Lengthy audits cut into BDO profits as firm defends use of furlough scheme
Audits carried out during the coronavirus pandemic have taken between 5 and 10 per cent longer than they would typically, creating extra expense for clients and smaller profits for BDO.
Profits at the audit and consultancy firm suffered somewhat in the 2019/20 financial year, with the firm making a profit of £137m, down from a profit estimated by the business at £165m, had coronavirus not happened.
Part of the reason profits suffered was audits taking longer than expected. BDO managing partner Paul Eagland told CityAM the audit of a “relatively sensibly-sized” firm would typically take a team of 10 some four weeks to complete. With the change in working environments brought about by the pandemic, however, audits were taking between five and 10 per cent longer.
“It’s more expensive for the client and it’s less profitable for us,” Eagland said.
BDO profits also suffered thanks to the sudden ferocity of the virus. Overnight clients of BDO cut costs, and the challenger audit firm lost work as a result.
In the final three months of BDO’s 2019/2020 financial year, profits at the firm tumbled by 50% on last year, equating to a drop of £25m.
From April 2020 to June 2020, during the coronavirus lockdown period in the UK, revenues and profits fell by 13% and 50% respectively at the auditor, hitting its overall profitability for the year.
The £25m reduction in profits was absorbed by BDO’s partners with average distributable profit per partner, before taxation, for the year decreasing by 14 per cent to £518,000 compared to £602,000 last year.
Furlough use
BDO also furloughed some of its workforce, which managing partner Eagland said was to protect the jobs and pay of its people. BDO topped up furloughed staff’s pay so they still received 100 per cent of salary.
Despite the firm’s £137m profit, and partners still earning more than half a million pounds annually, BDO defended its right to make use of the scheme, which has cost the taxpayers billions of pounds overall.
Eagland said: “We sat down and thought about it very carefully. When we took the money it was absolutely dedicated to protecting jobs, and when people then say, ‘would you give that money back?’ We’re saying, ‘well look, it’s been spent on protecting jobs.’
“It’s become quite a hot topic, and some people are quite passionate about it,” he continued. “You either subscribe to the fact that if people earn big money they should pay the money back, or you subscribe to this being about protecting jobs, and when the government works out how to balance its book, they will be coming to businesses and partners at BDO – we’ll be one of the first people in their firing line.”
BDO furloughed 700 of its staff – an eighth of its UK workforce – at the start of the pandemic. The company’s decision to make use of the furlough scheme cost the taxpayer £2.5m.
Overall the firm recovered revenues of £660m for the financial year, a 14 per cent increase on last year. The majority of the firm’s revenue increase came from its acquisition of Moore Stephens, which accounted for 9 per cent of revenue growth.
BDO expects a lower level of profitability going forward.
‘Two very different periods’
Eagland said those wishing to “fully understand” BDO’s results should break them down into two halves: pre and post-lockdown.
“The strength of our overall financial results derives entirely from the first nine months before the crisis hit us. The last three months tell a completely different story with revenues and profits falling as lockdown took hold,” he continued.
“COVID-19 has already had a huge impact on our business and we don’t know what lies around the corner. This means we have had to take a number of tough but prudent decisions to ensure the sustainability of the firm and to protect our people’s jobs – not just for the initial lockdown period but also looking ahead to the slow, challenging recovery.”