IT HAS NOT BEEN the easiest of years for the international networks and associations in our survey, but they have maintained growth, albeit at a reduced rate compared the previous year. Overall, the international accountancy sector grew its fee income by an average of 5.9% to reach a total of more than $170.5bn (£111bn). Last year, this figure stood at $160.5bn, which was up 7.7% on the previous year’s total.
At the very top, the pecking order remains the same among the Big Four networks. PwC maintains its slender lead over Deloitte, with just $210m separating these two groups. There is however a gap of nearly $7bn between the top two and third placed EY, while KPMG sits in fourth place, a further $1.4bn behind its third placed rival.
Taken together, these networks make up nearly two thirds (65%) of the overall market – it is perhaps no wonder then that so much energy has been expended in the various competition debates that are taking place around the world, notably in Europe where both the European Commission and the UK’s Competition Commission have been investigating how the market can be opened up to greater choice and competition.
With representation in between 150 and 158 countries between them, one wonders whether it would be possible for the Big Four to extend their reach any further. And yet they still manage to do so. For instance, EY recently announced new member firms in Myanmar and South Sudan. The latter is a good indication of where the network sees future growth.
The big can get bigger
As EY’s South Sudan managing partner Patrick Kamau says: “East Africa is one of the most exciting and rapidly growing regions in the world. The five countries – Burundi, Kenya, Rwanda, Tanzania and Uganda – that currently form part of the East African community alone form a common market of 130m people. Given the unexploited mineral wealth, mainly in oil extraction, South Sudan has the potential to be a substantial market in the next few years.”
Likewise, Deloitte recently opened up shop in Ethiopia’s capital Addis Ababa after its merger with local accountancy firm HST, while Myanmar has also attracted attention from the other networks, with KPMG opening a new office there last year. The network also established member firms in Iraq and Mongolia.
However, the year has not been without its difficulties for the mega-networks, with KPMG’s chairman Michael Andrew describing 2012 as a year of two halves. Growth of 6.4% in the first six months of its financial year was replaced with a more muted 2.1% in the second half.
China out of your hands
Another area of difficulty has been China, with the networks being forced to change the way their local firms operate as their joint ventures came to an end. In February this year Deloitte became the third of the Big Four firms to ‘localise’ its Chinese operations, following government requirements to have more home-grown accountants in senior positions within the firms.
The new firm, which will be a limited liability partnership, replaced a former joint venture in the country. EY and KPMG had already moved their operations into similar structures, following a decree last year from the Chinese government that accountancy firms should have no more than 40% foreign-qualified partners by August this year, falling to 20% by 2017. The Chinese finance ministry also stipulated that senior partners must be Chinese-qualified.
The joint venture licences for Deloitte, EY and KPMG expired last year – PwC’s licence is due to expire in 2017, but says it is already localising its China practice by investing heavily in developing local talent and promoting local partners. “We will continue to work closely with the Ministry of Finance and other relevant authorities to ensure a successful transition of the existing joint venture structure in China,” a spokesman said.
Despite the shake-up, the networks understandably remain very committed to the country. Chris Lu, chief executive of Deloitte China, said the firm planned to invest $160m in China over the next three years, increasing the number of staff to 15,000 people by 2015. The firm has invested $250m since 2004.
“We are deeply committed to playing our part in supporting the needs for professional services of China inbound and outbound business opportunities, as well as ensuring that the ongoing growth of China’s economy is well supported by the ongoing growth and maturity of the Chinese accounting industry,” Lu said.
Of course, it is not only the Big Four that are looking to countries such as China, and regions such as Africa for growth. As Geoff Barnes, chief executive of Baker Tilly International, says: “We have an ambitious strategy to grow our operations across Africa, a region that is seeing increased activity by multinational businesses. In the last year alone, we welcomed five new member firms in the region and will continue to grow into this market in 2013.”
Barnes adds that the network also sees China as a major market and a big growth driver of not only its Asia-Pacific region but internationally. “The Chinese government is keen to create domestic audit firms with sufficient scale to audit the country’s huge state-owned enterprises and rapid growth businesses,” he says. “The accounting profession is relatively young, but it is on an accelerated upward trajectory. There are great opportunities in the country and we are planning on being a big player.”
Other networks and associations are also eying up opportunities in the emerging markets. “Some of the African economies are really expanding at an exponential rate,” says Donal Watkin, chief executive of MSI Global Alliance, “and it is fair to say that among the investment community it will be the next big marketplace.” Much of this interest is focused on natural resources, and Watkin has seen member firms in Australia and New Zealand working with colleagues in Southern Africa in response to client demands. Likewise, Watkin has seen a good deal of interest in Brazil. “We are gearing ourselves up in Brazil to have a very good group of firms as we recognise the market will continue to expand.”
Follow the Big Four
Watkin however makes the observation that the accountancy profession itself needs investment if it is to serve the entrepreneurial companies that are springing up in these countries. In this respect, the Big Four firms could well end up providing the raw material for smaller networks and associations as groups of partners seek to set up their own firms.
“It can be speculative, but you can recognise the aspirations of these people and you take an informed view on where they will be two or three years down the line. They can offer something dynamic, but obviously in a start-up model,” Watkin explains, adding that these types of practices are ideal for a group such as MSI as they are geared up for international business. “That is the critical issue,” he says. “We need to make sure that we provide a resource in the marketplace that can respond to the international requirements of our members’ clients.”
Last year, there was much talk about mergers among the international groups – IGAF and Polaris had come together, a group that has now rebranded itself as PrimeGlobal, but since then there have not been any wholesale mergers. There have, however been defections from one group to another, most notably when PKF in the UK merged into BDO, though as this was not formalised until earlier this year, the Accountancy Age tables do not reflect this change.
The move left PKF International without a UK representative until Littlejohn signed up – the firm, which joined PKF from the beginning of the month, was previously, ironically, a member of PrimeGlobal.
Such musical chairs are seen as both a threat and an opportunity to the international groups, depending on whether they are losing or gaining a member firm. As James Hickey, chief executive of Alliott Group, says: “The key issue facing all groups is to deliver tangible value to their members. More and more firms are looking at what return they have had from their network or association and more and more are questioning the return they have received from their investment.” Hickey adds that his group is seeking to maximise the benefits that membership brings by generating new business through developing strategic partnerships with global business.
Alliott says it has signed up 16 firms in the past eight months. “Interest is coming from two types of firms,” says Hickey, “the first being those mid-tier firms that have not been part of a group before and those that have not found value from their past membership to another group”.
“For those firms that are joining a group for the first time, they tend to be firms that have found their markets become more competitive and they are looking to be part of a group to help retain existing client business and to also help them attract businesses from firms that might require cross-border advice.”
It is such changes in the global marketplace that will continue to drive the demand for international business advice. As such, it is reasonable to expect that the international accountancy networks and associations will continue along their growth path in the future.
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