Top 50 retrospective - 1969 was a very good year ...

Of the top 10 firms ranked by fee income in 1969 not one name remains the same: they have all either merged into each other or disappeared altogether.

Just a glance at the comparative league table (see below) shows how the biggest firms of the late sixties have become the mega-firms of the early 21st century.

Price Waterhouse swallowed Coopers & Lybrand, which had itself taken on the UK firm of Deloitte, Haskins & Sells. Peat Marwick Mitchell has become KPMG (see box) by way of Thomson McLintock and Whinney Murray is now Ernst & Young, via merging with Turquand Youngs and absorbing Arthur Young Mclelland Moores.

And so on and so on up to the present day. More recent changes have been still more profound. The seismic upheaval of a couple of years ago that saw Andersen, then the UK’s fifth biggest accountancy firm, disappear, is truly unparalled. We should hope, of course, that it is not repeated.

Deloitte & Touche obtained the lion’s share of the Andersen business, with Ernst & Young picking up some of the remainder.

It’s worth remembering that Andersen’s growth had not all been organic – it had had previously acquired the principal offices of BDO Binder Hamlyn, with the remainder going into Stoy Hayward.

Of course, no league table such as this can be 100% accurate. The criteria for inclusion may have changed slightly over the years, and there are always some firms that should undoubtedly register on the list, but are too shy to appear in league tables. And until the last few years, disclosure of financial information had never been the forte of the the top firms.

The fact remains that in just a few short years, the face of the accountancy profession has changed completely. It’s a change that is replicated through every level, from the giants at the top end, through the mid-tier firms, the independent practices and the small practitioners at the bottom of the pile.

Globalisation, competition and the demands of the market have reduced the top 20 firms of the eighties to a handful of mega-firms that dominate the scene nationally and internationally. The number of mid-tier practices has also shrunk as firms have looked to merge rather than opting for organic growth and development.

Of the top 75 firms in 1989, more than 60% have disappeared through acquisition or merger. It’s a staggering statistic. The consolidators may not have made the impression that some predicted, but firms are continuing to merge or be taken over.

Interestingly, it is the independent sector that has seen the greatest upheaval in recent years, although this is far less visible, as they rarely feature in league tables and their growth or decline generates little interest in the professional media. Here, many firms are struggling to bolt on an additional range of services to cope with client demand, while at the same time trying to grow the business and retain their independence.

To add to their woes is the ticking time bomb of succession that has been rumbling under the surface for several years and is now about to explode. For many this may eventually prove an insurmountable problem.

An ageing partnership profile; shrinking pensions; insufficient capital in the practice to pay out retiring partners; a dearth of high-calibre new partners prepared to invest in the business; problems with client retention as partners retire; no hope of early retirement; and no possibility of continuing independence. These are just a few of the succession issues revealed by the firms taking part in a recent survey by Kato Consulting.

Perhaps the most shocking fact to emerge from this survey is that 28% of the respondents saw a sale or merger as the only way of solving their succession problems. Bearing in mind the number of partners now in their late 40s and 50s – and assuming that they will virtually all be working until they are 65 – this means that in 10 years or less the profession will have lost more than a quarter of the independent firms practising today.

The consequences of a loss of this magnitude will be felt throughout the profession as a whole, as well as by the entire business community, particularly the owner-managed businesses and SME clients that constitute the lifeblood of the sector.

For some years now, multinational corporations have had to select their accountants from an increasingly dwindling pool, as mega-mergers reduce the number of firms available. It is a desparately unsatisfactory situation, which does little to provide comfort to regulators, clients and, for that matter, the firms themselves.

Nevertheless, the same is now set to happen to smaller companies. Those that prefer to use local independent practices, rather than a national or international firm, are going to find their choice is similarly restricted and there may well be areas where no substantial independent firms survive at all.

Another negative outcome for clients will be the inevitable rise in fees as the number of service providers gets smaller, and they may well find that the traditional personal service that independent firms provide is replaced by the rather more clinical and detached attitude of a large practice. Although succession problems will precipitate the demise of a proportion of the independent sector, there will still be some new practices arriving, as individual offices or specialist teams bail out of the top 20 firms.

This is a relatively new phenomenon and has occurred as a result of disaffection within offices, or where specialist sectors and teams (such as corporate finance, forensic or tax consultancy) have found their profit shares too restricted by the compliance service results in their firms.

As for how the profession will be structured in the future, it doesn’t take a crystal ball to predict the inevitability that the Big Four will become the Big Three within the next five years. It also seems increasingly likely that the residue of the top 30 will continue leaping into bed with each other – with varying degrees of success. As a result we will soon see more of the larger regional independent practices appearing in the top 30.

What is less certain is the fate of many of the smaller independents.

Those that have solved their succession problems and geared themselves up to provide a service that is of real value to their corporate clients will succeed: the rest may struggle to survive.

• Phil Shohet and Andrew Jenner are directors of Kato Consultancy.