Six international accounting networks could currently be considered to have global reach. What does the future hold for them?

The international networks created by the Big Four firms, plus BDO International and Grant Thornton International, generate impressive fees ­ in excess of $25bn (£12.6bn) for PricewaterhouseCoopers alone. BDO and GTI may trail some way behind (GTI reporting fees of $3.5bn in 2007), but they are growing strongly.

‘The opportunities for BDO International are immense and our growth stats in recent years have been good,’ says Jeremy Newman, who becomes CEO of the fifth largest network in October.

Just as regulator and corporate sentiment in the UK has warmed towards players outside the Big Four, so it has elsewhere.

Newman says this is notable in developing markets such as China, where BDO International network members are ‘seeing a lot of interest’. This isn’t to say that Newman envisages BDO International competing for the audits of the largest global corporations.

Its UK clients tend to be FTSE 350 rather than FTSE 100, and this mid-corporate client pattern is repeated internationally.

GTI CEO David McDonnell also anticipates a bright future. ‘We see the opportunity to considerably increase our market share,’ he says. ‘We have no aspiration to be the same size as the Big Four, but we do have the aspiration to be bigger. Our plan is to double in size in the next three to four years, by organic growth and acquisition.’

Like Newman, McDonnell sees great growth potential in the developing economies such as China, India and Brazil, though the US firm has also been a major driver of growth.

McDonnell says that GTI member firms have always invested heavily in their
global organisation.

‘It’s no good having a network of firms round the world if it’s not that cohesive. Since the late ‘80s we have had a commitment to a single name, quality control, investing in a sizeable HQ ­ based on a Big Four-type model, with Big Four-type costs,’ he explains.

Breaking the mould

Though the traditional network model remains dominant, KPMG has broken step with its rivals ­ merging its UK, German and Swiss firms to create KPMG Europe.

Joint chairman John Griffiths-Jones says there are the key reasons behind the move. ‘We can provide a better service to the client and a better work experience to our people. These are our two main assets ­ clients and people.’

Though still early days, Griffiths-Jones appears content with progress. ‘After six months we can’t say we have proved it definitely works,’ he says. ‘But I am quite chipper about it. Clients are happy. We have had some wins, we have had one or two arguments, but that is fine.’

He envisages other European network firms joining in future. ‘A year ago we sold it to ourselves on a vision,’ he says. ‘Once we’ve been running a year, we will be able to sell it on reality.’

Other networks, publicly at least, have yet shown any imminent signs of following suit. ‘I think they are waiting to see whether we can make it work,’ Griffiths-Jones notes.

The chances are that others will follow, however. ‘I think it will happen,’ says GTI’s McDonnell. ‘If you go to the medium-term, I do see our organisation consisting of fewer member firms.’

Some current members will have merged cross-border. ‘That’s most likely where economies are integrated,’ McDonnell says.

‘In Europe we have a single market, and so there is logic to it. We have had discussions about it, but it’s not happening in the immediate future.’

One potential barrier to such mergers is the risk of unlimited liability claims crossing national boundaries. However, KPMG Europe’s structure is designed with this risk in mind, involving a non-trading holding company and locally-based trading subsidiaries. ‘In theory, the claim lands in the same subsidiary as it would pre-merger,’ Griffiths-Jones says.

Even so, any transatlantic merger is currently out of the question due to the particularly litigious environment in the States and the sheer size of claims that can arise there. ‘For the immediate future, working really closely with our American colleagues is the obvious way to go,’ Griffiths-Jones says.

Most networks are familiar with liability claims and disputes. GTI recently won a battle with insurers Brit, to the effect that legal fees incurred in defence of Parmalat-related claims will be covered by the insurance policy. ‘We are very pleased,’ McDonnell says.

BDO International meanwhile is challenging the attribution of any liability to itself following a successful suit brought by Portuguese bank Banco Espirito Santo against member firm BDO Seidman.

A jury is to decide the international case. ‘It’s not causing me any lack of sleep,’ Newman says. In fact, Newman says he doesn’t consider the liability threat in general to be a massive issue at present.

‘It’s not an issue that stops growth of the firm, other than indirectly. It doesn’t stop us growing in the UK, India, China or anywhere else. What it does prevent is closer cooperation between member firms. It’s a barrier to integration. It’s a barrier to being able to provide as seamless a service as we would like.’

Insurers are keeping an eye on liability patterns. ‘There is a general trend towards bigger levels of litigation,’ says Gary Head, underwriting director of the professions department for Hiscox UK. ‘When you put that in the context of these international networks, where contracts and complexities are larger than normal, inevitably you are going to end up with the potential for very damaging litigation.’

Given that fees charged by audit firms don’t fully reflect their unlimited liability exposure, Head feels that capping liability is desirable for firms. ‘It’s a very sensible thing for them to be able to do,’ he says.

Despite the obvious challenges involved in running international networks, those involved are optimistic about the future.

‘If you look back over the last 30 years, firms have shown enormous resilience and ability to keep themselves current,’ says PricewaterhouseCoopers partner Peter Wyman. ‘I think that will carry on. [But] I expect things will look quite different in 30 years’ time. Will all our global HQs be in China not America? Your guess is as good as mine.’

Truly European

KPMG became the first of the big firms to set formal ties between its firms when it created KPMG Europe, an entity containing 18,000 partners across the UK, Germany and Switzerland.

However the strategy to create a 'super-firm' has not all gone smoothly. Partners in KPMG's Dutch member firm voted against joining KPMG Europe, which in turn blew out plans to introduce Jaap van Everdingen as the super-firm's CFO – which instead went to Bernd Erle.

However the latest suggestions are that the Dutch will be won around and soon join KPMG Europe.