Top 50 Analysis - PwC and all that

With an average growth rate over 20%, the Big Five firms create the equivalent of a new firm of the same size each year. If this trend continues, every accountant in the UK will work for a Big Five firm by the year 2010.

Even accounting for the upheavals and redundancies brought about by last year’s merger between Price Waterhouse and Coopers & Lybrand, PwC has more than double the number of partners of its nearest rival, KPMG.

PwC insists it is a global company and is reluctant to give a precise figure for its UK fee income. However, the firm’s sheer size makes it an automatic choice for any multinational or listed UK company’s shortlist; it remains the benchmark against which rival firms are measured.

While KPMG held on to second place, the following placings are up for grabs. Deloitte & Touche is in the process of shifting its year end from 30 September to 15 April. Under the new regime, Deloittes claims its UK fee income would be £650m – leap-frogging the firm into third place ahead of Ernst & Young and Arthur Andersen.

Consultancy has been one of Deloitte’s main differentiators; about 18 months ago, the firm zeroed in on the market for IT consultancy among second-tier corporates. Big Five rivals PwC and KPMG enjoyed 51% and 43% growth rates respectively, but with a 60% jump, Deloittes became the first firm to earn more from consultancy in the UK than audit and accountancy work.

Having been cut loose from its Consulting sibling, Andersen is now firmly anchored in fifth place. Given the emphasis advisers and institutional investors put on accountancy firms’ fee turnover, do not be surprised if the firm’s name crops up in merger rumours.

SECTORS – AUDIT

An important but waning star is how most firms see their audit services and this year’s Top 50 only adds weight to that argument. Growth in audit fees again lagged behind other sectors but, for most firms, it is still the most lucrative sector and all-important in generating additional fees that can be earned from the real growth areas like consulting.

In that respect the audit story is very much the same as last year’s.

However, what added some much needed spice was the fallout from the PricewaterhouseCoopers merger.

Diageo was the first PwC client to defect after last July’s merger, jumping ship to KPMG last October. Deloittes picked up PwC’s Abbey National contract a month later. In February this year, building products conglomerate Caradon and private City bank Leopold Joseph decided to drop PwC.

This month PwC admitted it was reviewing its audit client base, a review that culminated in the firm ceasing to be auditor of troubled retailer Laura Ashley – ending a ten-year relationship in the process. It had dropped Asian-owned Meghraj Bank a month earlier. As for the net effect of these defections and droppings, it’s impossible to tell. PwC refuses to break down its fees by sector.

Big Five firms that had benefited from this fallout could not claim a bumper year in audit, as fee increases in this sector were almost half the rate of overall increase. Ernst & Young, Deloitte & Touche and KPMG all posted gains around the 10% mark – the average advance across the Top 50 was a shade higher – while, like PwC, Andersens failed to break down its income by sector.

Most mid-tier firms enjoyed better audit business. Smith & Williamson fared best of all in the Top 50, notching up an impressive 45% rise in audit fee income to £9.6m. The firm was rightly pleased, but it too sees audit as playing a less important role in the future. It now accounts for just 20% of its fees.

The spate of mid-tier mergers has not filtered through into audit reviews by companies yet. And that – alongside the spate of corporate mergers that will require companies to pick an auditor for the year and years ahead – should be interesting in the audit field over the next 12 months. By Damian Wild

TAX

Respectable growth figures for tax work from almost every firm surveyed reflect the fact that tax continues to be a growing and profitable area of work for accountancy firms of all sizes. Mike Warburton, tax partner at Grant Thornton, says this growth would be bigger if the profession could find enough skilled practitioners to do the work available. ‘The battle is not so much to get business, but to get good people,’ he comments.

Tax specialists are commanding ever-greater premiums over colleagues in other areas – prompting increasingly aggressive attempts by the larger firms to attract staff with tax knowledge. The wails of Inland Revenue chiefs that their best inspectors are being poached by accountancy firms offering lucrative salary packages, have grown this year.

The profession should also thank Gordon Brown for the plentiful availability of tax work. Reams of new tax legislation and new Inland Revenue practices mean headaches for practitioners, but it also means more clients are asking them to carry out more work.

One of the many areas where complicated new tax rules are being introduced is corporation tax self-assessment. An Ernst & Young spokesman says: ‘CTSA means a lot of businesses have to radically change their approach. They now require quick-reacting tax advisers that can give them practical advice as they go along.’

He also refers to the increased market for international tax work: ‘We have truly global companies wanting truly global tax advice. This raises issues for accountancy firms about things such as knowledge management.’

The continuing enthusiasm for mergers and acquisitions and corporate restructuring is also providing plenty of tax work, as is a growing demand for forensics services. Conflict of interest issues for the Big Five, Warburton argues, means much of this work is trickling down the mid-tier.

Those firms who have experienced the greatest growth in their tax work come from all sectors. Among the stars are Big Five firm KPMG, mid-tier firms HLB Kidsons, Smith & Williamson, Baker Tilly, MacIntyre Hudson and Cooper Lancaster Brewers, and nearer the bottom of the Big 50, Larking Gowen and Jacksons.

Only two firms recorded a drop in income from tax work, and in both cases these drops were tiny. By Chris Quick

MANAGEMENT CONSULTANCY

Management consultancy revenue for the Big Five soared by over 50% in 1998 despite fears of an impending recession. But in contrast to figures from the previous year, the boom in consultancy was not just restricted to the Big Five. Some of the fastest growth took place in the top 20 and 30 firms.

PricewaterhouseCoopers’ consultancy still dominates the sector. Globally it reports a 41.5% increase. Its rivals, however, are also expanding fast. Its nearest competitor, KPMG, earned £217m in consultancy for 1998, up 51% from 1997.

