News Analysis - PwC split will change the face of accountancy.
With the regulatory spotlight brighter than ever, PwC's move may
With the regulatory spotlight brighter than ever, PwC's move may
Last week when PricewaterhouseCoopers announced it would be splitting into two or more separate businesses, it turned the profession on its head. Not only does the move jeopardise PwC’s position as the world’s largest accountancy and professional services firm, it is also likely to change the face of accounting firms forever. Insiders have been working on moves to separate the firm’s consultancy and audit services since last November. The seismic shift that this requires will hit partners, staff, clients and rival firms alike. Little about how the split will work in practice has been finalised, and many staff are in the dark about how they will be affected. In other words it’s a lot like two years ago when the world’s biggest professional services firm was born. PwC marketing communications partner Patrick Figgis says the new developments followed on from the rationale behind that merger. At the time, the motive was to have critical mass in order to become a market leader. ‘We have embarked on the next chapter from a position of enormous strength,’ he says. The changes have been driven by the marketplace, particularly the rapid developments in e-business and the need to develop alliances in order to share risk. The rise of e-business has had a dramatic effect across the profession, with Arthur Andersen, Ernst & Young and PwC all confessing to getting rid of consultants without virtual experience and replacing them with specialists. But keeping up with the Jones requires serious capital, and, unfortunately for audit firms, it is very difficult to raise cash on the market with the deepest pockets in the world – the US. This is because US Securities and Exchange Commission rules are designed to prevent anything compromising the objectivity of audits. ‘This announcement helps us to be released from these constraints and advantage the firm with opportunities to be a bit more agile, particularly in the areas of outsourcing and consulting,’ says Figgis. Crucial to the new PwC will be the ability to form partnerships that are also largely prohibited under audit independence rules. But although US regulator the Securities and Exchange Commission has had a heavy input in the decision behind the split, Figgis points out that the new structure is a separate issue from the audit independence breaches that were recently uncovered in an SEC report into the share dealings of the firm’s staff and their relatives. Much of the detail of the new operation remains to be thrashed out. What is clear, however, is that audit, tax and business advisory work will remain under the PwC partnership banner. Meanwhile, consultancy, corporate finance, HR and business process outsourcing will be able to organise themselves as necessary – even if that means ditching the partnership structure. PwC says the new units will not be able to have access to capital with the businesses set up as partnerships, and it already looks highly likely that consultancy will be floated off as a separate entity. Whatever happens, the separation of audit and consultancy is likely to mean that PwC will lose its much-hyped title of the ‘world’s biggest professional services firm’, but the management has decided that size isn’t everything. ‘We have never said that size for size’s sake is the be-all and end-all, and this means that we can continue to deliver what our clients want,’ says Figgis. In fact, far from dwelling on the potential shrinkage, the firm has already issued a sideswipe against its rivals by claiming that proposals to split the firm would make it unique as an ‘independent’ Big Five global auditing firm. PwC has not wasted any time in capitalising on any marketing advantage the split offers, even though full details have yet to be rolled out. In a statement to the firm’s clients, published on its Internet site, chief executive James Schiro says: ‘This constitutes something unique to the Big Five – a completely independent global auditing firm.’ Independence is something that the SEC has been pushing for and there can be little doubt that PwC will be crossing its fingers that it will be able to come to some arrangement with the regulator over its employees’ shareholdings. Only last week it was reported that the firm had to confess to one of its biggest audit clients in the US, Cisco Systems, that it was one of the companies ‘affected’ by the share problems. However, an SEC spokesman indicated that it will be no pushover in reaching a settlement. ‘There was a systematic disinterest in subscribing to the audit independence rules,’ he said. The regulator has the right to dish out a variety of sanctions if it decides an audit has been compromised. These include making the company choose a new auditor, asking for a re-audit, or even sanctioning the auditor in question. There is a glimmer of hope for other firms, as the spokesman indicated that the SEC is looking to update its independence rules with regard to spouses holding company shares. This would not have saved PwC UK partner Geoff Westmore, who left his job when it was found that his brother-in-law is financial controller of Reuters. But it might partly lift the cloud of regulation covering accountancy firms. WHERE NOW FOR THE BIG FIVE CONSULTING ARMS? PricewaterhouseCoopers is to separate its audit and consultancy work. Audit, tax and business advisory services will remain under the PwC partnership umbrella, while management consulting, business process outsourcing, corporate finance and human resources consulting will be free to organise themselves outside of regulatory constraints. Ernst & Young is involved in ‘amicable discussions’ with consultancy giant Cap Gemini, over a potential $8bn sale and denied that PwC’s changes would speed up the deal, or change its resolve to sell the consultancy business. Arthur Andersen is involved in a messy divorce with Andersen Consulting. In the mean time it is growing its own consultancy arm’s focus on e-business. Deloitte & