RSM Tenon's plight puts listed firm model under scrutiny

IN 2003 an ambitious chief executive argued that acquisitive accounting firms had a bright future on the stock markets.

In an article for Accountancy Age the chief executive boasted that he ran a “profit-led business with own strategies.” Future growth would come through “consolidation” and also “abundant opportunities that it would be rude not to grasp,” wrote Andy Raynor, the then chief executive of Tenon (which later became RSM Tenon).

At the time the article was published the two other listed accounting firms, Numerica and Vantis, both of which have now disappeared, had seen their share prices slide. Tenon’s share price was also depressed. Some experts said that accounting partnerships were ill-suited to cope with shareholder demands for quick returns, intense scrutiny of performance and extra regulations involved in being a public company.

But Raynor was confident that the so-called consolidation model – listed accounting firms who grow mainly by making lots of acquisitions – had great potential. “Commentators should work harder, as we do, to realise what the future potential of accountants should be,” he said.

After last week’s profit warning by RSM Tenon, and the announcement that Raynor and the company’s chairman were to step down, few experts think that accounting firms will rush to go public in the near future.

Only one other accounting firm is listed: Begbies Traynor, a business recovery specialist. In December, it reported a slight fall in first-half revenues but increased profits – its share price has slid from 65p to 41p ni the last year.

Some accountants argue that the current problems faced by RSM Tenon, the UK’s seventh-biggest accountant, show that firms should stay private.

Phil Shohet, a director at Kato Consultancy, which advises accounting firms, says: “The business model with RSM Tenon is no different to Numerica or Vantis. It acquires firms with a turnover of less than £10m and tries to integrate them. The business model is flawed.”

Accounting practices have high wage costs and are owned by their partners. When firms go public, partners stand to lose money and control to shareholders who demand a slice of any profits. Partners at accounting practices have better pay, career prospects, and influence than counterparts at listed accounting businesses, supporters of the partnership model also argue.

Also, listed firms have to be more transparent than partnerships due to stock market regulations – making it harder to bury bad news and ride out financial problems.

But perhaps reports of the death of the listed accounting firm are premature. An alternative view is that public accounting firms have come unstuck because of their size and strategy, rather than any inherent incompatibility with stock markets.

Jeremy Newman, former global CEO of BDO International, who was last week appointed as consultant to RSM Tenon, doesn’t think the company’s problems came from it being listed.

Tenon is different from Numerica and Vantis, Newman says. And he should know. As BDO chief he led its purchase of a large chunk of Numerica.

Tenon started as a listed company. It was an “empty vehicle” that expanded through acquisitions, Newman says. This model was “more of a challenge” for its then peers Numerica and Vantis than for Tenon, as Tenon has acquired bigger and more established firms, he adds.

RSM Tenon’s finance director last week partly blamed the company’s profit warning on the costs of integrating recent acquisitions including Bentley Jennison and parts of Vantis.

Newman, declines to comment on the reasons for the profit warning, but says that Tenon’s “significant” acquisitions provide a “more stable platform” for the long term.

Early priorities in his consultancy role include improving morale among RSM Tenon’s employees and reassuring clients, he says.

RSM Tenon’s problems aside, if accounting firms prefer not to rely on shareholders for money to help finance acquisitions and expansion, what other finance options do they have, other using clients’ fees or making a “cash call” to partners?

Gaining external investment from private equity is tricky because under UK audit rules a majority of owners at an audit firm have to be qualified auditors.

Accounting firms may find it easier to access capital from partnerships in another profession – law. Since last October lawyers have be able to form partnerships with other professions including accountants.

Under the Legal Services Act accounting firms can merge with law firms to create firms offering combined financial and legal advice.

The benefits of combining the two professions are largely unproven, but given the fate of some listed accounting firms accountants may want to explore other ways to expand.

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