International networks survey: the big chill

It has been a difficult year for most of the international accountancy
groups. Fee income has dropped for nearly half of the organisations featured in
Accountancy Age’s international survey, including all of the Big Four firms. In
total, the 30 largest international accountancy networks, alliances and
associations saw their fee income fall by nearly 5% to $142bn (£100bn) this year
compared to $150bn in 2009.

While part of this fall can be explained by exchange rate differences – the
figures are quoted in dollars – it is clear that the groups have had a tough

Add to this the near constant fear of cross-border legal action and you can
see why some senior executives in these organisations might have problems
sleeping at night. The global recession has, in effect, created a double whammy
for the groups – corporate cutbacks have hit revenues in areas such as tax and
transactions, while corporate collapse has seen creditors that are out of pocket
searching for those with the deepest pockets.

And we are not out of the woods yet. When asked about possible threats to the
industry, a significant number of groups said they feared a double dip
recession. So it is possible that, if such fears are realised, some groups won’t
see a return to growth next year.

Looking at the very top of the table, all of the Big Four international
networks saw fee income fall compared to last year’s results. Once again,
PricewaterhouseCoopers tops the league, with fee income of $26.2bn, down 7% on
last year’s total. But it was able to just keep its nose in front of second
placed Deloitte, which delivered $26.1bn in revenues, down 5% on the previous

Ernst & Young remains in third place with some $21.4bn in fee income,
down 7%, while KPMG, which saw an 11% fall, came fourth with $20.1bn, though the
network is quick to point out that this was only a 2.6% fall in local

However, despite these results, the accountancy giants remain upbeat about
future prospects.
PwC says: “There are now clear signs that the global economic recovery has
started and is picking up speed.”

It points to a number of sectors where it sees potential for growth –
healthcare, financial services and infrastructure – and certain service lines,
such as sustainability, including corporate social and non-financial reporting,
carbon markets and trading and environmental data management.

KPMG sees potential in emerging markets, saying: “Geographically, high-growth
markets in Asia Pacific, particularly China, and Latin America continue to
present some of the greatest opportunities, and we expect to see continued
expansion of investment and M&A activity in these markets.”

But the network can see some critical challenges ahead. The first is having
standards and procedures in place that ensure consistency and integrity wherever
a global network’s firms operate. The second challenge is balancing long-term
goals with short-term costs so that productivity gains are realised while also
supporting longer-term business objectives. Finally, with increasingly global
markets, it is a greater challenge than ever to have the right people and
resources in the right places to meet the needs of clients and the business.

The picture is mixed for the next tier of groups, as indeed is the way in
which they are organised. Five out of the next 10 groups actually saw fee income
increase on last year’s figures. This includes 12th placed Leading Edge
Alliance, which reported a 16% jump in fee income to $2.4bn. This association of
independent firms counts UK firms Johnston Carmichael and HW Fisher among its

Seventh placed Geneva Group International reported 9% growth ($4bn) – its
members include UK accountancy firm Citroen Wells, though it should be
remembered that the group as a whole includes law firms as well as accountancy

“Geneva Group International has a continuous and constant growth, despite
the situation of the global economy,” says Michael Reiss von Filski, secretary
gen eral of the group, who believes his members have picked up work by being
more fleet of foot than some of their larger rivals.

“Now more than ever, customers are looking for excellent professional
services at a reasonable and fair price. Entrepreneur-owned accounting firms are
preferred by clients,” he says. “It seems that many managers without any
entrepreneurial attitude have completely lost touch with reality and paved the
way to the world’s largest financial crisis.”

RSM International (7th, $3.9bn), likewise, saw a boost in its fee income.
Praxity (9th, $3.3bn), whose members include the global firm Mazars, saw fee
income go up by just 1% ($3.2bn). However, it believes it will grow through the
addition of firms covering countries where it is currently under-represented.

Like many of the other groups, Baker Tilly International (10th, $3.1bn)
believes that Latin America and China will have an influence on its direction.
“The Chinese accounting profession is undergoing a period of significant
transition with the ambitious announcement by the ministry of finance of the
creation of a Big 10 that includes the Big Four and six large domestic firms,”
says Geoff Barnes, Baker Tilly’s chief executive.

“Such a dilution of power will give the mid-tier networks more access to
companies in the world’s third largest economy in nominal GDP terms.”

But, like so many of the international groups, Baker Tilly sees legal action
as a constant headache.
“The threat of network-wide vicarious liability litigation as a result of the
grey areas in the definition of ‘network’ is always a concern,” Barnes says.
“However, all networks understand generally that the onus of liability arises
from actions implying control over member firms. This is a known parameter
within which we must work and remain vigilant for members who misunderstand the
implications of implying such control.”

And this is why all the groups are very clear about how they define
themselves. Size would appear to have a bearing on this. In the top 15 groups,
all – bar three – class themselves as a network, as set out in the EU’s 8th
company directive and the International Federation of Accountants’ (IFAC) own
ethical code.

But, after that, the picture changes. Out of the remaining 15 groups in the
Top 30, only four describe themselves as a network, with the others preferring
to take the association route. This is understandable as there can be little
doubt that greater resources are required in order to police a network and
ensure that there is no exposure to legal action.

“Some international groupings that rather sat on the fence in the ‘network or
association’ debate a year or two back are now beginning to take clearer
positions about which path they wish to take, and this is causing certain member
firms to re-evaluate their membership,” comments James Mendelssohn, chief
executive of MSI Global Alliance (20th, $1.3bn).

“This will result in a certain amount of movement of member firms between
different organisations – and those with a clear and defined strategy will do
well. MSI Global Alliance sees this as an opportunity and, indeed, one that has
already resulted in us gaining a couple of new members,” he says.

The group itself expanded into six new countries over the last 12 months, a
trend it expects to maintain. However, the association option is not a soft one.
As Mendelssohn says: “We continue to extend the association only when a firm is
able to meet exacting membership criteria that include full service capability,
independent and medium sized, a diverse and growing client base, strong local
focus and international experience, and the ability to work in English.”

And he adds that the association is seeing a steady stream of enquiries from
firms for whom network membership is no longer desirable.

GMN International (just outside the top 30 with $250m) picks up this theme.
“All networks will need to review their operating structure to see if it is
proving optimal results for members,” it says.

However, this hasn’t put off some organisations moving from the association
model to a network.
From November 2009, Kreston International (16th, $1.9bn) has adopted a strategy
that falls within the IFAC network definition. The introduction of procedures to
ensure compliance with the regulatory requirements for networks will be
completed during 2010, it says.

“The resumption of growth of international business following the recent
global economic slowdown will see the resurgence of sustained demand for
international networks with the ability to provide seamless and integrated high
quality compliance and advisory professional services,” it explains.

And this sums up the optimistic attitude of the groups, with many believing
that there will be great opportunities for client service and also to grow
through acquisition.

Crowe Horwath (11th, $2.8bn) says: “We believe the global economy will
recover and will present middle market opportunities for the specialised
consulting services that are keys to our business strategy. In addition to
organic revenue growth, we anticipate that our larger member firms will complete
strategic merger and acquisitions, which will provide additional revenue

The flipside to this is that a slower economic recovery could dent such
growth ambitions while member firms might be acquired by other organisations.
And then there is the fear that continued price competition driven by the
largest global networks looking for revenue growth will have an impact on the
mid-tier groups.

All this means that 2010 is shaping up to be a very interesting year for the
international organisations, with winners and losers likely to emerge in equal

here for this year’s results in full


Further reading:

year’s survey

Related reading

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