Published: 30/01/2012 9:12 am
Growth in Oman’s audit industry may have stagnated since the global downturn, but upcoming projects and rising ambitions of corporates could push it to the next stage of development.
Strict regulations and commercial laws have enabled the audit firms operating in the sultanate to survive on the demand for external audit and tax consultancy services alone over the years. But this demand has not translated to a growth high enough to take the sector forward to the next stage of development, with an array of offerings in accountancy services still relatively untapped.
Business has remained more or less stagnant since the 2008 global financial downturn, admit those in the industry. With around 60 audit firms vying with each other for a share of the market, competition is stiff. Industry onlookers point out that the top 15 firms occupy a market share of 75 per cent, while the other firms have to fight it out for the remaining 25 per cent.
Says Nasser Said al Mugheiry, managing partner, Abu Timam Grant Thornton, The growth of audit firms is tied to the growth of the market in which they operate. The Omani market has not seen significant growth in the last three years. We have not seen much activity on MSM and not many foreign investors have entered this market. Those who enter go to the international auditing firms present in Oman who are already serving as their auditors in their home markets."
Apart from areas like external auditing and tax consultancy, only a handful of the audit firms in Oman have the expertise to provide services such as internal auditing and advisory in areas like risk assessment, management and fraud detection. Also, demand for such services has remained somewhat muted in the sultanate.
Hence the entire gamut of services in the auditing and accountancy sector in Oman has not developed to the extent seen in the international markets. But executives point out that with the rising number of infrastructure projects and Oman's continuous efforts to bring about changes in its banking and financial sector, areas like advisory and transactions are witnessing a slow rise in demand, which can fuel the growth of the industry in the coming years.
A unique playing field
Among early entrants to the sultanate are international players such as PricewaterhouseCoopers (PwC) and Ernst &Young (E&Y) who came in about four decades ago. Several small and mid-sized practitioners with little expertise followed, setting up operations with the intention of partnering with the larger firms, a strategy that did not pan out as intended, says Mugheiry.
Yashpal Mehta, partner, BDO Oman agrees. "In the early '90s, when the accountancy rules had just been formulated, Omanis were encouraged to set up their own auditing practices. People were hopeful that branches of the international firms will take in Omanis as small partners and then they would move on to work full time with the big players. Many firms came up but due to the small nature of the market and the lack of proper expertise, a lot of them are already defunct," Mehta explains.
Core aspects of auditing and accountancy services being offered in Oman have not differed much from that in the international arena. But there are some varying trends in this market when compared to the rest of GCC and the West that stems from the country's accounting rules.
Oman stands out as the only nation in the GCC where companies owned by Omanis and GCC nationals have to pay corporate tax, says Sridhar Sridharan, managing partner, E&Y. Another unique feature is the mandatory rotation of audit firms for listed companies every four years, while in most international markets, only the auditing team is changed periodically. "The regulators may feel that auditors who are associated with the management of a company for a long time tend to become biased.
But this can be taken care of by just changing the auditing team instead of changing the audit firm itself," says Sridharan. He adds that highly developed economies such as the US or UK have not adopted the principle of audit rotation. In Oman, audit and accountancy services are sought mainly by corporates and government entities, unlike in the other parts of the world where personal taxation and indirect taxation are areas where audit firms find their services sought after.
In auditing, the services in demand are mostly external audit and tax consultancy. When it comes to internal audit, only listed companies with a capital base of RO5mn and above are required as per law to set up their own internal audit departments. For non-listed companies, no such regulation exists, but several private firms of a sizeable capital have established their own internal auditing practices. So the demand for such services, although not too robust, is slowly on the rise. "These firms seek consultancy services during the initial stage of setting up their audit departments and after the unit has been well established, control is handed over to the management," says Mugheiry.
Low demand for services such as internal auditing is also due to a lack of awareness and understanding about the importance of strong accounting practices, says Kenneth MacFarlane, country partner, PwC. "Only a handful of the auditing firms have a separate internal audit department as there is not enough work to go around. Companies should be willing to pay for such services. While some companies outsource a part of their internal auditing to firms like us, many look towards auditing services only for the sake of compliance," he adds.
Of late, advisory services and tax consultancy are witnessing a slow rise in demand. These services have become a key area of focus for firms like E&Y and PwC for whom advisory services make up for about one third of their overall revenue. But advisory services are one-time contracts which are less frequent and more difficult to bag owing to stiff competition in the industry. For firms like BDO and Grant Thornton, 50-60 per cent of their revenue is primarily from audit and tax consultancy. The demand for tax consultancy has gone up since the revision of the tax law in 2010 that has resulted in a more detailed set of rules and regulations.
The trends for auditing and accounting services in Oman show that areas in assurance, advisory and transactions still remain largely untapped by the local audit companies. Executives from BDO and Grant Thornton attribute this to the lack of qualified local manpower in the business. "One of the primary commitments for audit firms in Oman is to train and develop Omanis so that they acquire professional qualifications. Our profession demands international qualifications, experience and integrity. These requirements cannot be achieved overnight," says Sridharan.
While E&Y has structured graduate development programmes in auditing and accounting in place, PwC has established its own academy to offer courses that include the CIMA diploma in performance management, CPA and CIA amongst others. BDO also coordinates with training institutes and the government to help offer accounting and audit programmes for their fresh recruits.
A major challenge for the audit firms has been to make local companies understand international accounting standards. "Assisting clients implement new and complex International Financial Accounting Standards (IFRS) has been a challenge. We now have an IFRS specialist based in Oman who advises clients on IFRS related issues as well as giving training courses," says Alfred Strolla, office managing partner, Deloitte and Touche ME.
While continued education might help increase expertise and awareness, the growth of audit firms and the demand for their services are still restricted by the small market. This has also increased competition. "Stiff competition for contracts will have an adverse effect on audit quality as people will tend to go for the cheapest and most basic form of auditing services," says MacFarlane.
Despite the pressure on pricing and a lacklustre demand for other accounting services, executives in the industry are optimistic about new windows of opportunities in the coming days. "The next area of growth will be in non-traditional areas, including performance improvement services for organisations," says Sridharan. Deloitte is looking at enhancing its presence in the healthcare, logistics and FMCG industries.
Partners at Deloitte points out that the new European Union and international financial regulations like Basel III and Solvency II will be eventually adopted and implemented in the sultanate. There will be opportunities in terms of assisting companies in implementing the new regulatory frameworks and reviewing compliance.
Strolla adds that another major growth area for audit firms is in Islamic finance. "We are already advising some banks on opening Islamic windows."
Some may be concentrating on niche areas to sustain their market share, but a slow increase in the demand for advisory and tax consultancy services has other players very optimistic about a significant growth of the industry in the near future.
Local companies are increasingly looking to expand in the international arena, while a significant chunk of foreign investments too are expected to trickle into the market once world economies begin to revive, throwing open a large window of opportunities for the audit and accountancy firms present in the sultanate.