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Top accountancy firm fees jump 16 per cent Back  
Salaries and recruitment rise sharply, as giant PricewaterhouseCoopers edges towards IEP100 million
Fee income at the top accountancy practices has again outstripped growth in the Irish economy as a whole, rising by 16 per cent over last year’s survey. Total fees earned by the accountancy, tax and consulting practices of chartered accountancy firms included in the Republic of Ireland in 2000 survey was in the region of IEP350 million.

PricewaterhouseCoopers is now heading towards the IEP100 million mark, with its preliminary estimate of fees for its financial year ending 30 June 2000 of IEP94 million. Not that far behind was KPMG with fees of IEP77 million. The outstanding fact is that these two firms accounted for nearly half of all fees earned by the top 20 firms in the country and their growth rates were also in the highest echelon, at 21 per cent and 18 per cent respectively.

The 80:20 rule is alive and well in accounting and related professional services. The dominance of the big five accounting firms is also clearly shown by their near 80 per cent market share of fees. Moving down a step to include BDO Simpson Xavier, Grant Thornton, Chapman Flood Mazars, Farrell Grant Sparks and IFAC Accountants, 92 per cent of the market is captured.

The dominance of the these top ten firms does not entirely hide the fact that other firms have made strong business gains in the last year and representing effective small practice management.

OSK accountants report a 49 per cent fee income growth to IEP2.65 million, Hargaden Moor, 27per cent, HLB Nathans 26 per cent and Horwath Bastow Charlton 22 per cent. Clearly, there is scope for ‘niche’ or smaller practices in the strong economic conditions of the country.

The total of c.IEP350 million represents approximately one-half a percentage point of Ireland’s GDP in 1999.

(In compiling the survey, Grant Thornton have pointed out that its figures do not include their two Northern Ireland offices in Belfast and Enniskillen. There are 8 partners in total and 86 staff (66 professional and 20 support staff) for a total of 94. The firm fee income is in the region of IEP6 million per annum.)

For the year ahead, the areas of strongest growth identified by respondents were evenly spread across the main disciplines - with the exception, of course, that no firm envisages corporate recovery as the area of maximum growth. Corporate finance was most frequently mentioned as the most promising area, particularly for mid-sized firms, and not surprisingly, given developments in the economy, M&A and management buy-out trends. Management and IT consultancy, which might perhaps include ‘e-business’ in many people’s eyes, is also a prospective area of strong growth. Contrary to some assumptions about the field, quite a number of firms see strong growth prospects in audit, often thought of as ‘the poor relation’.

Partners and staff
Trends in relation to the 5,431 partners and staff covered by the survey are no less interesting. There are now 351 partners, 4,228 other chargeable staff and 853 support staff in reporting firms. Overall, there has been a 4 per cent growth in the number of people working in the responding firms. With fee income up 16 per cent, this illustrates the growth in productivity in the sector.

Some firms have contracted in staff size since last reporting, notably Ernst & Young at 10 per cent (driven by the sale of the consulting wing to CapGemini). Among the top firms, PwC has grown by 17 per cent, quite in excess of KPMG (4 per cent) and Deloitte & Touche (5 per cent). BDO Simpson Xavier expanded their headcount significantly, at 21 per cent, bringing it up to 382. Firms such as O’Hare and Associates, Ormsby and Rhodes and Hargaden Moor have expanded rapidly in the last year.

Again, the 80:20 rule applies to ‘share of headcount’: 28 per cent of people in the surveyed accountancy firms work at Pricewaterhouse, followed by 20 per cent at KPMG. The big five employ 4,000 out of the 5,431 covered by the survey.

Once again, KPMG leads the way in fee income per partner, at IEP1.757 million, up an impressive 23 per cent on its figure last year and also ahead of its nearest rival, PwC, by IEP567,000 per partner. This is a substantial difference by all accounts, especially when compared to the industry average (ex-KPMG) of IEP883,000 and a median of IEP528,000. The implication is that KPMG manages its business is quite a different way to most other firms, as evidenced also by its high partner to non-partner ratio of 23.

With the big five firms (excepting Arthur Andersen whose fees are estimates only) recording fee income per partner of over IEP1 million, the benefits of scale are evident. But practices such as Chapman Flood, Horwath Bastow Charlton, BDO Simpson Xavier and HLB Nathans, all had fee income per partner of over IEP600,000, a business performance which clearly meets any reasonable measures for a professional firm of their size.

The statistics in relation to change in this measure show that PwC were up 18 per cent, and Ernst & Young and Deloitte & Touche both up 14 per cent HLB Nathans grew it by 16 per cent while many other firms increased this key profitability measure by the order of around 10 per cent. BDO Simpson Xavier had fee income per partner of IEP603,000, down 6 per cent on 1999.

