Top 40 International Alliances, Associations, and Networks 2018: $20bn fee hike drives global accountancy growth

It has been another year of impressive growth for the world’s leading international accountancy groups. According to the Accountancy Age 2018 international survey, fee income for the top 40 networks, associations and alliance has increased by $20bn, from last year’s $200bn up to a current $220.5bn – a 10% increase.

From the very largest Big Four networks down to smaller associations, all but five have reported positive growth. This increase has come across the board, from assurance and accounting, tax and legal, and business advisory services, with fee increases of 6.5%, 13.3% and 6% respectively.

Partner and professional staff levels have also risen during the year. Last year’s survey revealed there were 1.2m professional staff employed within these international groups. Now there are 1.4m. It is the same story with partner levels: 105,000 last year; 109,000 this year.

But there is a fly in the ointment of this apparent success – an ongoing debate over how the audit market is, or isn’t, functioning, together with increasing regulatory pressure over conflicts of interest, notably in the UK market but in other jurisdictions as well, could have far-reaching effects around the international market.

As Richard Attisha, president and CEO of TAG Alliances ($4.5bn, up 12.6%), says: ‘Similar to how Enron in the early 2000s changed the landscape of financial regulations and corporate controls, the involvement of major accounting firms, in particular the Big Four, in high profile audit failures and scandals such as Carillion, HBOS, BHS and Tesco in the UK, Colonial Bank in the US, Steinhoff and the Gupta Affair in South Africa, among others, has placed pressures on legislative bodies and regulators to take action in order to protect company stakeholders and the public interest at large.’

But these pressures could play into the hands of the smaller networks and associations. As John Sim, CEO of PKF International ($1.5bn, up 15.9%) says: ‘Most of the major issues in recent times have focused on the Big Four although the International Forum of Independent Audit Regulators (IFIAR) is more actively reviewing the mid-tier networks. We have seen both the Chinese regulators and the South African regulators very active in recent months.

‘Any move towards only being able to provide either audit or non-audit services will be good for the mid-tier firms and we are seeing increasing opportunities in the provision of non-audit services to listed companies.’

Not that the Big Four networks of Deloitte, EY, KPMG and PwC appear to be suffering. Of the overall $220.5bn fee total, these four giants account for $146bn. That’s two thirds of the market.

All of the Big Four recorded increasing fee income. Three of the four – Deloitte, EY and PwC – saw double-digit percentage increases: 11.3%, 10.8% and 15% respectively. Even the embattled KPMG secured a near-4% increase, though it remains firmly in fourth place, with a total of $26.4bn, trailing third placed EY by $8.4bn.

After spending a number of years swapping the top position with PwC, Deloitte has firmed up its position as the largest network, reporting fees of $43.2bn. However, PwC’s impressive 15% growth rate to $41.3bn hints of more rivalry to come.

Among the remaining networks (the Accountancy Age survey splits the top 40 into two groups, the top 20 networks and top 20 associations and alliances), BDO ($8.1bn, up 7%) retains its fifth position with $8.1bn, up 7% on last year. Keith Farlinger, who took over as the network’s CEO last year, expresses concern over the regulatory environment and potential market intervention, fearing possible solutions to the current competition and choice debate may create unexpected results.

‘The examinations currently underway in these jurisdictions are directed at identifying means by which the audit profession may be strengthened and improved,’ Farlinger says. ‘We welcome any and all such examinations which are done in a measured and holistic manner where the end result is higher audit quality.

But he warned: ‘Many of the interventions being proposed may have unintended consequences both on the local and global markets in which audits are performed and may not necessarily give rise to increased audit quality.’

Eighth placed Crowe Global ($3.8bn, up 2.8%) believes that market intervention will create opportunities, but that equally there will be challenges ahead. David Mellor, the network’s CEO, says: ‘The current business model in some markets is under scrutiny, and any intervention is likely to create both challenges and opportunities. But opportunities are not always easily seized, otherwise arguably they would have been seized already.

‘Changing markets for particular services requires many things: not just intervention, but time, desire to participate, ability to invest in the necessary resources, changing attitudes from the market, and an evaluation of risk and likely reward.’

Other networks and associations also expect to benefit from this disruption. BKR, the seventh largest association ($1.4bn, up 2.9%), believes market intervention will create opportunities for its members. ‘We have already seen some of our member firms pick up work due to their ability to respond faster to clients or offer deeper experience in sensitive practices such as employee benefit audits or captive insurance, for example,’ says Maureen Schwartz, BKR’s worldwide executive director.

‘In addition, we have more firms that focus on a few specific industries or niches rather than trying to be all things to all clients. We believe this is where the future of public accounting is likely headed, with firms offering much narrower, but deeper areas of knowledge and service.’

Firms leaving, firms joining

Aside from potential market intervention, all the international groups bar the Big Four, continue to grapple with the prospect of individual firms leaving one to join another. At times this can leave gaps in their international coverage, but when a new firm comes on board, then it can give a considerable boost to income.

