers Fixed share / salary partner numbers Director / manager numbers Junior to mid-level accountant numbers Shared service staff numbers (eg Marketing, IT, Finance, HR) Secretarial and admin staff numbers Change in operating margins for the next 6 months Overall, all firm types are forecasting an increase in operating margins for the next 6 months. 1 8 6 4 2 6 33 42 8 1 8 2

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Provision of non-accounting services Provision of non-accounting services The majority of firms surveyed currently provide non-accounting services. 1 9 8 85 1 1 77 7 6 Yes % 5 4 3 2 1 All firms Revenue from non-accounting services Non-accounting services contribute to over 1% of firm revenues. 1 9 Yes % 8 7 6 5 4 3 2 1 7 18 12 All firms 8 2 1 6 2 2 Less than 5% 5-1% 1% or more 21

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Changes in revenue from non-accounting services The majority of firms expect revenue from non-accounting services to increase. 1 1 9 1 9 8 6 4 5 5 2 Over the next 12 months Over the next 2 years 22

COMMBANK ACCOUNTING MARKET PULSE JULY 215 Further information For further insights or information, please contact: Marc Totaro, National Manager Professional Services Mobile: 477 739 315 Phone: +61 2 933 194 Email: marc.totaro@cba.com.au Web: commbank.com.au/accountingmarketpulse For media inquiries, please contact: Sarah Gibbons, Public Relations Advisor Phone: +61 2 9118 176 Email: sarah.gibbons@cba.com.au About Beaton Research + Consulting Beaton Research + Consulting is a full-service research firm which offers a full range of solutions for professional services firms, financial services firms and associations. Their expertise includes benchmarking, thought leadership, brand solutions, customised solutions and client satisfaction. 23 Things to know before you Can: This report is published solely for information purposes. As this report has been prepared without considering your objectives, financial situation or needs you should consider the appropriateness to your circumstances and, if necessary, seek appropriate professional advice. This biannual report has been prepared independently by Beaton Research + Consulting and is commissioned by Commonwealth Bank. The confidential online survey used to prepare this report was undertaken by Beaton Research + Consulting in March to May 215. The report is based on the views of 2 accounting firms across Australia with combined revenue of approximately $4.9B. Any opinions, conclusions or recommendations are reasonably held or made based on the information available at the time of its compilation. No representation or warranty, either expressed or implied, is made or provided as to the accuracy, reliability or completeness of any statement made in this report. The project was undertaken in compliance with the requirements of ISO 2252. Commonwealth Bank of Australia ABN 48 123 123 124.