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Saturday, 20th April 2024 |
| The changing face of the accountancy industry |
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| Based on the experiences of the past 15 years, Anthuan Xavier says that the next fifteen is bound to be full of upheaval and further consolidation. |
For an industry renowned for its supposed dullness, the evolution of the accountancy profession over the last fifteen years has been quite a roller-coaster ride. The industry has been the focus of much attention in recent years, and particularly so in the last six months with the collapse of Enron. Public sentiment, as well as regulatory authorities are calling for a drastic change in the structure of the profession, and the debate is likely to rage on for some time as to what form this change should take. It is interesting therefore to take a retrospective look at the industry, and how it has evolved over the last fifteen years.
Mega-merger mania
The late 1980s saw the sudden emergence of a worldwide wave of mega-mergers amongst what the industry had regarded as ‘the Big Eight’ for over thirty years. This period marked the beginning of Ireland’s globalisation process, with the shedding of the local name in favour of an internationally recognised brand name. Ireland as a nation increasingly saw a role for itself on the international stage. This public sentiment was mirrored in the accountancy profession, which recognised clients’ growing need for not only international expertise, but also the comfort and security of a recognised brand.
The consolidator…
The mid 90s saw the arrival of the consolidator. The consolidators were responding to a growing requirement on the part of the consumer for an alternative to the big five firms. The big five were striving to provide global services to global clients, but there was a host of small and mid-tier companies out there whose needs were not being met. Consumers wanted someone to integrate their financial services, and the consolidator aimed to exploit this niche by providing a wide range of services to the small and medium sized business market. What started out as a US phenomenon has been gaining considerable credence in Europe. Tenon, the largest UK consolidator was established two years ago with the aim of becoming a leading provider of non-audit, professional services. Two short years later they are firmly among the UK’s top ten firms following a raft of acquisitions.
Variety is the spice of life…
Throughout the last fifteen years, the accountancy profession has capitalised on its client relationship by bolting on other services. The audit function in some respects became the ‘poor relation’ to other more lucrative services, such as consulting, tax advice and corporate finance. Activities previously done internally are now increasingly being outsourced as companies shift towards focussing on their core activities. This fuelled the expansion of traditional firms into new areas of business. The big firms began to brand themselves as financial and business advisors as opposed to auditors, offering more and more services ranging from corporate finance to fund administration to human resources. This was to become a major bone of contention, when authorities began to question the degree of independence an auditor could exercise, where there was potential to earn significantly greater fees through cross-selling opportunities.
Audit takes centre stage…
The media have been documenting auditor firings, corporate debacles and even memos allegedly directing audit staff to shred documents. However, scrutiny over the role of auditors often coincides with a downturn in the economy. Auditors should certainly be held accountable for their actions, but treating the industry as a scapegoat for the sins of management is a misplaced criticism. Auditors do not run companies or even advise company directors on corporate strategy, so how can they be held accountable for corporate failure? The success or failure of any organization is the responsibility of company directors not company auditors!
‘Big Five’ become ‘Big Four’
The Enron/Andersen collapse will undoubtedly add more weight to the SEC’s concerns over potential conflicts of interest that exist in multi-disciplinary firms. Furthermore, in Ireland the move is very much towards supervised self-regulation of the profession. While the profession vehemently defends its ability to regulate itself, it will be necessary for firms to demonstrate that they view audit as a key part of their business, as opposed to a method of selling on more lucrative services.
Interestingly, the industry has now come full circle, as evidenced by the spinning off of consulting functions by Andersen and Ernst & Young. Other global accountancy practices, including PricewaterhouseCooper whose talks fell through with Hewlett Packard, are now considering demerging non-core services such as consulting, with the focus shifting back to their core services once again. Not only would this allow the bigger practices to recognize considerable value, but it also addresses the thorny issue of auditor independence, which is not likely to go away.
‘Big Four’…an opportunity or threat?
There is a huge body of opinion that believes the merging of KPMG and Andersen in Ireland will further compound the oligopolistic nature of the industry at the expense of the customer. In an industry that is continually evolving it is likely that we will continue to see merger activity for the foreseeable future, although it will not be at the top end of the market. There is certainly a gap in the market for an alternative provider of services beyond the big four, and this presents a great opportunity for mid-tier firms to grow their business.
Mid-tier firms gaining momentum…
Consolidation at the mid-tier level of the market and the increasing presence of consolidators such as Tenon are already closing this gap. Furthermore, many mid-tier firms are differentiating themselves by focusing on market niches and offering specialized services to these segments of the market. The Big Four have become global players catering to global clients. However, there is a gap in the market for firms to service indigenous, growing and entrepreneurial businesses for whom intimate knowledge of the business and the relationship is still important.
Meteoric rise of BDO Simpson Xavier…
This strategy has stood the test of time for BDO Simpson Xavier, Ireland’s fifth largest accountancy - financial services company, who recently celebrated their 20th birthday. BDO Simpson Xavier recognized an entire segment of the market that was largely being ignored by the big eight, as they then were. Its focus from inception was to become market-leader in the owner-managed, growing entrepreneurial market. BDO Simpson Xavier’s meteoric rise over the last twenty years has been in tandem with its clients, whose entrepreneurial spirit has been one of the key drivers in the growth of our economy during that time. Perhaps the best testimony to the success of that strategy comes from studying the Top 20 Accountancy Firms tables from 1987 in comparison with today’s Top 20 Table. It is interesting to note that ten out of the twenty are no longer there, due to mergers and acquisitions, and BDO Simpson Xavier’s rank has risen from eighteenth to fifth largest in that time. Although ranking fifth in size, it is the firms unwavering commitment to meeting the needs of this segment of the market that has made it one of Ireland’s leading advisors to entrepreneurial and growing businesses.
Conclusion
If the roller coaster ride of the last fifteen years is anything to go by the next fifteen is bound to be full of upheaval and further consolidation. |
Anthuan Xavier is managing partner of BDO Simpson Xavier.
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| Article appeared in the June 2002 issue.
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