This is clearly demonstrated by ECOVIS International’s impressive 182% leap in fee income, driven by an increased presence in the US when it welcomed Marcum into the fold of the Berlin-headquartered network. From last year’s $336m, the network is now close to breaching the $1bn mark.

Although there have been no mergers between the international organisations over the past year, it is an aspect of the market that is keenly watched as groups compete with each other to attract the best firms in particular locations. ‘The landscape will continue to change, with firm mergers being a key feature of that change,’ says Liza Robbins, who herself recently moved from Morison KSi to become CEO at Kreston International ($2.3bn, up 7.5%). ‘Firms will leave and join networks or associations according to the commercial interests of the merged firms.’

Of course, Robbins oversaw the merger between Morison and Kingston Smith International two years ago. ‘Different networks and associations will be right for different firms,’ she says. ‘In the immediate future I do not predict mergers at this level as the immediate challenges such as overlapping firms and different cultures are often too difficult to overcome. In the longer-term, I think there will be more mergers, particularly in the association world, as groups struggle to deliver real benefits and differentiators in the face of increasingly complex global landscape.

‘More than mergers, I predict that in the medium to long term some organisations will just disappear as they no longer have a relevant role for their members.’

Others are less sure, but have some interesting observations on what is happening between the groups. Clive Viegas Bennett, CEO of MGI Worldwide ($484m, up 15.8%) notes a trend that is particularly prevalent in the US – baby boomers who are selling their firms ahead of retirement can find their buyer belongs to another international group.

He also observes that there are smaller groups being formed. ‘On the one hand they are nibbling at the memberships of bigger organisations; on the other hand, firms which have spent time in those smaller groups then find they would be better off in bigger organisations with better services, management and coverage,’ he says. ‘Overall, our experience is that switching has dropped in the last year. Significant mergers have always happened every two or three years. It’s not new. I don’t see that reducing or accelerating.’

Michael Reiss von Filski, CEO of GGI Global Alliance ($5.374bn, up 2.3%), perhaps sums up the situation best when saying that firms want to climb the ladder by joining high ranked networks or associations. ‘The higher the ranking, the higher the chance to receive referrals and to have global coverage. However, there are more and more organisations accepting anybody and anything as members in order to suggest global coverage. We do not think this is a sustainable model and ultimately, skipping minimum quality criteria discredits the entire organisation.’

Death by technology

Moving away from organisational challenges, a number of groups believe technology will have an ever-increasing impact on their member firms. As Viegas Bennett says: ‘Technological change – AI, big data, cloud – represents a threat to the traditional approach of the profession but also many opportunities for those who are prepared. Having said that, there are huge regional variations around the world. What is true in Europe or North America may not be true in Latin America or Africa. Even between countries within regions there are big differences.’

Tim Wilson, CEO at MSI Global Alliance ($1.372bn, down 0.7%), agrees. ‘The greatest threat is standing still,’ he says. ‘Technology, the commercial demands of firms, different networking media, etc, all present potential threats and associations and networks need to recognise these and develop their organisations appropriately so that member firms continue to get maximum benefit from membership.

‘The greatest threat to the accountancy profession is from artificial intelligence, and unless firms embrace this and adapt their workforces, they will slowly die.’

PKF’s Sim adds to this, pointing to the war for talent as another challenge facing these organisations. ‘The biggest challenge is recruiting and retaining the best people who have the skills needed in the digital age,’ he says.

Stephen Hamlet, CEO of Russell Bedford International ($487m, up 18.2%), says the combination of embracing technology while recruiting the right people will ensure they keep up with these changes. ‘As processes become more automated, practices with people who have analytical skills and those who can build relationships and relate to clients, will be the firms who will do well,’ he says.

But he goes on to warn: ‘Those who do not progress with technology and do not look at their succession plans, recruiting younger generations, providing a more flexible approach, but instead stick to their long-standing traditions, will struggle and may not survive.’

It is an area where size, or rather the lack of it, could be an advantage as the smaller organisations seek to compete with the Big Four. Third-party technology solutions can now be adopted by the smaller groups, allowing them to avoid the massive investments that the Big Four have been forced to make as they develop their proprietary software and analytical solutions.

As TAG Alliance’s Attisha explains: ‘Recently, we have seen an upsurge in third party, off the shelf, applications which will make these offerings much more readily available to mid-sized firms, which we believe will level the playing field and competitive advantage of the major firms on this front.

‘We also believe that mid-sized firms will ultimately have a competitive advantage in relation to the Big Four in this area as they are already leaner in staff and will not have to navigate major adjustments to staff levels due to the implementation of audit automation, thus allowing them to offer more competitive costs.’

Whether or not these organisations will be able to maintain growth in the next 12 months remains to be seen. All the groups have identified areas where there is still room for development, whether in geographical regions such as Africa or China, or through more services that can add value to their members, and ultimately their end clients.

But as it stands today, the sector is in good health, though if market intervention causes the Big Four to catch a cold, it could be a different story next year.