Response strategies of small and medium audit firms in Nairobi to regulatory changes affecting the audit industry
The fact that organizations’ actions are related to what happens in their environment cannot be downplayed. The evolution of the phrase ‘strategy’ has its origins in man’s desire to react favorably to the changes occurring in his external environment. Many organizations’ activities are also geared towards maintaining a ‘strategic fit’ or ‘line of best fit’ with their environment which is known to be ever turbulent. Audit firms are no different and their environments too are not known to be static. As such, they have to regularly re-adjust their strategies to enable them fit in within their environments. The audit industry is one of the industries that is known to be growing rapidly across the globe. In Kenya, the industry is regulated by the Institute of Certified Public Accountants of Kenya (ICPAK) and currently has over 1000 person authorized to practice. This number has been growing at an average annual rate of 10%. The importance of this industry to an economy cannot be gainsaid. Auditors help install confidence in the financial statements by ensuring that the information presented therein is true and fair. Recent event across the globe have seen various large corporations across the globe collapse; events which in one way or another have been attributed largely to the omission or commission by the auditors. In the United States, we have had the collapse of Enron, in Italy we have had the collapse of Parmalat while in Kenya, we have had the collapse of Nyaga Stockbrokers. The downturn of these events has been that the regulators have zeroed in on the activities of the auditors to ensure that they play by the rules. Various legislations have been passed all with the aim of regulating this industry. This turbulent environment within which auditors continue to operate has been a concern to many stakeholders and therefore it was deemed necessary to conduct a research to establish how auditors are coping when faced with such turbulence. The study’s objective was to analyze the various approaches used by auditors to combat the forces that threaten their existence. This was aimed at analyzing the various strategic responses auditors would employ to remain afloat in light of the turbulent environment within which they operate. The output from the research will assist existing and upcoming auditors by guiding them on how best to survive in turbulent times and guide policy makers in developing favourable policies that will benefit the audit industry as a whole. The research was conducted by administering a questionnaire to 16 small and medium sized audit firms focusing on the audit partners and senior managers. The questionnaires sought to find out general information on the organization, how they rate various environmental factors and how they responded to the turbulent environment. From the findings, it was evident that all firms have responded both operationally and strategically. Some of the operational strategies include training of staff, marketing, research and development amongst others. Strategic responses have involved product development, changes in systems and processes, culture shifts among other responses. The study also points to the fact that most firms are more reactive than proactive to changes. The study will assist policy makers respond favorably to criticism pointing their way. Limitations encountered in the course of the research included absentee managing partners and over-delegation of responsibilities on the part of senior personnel in audit firms. Some respondents were of the opinion that some information was too confidential to share with the researcher. Additional areas for research have also been identified. Key among them would be the need to undertake a study to identity the various strategies employed by the clients to changes in their external environment. Similar studies need to be undertaken in other sectors of the economy.