BIG FIRMS SPLIT AS SEC FLEXES MUSCLES – By Michelle Perry[QQ] The big accountancy firms came close to seeing all their efforts to build up a vast array of business services reversed this year when the US Securities and Exchange Commission started wielding its transatlantic sword in a bid to crack down on audit independence violations.
After almost a year of wrangling, it finally unveiled new rules which substantially limit the amount of consultancy work – particularly in IT – large accountancy firms can offer audit clients.
But the SEC’s revised rules did not, as was feared, prohibit firms from offering a number of non-audit services which they maintained would strangle their ability to compete with other professional firms and provide good quality audits.
Firms can continue to develop and offer non-audit services provided the firm’s management team informs its audit committee. Such a framework already exists in the UK.
But the SEC moves contributed to structural changes.
Ernst & Young sold off its consulting arm to the French firm Cap Gemini, and PricewaterhouseCoopers made a failed attempt to sell off its consulting arm to computer giant Hewlett-Packard. PwC says it still intends to split, although the firm denies the changing regulatory environment has been a key influence in its structural decisions over the year.
Following the SEC climbdown, E&Y’s chairman Nick Land, continues to maintain that Big Five firms will have to split their audit and consultancy services due to market pressures.
While it appears that the rest of the world was moving towards a principles-based approach to ensure impartiality in the accountancy profession, US regulators were insisting on retaining a written rule method for safeguarding auditor independence and investor confidence.
In November IFAC, the international body of accountants, approved an initiative to forge ahead with a principles-based code of conduct to protect auditor independence. It hopes Iosco, the group of global stock exchange regulators, of which the SEC is a member, will endorse its proposal next April.
KPMG, Arthur Andersen and Deloitte Touche Tohmatsu, the three most vociferous opponents of the SEC’s initial proposals, are more than just a little disappointed.
Neil Lerner, head of risk management at KPMG, said: ‘The UK and Europe are already ahead of the US in many of the rules that the SEC now seeks to implement. KPMG still regards principles as a better basis for regulation than lists of prescriptive rules.
‘We are disappointed nevertheless that the SEC does not appear to recognise the validity of independence systems outside the US.’
Deloittes, however, remains the only firm committed to retaining its consultancy arm. AA divorced from Andersen Consulting earlier in the year after spending more than two years in arbitration proceedings. KPMG’s efforts to seek an IPO for its consulting arm in the US have been consistently scuppered first by regulatory pressures and more recently by market conditions.
Graham Ward, president of the English ICA and IFAC board member, visited Harvard’s Business School, to highlight the deficiencies of hard and fast rules, promoting instead a code of professional conduct based on principles.
Ward this month reiterated his demands for the SEC to recognise the UK’s system of safeguarding auditor independence as equally effective to the US rule-book approach.
And in a further twist of fate, E&Y announced its intention to becoming a limited liability partnership. It plans to push ahead to complete conversion by the middle of next year. As many as 90,000 firms have expressed an interest to the government in becoming an LLP and the E&Y move could mark the opening of the floodgates for other large accountancy and law firms to follow suit.
The Limited Liability Partnerships Act 2000 was duly passed in July this year creating a new business entity that combines the organisational flexibility and tax status of a partnership with limited liability for its members.
Chancellor Gordon Brown announced in his pre-Budget report in November that LLPs will be available from 6 April 2001.
CONSOLIDATORS STORM INTO MID TIER IN EFFORT TO REDRAW MARKET – By Alex Miller
Year 2000 will go down in accounting history as the year consolidators came to the fore amid plans which could completely re-draw the UK’s mid tier, which is worth about #1bn in fee income.
London-based stockbroking firm Raphael Zorn Hemsley began the new millennium by floating under the Tenon brand in Spring and revealed it was armed with #50m to unite smaller firms in a single business services operation.
Rival consolidator Jobtel said it was on track to launch a new consolidated firm in April – which it subsequently did – and predicted it would attract #160m in fee income within five years putting the new player within the top 10 firms according to the 2000 Accountancy Age Top 50.
It held a raft of talks with firms in the #3m to #16m fee income bracket and claimed strong expressions of interest from two mid-tier firms and met interested parties for secret discussions in March at the English ICA.
Consolidation stormed back into the news in August when Jobtel confirmed it had handed over the leadership of its programme to an unnamed Top 40 practice.
It also said it had signed up its core firms – however their identities remain a mystery. Two months later cracks in the plan appeared after it said it had stopped looking to sign any further firms, due to the ‘cultural differences’ of the firms on board.
Tenon announced its first acquisition in September after snapping up the non-audit business of Top 50 firm Morison Stoneham in a #10.25m deal.