There are issues which managing partners will best assess in relation to the target of fee income per partner. Different business areas will give different results, and firms are only comparable, strictly speaking, if their business mixes as between audit, tax and advisory services are similar. The sale of the consulting wing of Ernst & Young to CapGemini is a case in point, making a direct comparison between it and Arthur Andersen more relevant, but somewhat less relevant now would be a strict comparison with Deloitte & Touche.

The ratios of partners to other staff is closely tied in with fees per partner in terms of managing the configuration of the business. KPMG leads the table with a ratio of 1:23; at the other end of the scale is Ormsby & Rhodes with 1:5. The other big five accountancy firms are range between 14 and 23. Notably, the only firms outside the big five who have this ratio in the teens are HLB Nathans (16) and Horwath Bastow Charlton and Ryan Glennon (both at 13).

Recruitment and salaries
There was substantial recruitment into the top firms in 1999 and more is planned for the coming year - 6 per cent more professionally qualified staff recruitment and 15 per cent non-professional and support staff recruitment.

As the largest firm, it is no surprise that PwC are planning to recruit 260 professionally-qualified new staff and 160 support and other staff in the year ahead. This accounts for almost half of planned professional recruitment, with the next nearest single intake of professionals planned at BDO Simpson Xavier (43) and KPMG (35).

KPMG are planning to recruit 200 non-professional graduates and support staff, and PwC has 160 in mind. The difference in recruitment trends between the two largest firms may be considered a reflection of different practice management models. Significant recruitment is also planned at BDO Simpson Xavier, which plans to hire 43 qualified professionals, 28 non-professional graduates and 55 support staff.

The survey responses in relation to salaries and bonus trends show that firms, by and large (77 per cent) say they increased basic non-partner salaries by between 11 and 20 per cent last year, but expect somewhat lower increases next year, with most coming in the 5-15 per cent band. There was a wide divergence of practices as regards the percentage of basic pay that could be paid out in bonuses next year to non-partners - one firm mentioned a figure of up to 25 per cent, while another had zero. Most appear to be on the conservative side in this regard - 57 per cent expect to pay no more than 10 per cent in bonuses.

In the context of an ever-tightening labour market, this year Finance asked firms what recruitment methods they did or did not use with frequency. Respondents were clearly happier to identify methods they did not use much compared to those they did use - evidence also, perhaps, of a traditional method of recruiting from colleges, not mentioned in the table. However, among the methods used to recuit with moderate or frequent use, the most often cited was 'recruitment from other firms'. It can be taken that firms had in mind professionally qualified recruits mostly in this regard. This answer is not weighted by size of practice, so the answer of a firm like KPMG or PwC would have equal weight for the purposes of the question as a smaller firm.

Other methods suggested by firms that they use to hire new people included the use of internal recruitment departments, recruiting from universities and colleges, employee referral award programmes, recruitment agencies, internet, personal contacts / head hunting and career fairs.

Practice management
With increasing attention on the management of accountancy practices and regulatory changes in the offing, it is noteworthy that virtually all firms are in agreement that they would consider separately incorporating parts of their practice. A majority will not take equity for fees, but that a small and significant minority will do so, which may be indicative of a future trend. Two-third of firms have a policy limiting the size of a single engagement, and among the answers to that limit, 10 per cent of total fee income featured most often. The survey also asked what had been the size of the largest single piece of new business in the last year at each firm. Some were reluctant to comment, but among those that did, the relationship of that fee to overall fees per partner is the most interesting. Roughly speaking, that single new piece of business often represented about a fifth of average fee income per partner. In larger firms, that relationship would not hold since large new engagements would often be sold and managed as a team of partners.

Survey note:
The survey was carried out in the last part of July 2000. Finance does not seek to verify the data reported by each firm. Only in the case of Arthur Andersen was an estimate made of fee income. This was done solely in order not to underestimate by too large a factor the total fee income of accountancy practice in the economy. Arthur Andersen has a global policy of not disclosing individual country earnings.

Some firms may have had difficulty in isolating Republic of Ireland fee income from any fee income earned by partners in the Republic for work done in Northern Ireland. The survey requested fee income for the Republic only. Any overstatement of ‘pure’ Republic of Ireland business is not likely to have been material.

There are some firms who could be estimated to earn fee income in the IEP1-IEP10 million range which are not included in the survey as they decline to participate consistently. In the context of total fee earnings from reported firms, this omission is not likely to be more than about 8 per cent extra. Two such firms were included in last year’s survey with estimated fee income then of just over IEP10 million combined.

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