PWC: is it too big for its boots?

On 1 July 1998, a new giant appeared on the audit and accountancy block ­
PricewaterhouseCoopers ­ created from the merger of the world’s fifth and sixth
largest firms. Looking back, did its formation have a positive or negative
impact?

In 2008 there are mixed views. In the more negative camp, Paul Boyle, chief
executive of the Financial Reporting Council, says: ‘With hindsight, it’s
unfortunate that the merger was allowed to go ahead, because it has left us in a
more risky position than we otherwise would have been.’ This risk stems from the
reduction of the big firms to just four, given Andersen’s collapse, coupled with
the risk that another one could potentially disappear fast too.

Playing the ‘what if’ game, Boyle muses on what might have been had the Price
Waterhouse and Coopers & Lybrand merger not been allowed by the competition
authorities.

‘If PW and Coopers still existed, and if they were each half the size of PwC,
they would be about the size of Ernst & Young,’ Boyle says. ‘No one is
really going to say they would be too small to handle global clients.’ In other
words, we wouldn’t necessarily have the concerns over competition and audit
choice that exist now.

Did the competition authorities get it wrong? ‘I’m not saying it would have
been possible for the regulatory authorities to make a different decision,’
Boyle says. ‘But it is an example of how something that is in the commercial
interests of two parties to a transaction might not be in the public interest.’

Peter Wyman, head of professional affairs at PwC, disagrees. He proposes a
very different outcome to the same ‘what if’ scenario. He says: ‘If the merger
hadn’t gone ahead, it is quite possible, even by the time that Andersen had
gone, that E&Y and KPMG and Deloitte & Touche, as they were then, might
have moved so far ahead that we could have ended up with the Big Three, and then
four firms following: Coopers, PW, BDO and Grant Thornton.’

The pre-merger view in Coopers, Wyman’s firm, was that the fifth and sixth
placed firms globally would ‘topple out of the big league’. He explains: ‘We
would not have had the ability to do everything necessary to invest in people,
technology and emerging markets.’ The three largest firms, in contrast, did
have. ‘Because they were bigger, they had more resource and were able to deal
with the challenges of the late 90s, which were around globalisation and
technology and specialisation. Those were three big trends happening at the same
time.’

Wyman feels that the willingness of the authorities to approve the merger
confirms the validity of this argument. ‘Otherwise the competition authorities
would have put up the red flag,’ he says. ‘It was subject to a pretty exhaustive
and quite long period of review. We ultimately made the case successfully to the
competition authorities round the world, most particularly the Justice
Department in the US and the European Commission, that it was in the capital
markets’ best interests that the merger be allowed to happen.’

There has, however, been some debate about whether the merger of PW and
Coopers, and the Big Four outcome, caused a rise in audit fees. Jeremy Newman,
managing partner of BDO Stoy Hayward, believes research in the UK ‘shows a clear
trade-off between the number of firms in the marketplace and a reduction in
audit fees’.

Some others are unconvinced. These include Wyman, who sees no negatives
arising from the merger. ‘I think it’s been good for the capital markets,’ he
says. ‘The benefit of having a firm like ours, with the global reach and the
depth of specialisation, has been entirely a factor for good.’

BDO’s Newman also sees an upside. ‘From a selfish perspective, if we hadn’t
gone from the Big Six to the Big Four, people wouldn’t have been worried about
competition and choice. With six there’s enough competition, with four there
isn’t. So, over the last five or six years, we have had lots of opportunities to
grow more rapidly, to gain access to more interesting work, than we would have
had without these changes in the marketplace.’

The merger is, Newman suggests, ‘a prime example of the law of unintended
consequences’. He says: ‘At the time of the merger I don’t think anyone focused
as sharply as they are doing now on the impact a reduction in the number of
firms could have on competition and choice in the audit market.’