A further three quick-fire acquisitions followed after it snapped up the Williams Allan Group, BKL Weeks Green Group and the Berkeley Jackson Group, pushing Tenon into the Top 20 in the Accountancy Age league table based on fee income.
Last month a third major UK consolidator sprung up after Hampshire-based software producer Harris Walters revealed that under the Discovery Business Group brand it would acquire up to 12 ‘like-minded’ firms before floating.
Tenon moves into Top 20
DRESSING DOWN TO GO TO WORK AS STAFF REBEL OVER LONG HOURS
Accountants celebrated the new year by discarding much-loved business suits in favour of smart-casual attire for work. Arthur Andersen started the trend in 1999, but Big Five rivals and the mid-tier, possibly influenced to a lesser degree by their US counterparts, left it until 2000 to start dressing down.
Deloitte & Touche followed in April and KPMG in July.
According to KPMG the reason was because ‘it makes staff happier, more relaxed and therefore more productive’.
But the level of dressing down appeared limited. The line between what was supposedly allowed and what people were actually wearing seemed blurred and staff still seem unsure as to when the time is right to ditch formal apparel.
Some, however, continued to favour standards of dress from the good old days.
‘Due to the nature of accountancy, suits are the most suitable choice of dress,’ a spokesperson at Mazars Neville Russell told Accountancy Age.
Apart from attire, 2000 was a year when employers started talking more about flexible working practices, moves hastened in part by the burgeoning new economy and a tight labour market.
Employees appear to be weighing up the rewards that come from hard work against the rewards that come from having a fulfilling life outside work.
According to the UN’s International Labour Organisation, three out of ten UK employees experience mental health problems and work-related stress.
Whether employers are paying any more than lip service remains to be seen, but the debate appears far from over.
How to cope with ‘office casual’
– Ernst & Young becomes first Big Five firm to abandon English ICA training scheme in favour of Scots ICA
– English ICA officials visit other Big Five firms in attempt to persuade them not to follow E&Y
– With a week of the 31 January deadline, one third of tax returns still not submitted
– SEC forces PwC partner Geoff Westmore to resign
– A million taxpayers miss Revenue’s self-assessment deadline
– PwC joins the English ICA exodus
– Revenue announces it will collect its first income tax payments over the internet by end of year
– The Big Five launch fightback against SEC pressure to separate audit and consultancy business
– Government sets #1m audit threshold for small companies, and proposes #4.2m limit in future
– Accountancy bodies announce plans for global chartered accountancy qualification by 2003
– Ernst & Young partners give go-ahead to sell off firm’s consultancy practice to Cap Gemini
– A Y2K bug causes the Revenue’s computer system to fail creating a backlog of 900,000 self-assessment forms
– Government agrees to shift dot.com share tax burden from companies to individual employees
– JDS announces investigation into PwC over firm’s involvement in collapsed engineering company TransTec
– Further delays for taxpayers wanting to file their self-assessment tax returns over internet
– PwC delays splitting up its auditing and consulting divisions until end of year
– Accountancy Age Top 50 reveals Big Five firms are growing twice as fast as mid-tier firms
– Inland Revenue suffers further embarrassment as it admits its website does not work properly
– UK to play greater role in setting global accounting standards following appointment of Sir David Tweedie as chairman of board of revamped International Accounting Standards Committee
– Both sides claim victory as Arthur Andersen finally divorces from Andersen Consulting
– English ICA defends UK auditor independence in two reports against the SEC’s moves
– Former building societies saved huge ‘conversion’ tax bill following the Revenue’s decision not to appeal a special commissioner ruling
– An Accountancy Age/Reed Personnel Big Question survey reveals just one in five FDs believe Labour policies support business
– APB announces tough rules on UK auditor independence as SEC continues with crackdown on big firms
– PwC’s proposed sale of its consulting arm to Hewlett-Packard is revealed
– Andersen Consulting announces new name, Accenture, and #110m rebranding campaign
– UK venture capitalists say dot.com start-ups lack adequate financial controls
– IT contractors win the first round in their legal battle over the government’s IR35 tax legislation
– The Office of Fair Trading rules Inland Revenue did ÿ¯.
Just one half of UK practices have implemented a pricing structure around auto enrolment implementation and advice - with many suffering increased costs
Deloitte's north-west Europe foray; BDO, Smith & Williamson investment paths; Shelley Stock Hutter; and Wilkins Kennedy discussed by editor Kevin Reed on our Friday Afternoon Live broadcast
Accountants should alter their perspective on auto-enrolment to maximise business opportunities, according to Eric Clapton.
Kevin Reed discusses whether new accountancy group Cogital can rival the Big Four...and its likely direction of travel