But it is Deloitte & Touche that emerges as the star Big Five performer.

With fees of £206m – a 60% increase on last year – it leap-frogs Ernst & Young into third place.

Arthur Andersen, awaiting arbitration over its divorce from Andersen Consulting, declined to reveal consulting revenues. However, according to a survey earlier this month by Management Consulting International, its worldwide consulting revenues rose by 43.5% to $1.3bn.

Consultancy is an extremely broad church, covering outsourcing, management consulting and IT. Although firms are reluctant to break down their consulting revenues into categories, IT is clearly the main force behind the robust growth in consulting revenue.

Deloitte & Touche, claims its mid-market management consultancy, Management Solutions, grew by almost 45% for the year to 15 April. It remains coy about the breakdown of consulting revenue, but Nick Griffin, national manager, says it has placed increased emphasis on IT implementation over the last few years.

And, as small and medium- sized companies demand more complex financial software, mid-tier firms are finding management consultancy can provide a much-needed source of revenue. London-based Morley & Scott can claim the most rapid rise in consulting fees, while MacIntyre Hudson – ranked at number 17 in the table by fees – saw its revenues rocket by 87% to £2.8m.

Francis Clark, a chartered accountant based near Bristol, saw its consulting fees climb by 49%. Robert Beard, administrative partner, says it has expanded its range of services to include advice on implementing accountancy software packages from companies like Sage and Pegasus. ‘More small companies can afford to invest in IT and they need help implementing it,’ he says. ‘We are looking to add services to compliance work.’

E-commerce also helped boost revenue last year, as more companies look to sell their products and market themselves over the Internet. Most of the Big Five already have an e-commerce practice to advise companies on security and technical issues. It looks set to dominate the next Top 50 table. Nick Huber

INSOLVENCY

The business recovery sector has experienced some of its biggest changes over the past year, since insolvency practitioners became a recognised profession with their own exams back in 1986.

Against a backdrop of falling numbers of formal liquidations (although the overall numbers are beginning to rise again) and the rapid acceleration in turnaround consulting (whereby practitioners are brought in to advise a company before problems become insurmountable) the whole culture of the insolvency world is changing.

Alan Bloom, president of The Society of Practitioners of Insolvency, explains that the government is committed to encouraging a climate in which entrepreneurs are encouraged and failure is not seen as something that should be punished.

And this attitude has already led the DTI to conduct its own internal review into personal insolvency while there is an on-going joint review by the DTI and Treasury into whether the existing procedures are consistent with fostering entrepreneurship on a corporate level.

Only a matter of months ago, the Ten Years On working party of licensing bodies concluded that it should establish an Insolvency Practices Council which has since been agreed by Insolvency Minister Kim Howells. The soon-to-be-launched council will feature a majority of lay members who will be able to monitor the profession in a bid to make it more transparent.

The SPI has begun its own evolutionary campaign to widen its membership from licensed IPs – who include accountants and lawyers – to a range of other professionals who are involved in turnaround work, such as bankers.

Baker Tilly has shown the biggest leap in growth, adding 58.8% to its insolvency practice and other IPs have taken notice of the change.

Colin Haig, head of insolvency at Baker Tilly, is proud of the results but says that the firm made a conscious decision to hire some major talent and give them the best resources once on board. ‘We are recruiting the best and giving them everything to make sure they succeed,’ says Haig.

As Baker Tilly gains on the national stage, the Big Five’s workload is being driven by an international client base which recognises the strength of the UK insolvency profession.

PwC, which has by far the most staff operating within this field, says that its growth is being spurred on by this international dimension. Although it has also suffered from the downturn in formal insolvency work which has forced the firm to cut some jobs, turnaround consulting and overseas business is balancing the effect.

Insolvency partner Steve Hill says: ‘Clients are looking for firms who can demonstrate a global reach while also being able to draft in expertise.’ By Lucinda Kemeny

CORPORATE FINANCE

The corporate finance sector has continued to attract some of the largest fees for the Big Five and Group A accountancy firms, as they maintain efforts to compete with banks.

Ernst & Young tops the pile for corporate finance fee income in this year’s Accountancy Age Top 50. The firm produced fees of £62.3m and registered a 26% increase. But Deloitte & Touche achieved a higher percentage change of 31.6%, the highest of the Big Five, while KPMG saw its fees rise by 14% to £41m.

Among the Group A firms, HLB Kidsons performed best with a 26% rise in fee income to £2.3m. Kingston Smith also performed well with a 20% increase. While, lower down the Top 50 table, Jacksons achieved a 97% increase, although this amounted to £200,000 income from corporate finance.

The biggest slowdown was felt by The Smith & William-son Group – whose income dropped by 3% to £2.5m – and Solomon Hare which saw a 10% reduction in corporate finance income to £2m.

In the mid-tier sector, where some of the most significant new work is made, fees from respondents averaged 2.5%.

Keith Tilson, head of mergers and acquisitions at PwC, said: ‘All of the Big Five have corporate finance and mergers and acquisitions arms.

Now, many banks have amalgamated and are looking at bigger deals. We are big players in deals of up to about £300m, but we average around £30-£40m.’

Fears of an economic decline around the turn of the year proved to be unfounded and business in corporate finance has picked up again.

‘The recession worry has now gone away and deals are still being done,’ Tilson added.

Accountancy firms have increased their stake in the lucrative corporate finance market. For deals above £300m, the merchant banks are still leading the pack.

Trends in the sector have emerged from pan-European investment, globalisation and consolidation – all of which have led to increased business.

Additionally, with business investment moving away from single countries, the introduction of the Euro has also boosted potential markets. By Ben Griffiths