Top 35 Networks 2012: Recovery position

by Philip Smith, freelance journalist

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09 Jul 2012

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THE NATURAL ORDER has been restored. International accountancy networks, alliances and associations have reported healthy fee income growth as the world has witnessed plunging stock markets, euro-wobbles and financial scandals.

Overall, our top 35 groups have seen combined fee income rise by nearly 8% over the last year. Last year, we reported a far more modest 2% growth rate. This improvement can be attributed to the need for solid business advice even during tough trading times, and also to a focus on the emerging markets that continue to grow while the mature economies struggle against a background of austerity and social unrest.

The natural order has also been restored in the highest echelons of our survey. Last year, Deloitte squeezed past PwC to become the world's largest network by fee income, but this year PwC has sprung back to the top. The network, which until 2011 had held the top position since its creation following the merger of Coopers & Lybrand with Price Waterhouse in 1998, bagged a 10% increase in fees to hit $29.2bn (£18.5bn).

That's not to say that Deloitte has been tardy – its 8% growth to reach $28.8bn is keeping PwC honest, while positioning it comfortably ahead of rivals Ernst & Young and KPMG.

Despite its size and global reach, PwC is still on the look-out for growth. As Dennis Nally, PwC's international chairman, says: "PwC member firms have a presence in 158 countries around the world, up from 154 in 2010. We are constantly seeking and exploring opportunities to grow. Several member firms have made significant acquisitions in the past 12 months and we expect to continue this trend in the year ahead."

Nally says his network plans to grow both organically and through acquisitions – he sees the strongest opportunities in advisory work, which has grown by 20% over the last year, while India, China and the Middle East are the likely battleground markets.

Likewise, Deloitte is looking to stretch its footprint even further. In January this year, it announced it had established a new member firm in Mongolia after tying up a deal with Onch Audit. "In addition to adding a new firm to our vast global network, we are delighted to be expanding in what is fast becoming a critical market of the Asia Pacific region, and the global economy as a whole," said Deloitte's global CEO Barry Salzberg.

KPMG has also set up shop in Mongolia, and has recently added Iraq to its network. As Alan Buckle, KPMG's international deputy chairman, says: "We have a comprehensive footprint which requires only minor extension. However, we have an active acquisition programme to bring new capability and have completed 15 acquisitions since the start of 2011."

To say that the Big Four networks dominate the global accountancy scene would be an understatement. In fact, they make up some two-thirds of the total income created by the top 35 groups. Another sobering thought: you would need to combine nine of the mid-tier networks to create one network similar in size to each of the Big Four. It is no wonder that competition concerns figure so highly on the radar of all the groups.

The competition fight will be fought in Europe, where proposals from the European Commission could result in fundamental changes to the structure of the audit profession. As Geoff Barnes, CEO at Baker Tilly International ($3.2bn), says: "One of the greatest challenges that networks currently face is the uncertainty in relation to possible changes in the audit market as a result of the EU proposals on auditing."

Barnes believes that mandatory joint audits would be a good way to provide the market with wider choice. "There are a number of networks that have the international reach and the quality of people and resources to work with larger firms on the delivery of joint audits," he argues, adding that it would be the clients that see the benefits. "Not only would they be able to select the local firms from two networks that best meet their needs, but the benchmarking that would take place between the two firms would raise the overall level of service quality of the audit," he says.

But while the main action is in Europe, other regions are paying attention.

"Non-European legislators and regulators are watching these developments, which may have an impact beyond Europe," says Frank Arford, CEO of Crowe Horwath International ($2.9bn). "For example, in several South American countries there are also proposals emerging for the mandatory rotation of audit firms. Even if European regulation was not replicated elsewhere in the world, there is every chance that the structure and influence of the Big Four will change globally because of the European Commission's desire to broaden the audit market for public companies in Europe."

Not that all of the groups want to be like the Big Four in any case. Nor should they, argues Michael Reiss von Filski, chief executive of Geneva Group International, which tops our list of alliances and associations with $4.3bn in combined fees. "Many networks try to imitate the Big Four and are, by doing that, putting themselves into a disadvantageous situation," he says. "The Big Four are the Big Four and their business model is different than the one of an international alliance of independent firms. The glamour of the biggest and the most aggressive audit firms is not the same anymore."

Competition still remains keen at this level as the small groups vie to attract the best independent national accountancy firms. Many of the groups believe they offer a viable alternative to the larger networks, both for member firms and their clients. "The current economic environment is leading to larger and larger businesses evaluating how they buy in their external professional service advice," says James Hickey, executive director of Alliott Group, which has seen its fee income grow 22% to $541m over the past year. "These businesses are recognising how local independent professional service firms that are members of worldwide associations can provide the same technical service as the larger multi-office firms but have the ability to tailor the solutions and to provide far greater client service levels."

More importantly, they can provide this service at a far lower cost, according to Hickey. "This greater understanding from the business community into how groups like Alliott Group support the service offering of independent mid-tier professional service firms in turn allows our members to look to retain their existing clients but also go out to their respective business markets and win new clients who might have traditionally thought that only the large multi-nationals could support their cross-border needs," he says.

So in the coming year, it is likely that firms could switch allegiances as they evaluate the merits of the different groups. "We face different issues in different regions," says Paul Winder of MGI ($500m).

"In Asia, Africa and the Middle East, we need better coverage as the priorities of world trade shift. In some other regions, we need to review the size and nature of some existing members and see if we can find some stronger firms with more international aspirations. However, in reality we rarely find countries where member's clients have a need that we don't cover," he says.

"While competition is always a threat, very few firms leave so we are confident that the alliance fulfills its core purpose. Pressures on members' time and finances are probably the greatest threat as harsh economic times lead to more short-term thinking."

As Winder suggests, Asia and Africa are going to be the areas of most interest to the international groups in the coming years. In percentage terms, the Asia Pacific region tends to be the smallest region for income for all of the groups, but within that area there is, of course, the world's second-largest economy, China. And it is China that could present the biggest headache, especially for the Big Four.

As readers are no doubt aware, China's finance ministry recently set out its ‘localisation' rules, which will require the large accountancy firms to reduce the number of foreign partners to 20% by 2017, and ensure the senior partner is a Chinese national. The Big Four have all said the rules fit their own localisation plans. But there will surely be opportunities for domestic firms to exploit the move. For instance, ShineWing, the country's largest domestic firm, has already set up in Japan, Australia, Singapore and Hong Kong. And as Sir David Tweedie, ICAS president, recently told Accountancy Age, the next ten years could see entrants from China take on PwC, KPMG, Ernst & Young and Deloitte.

So there is still all to play for on the international accountancy scene. As certain markets mature, so others emerge and offer the opportunity for all the networks, associations and alliances to grow and extend their global influence.

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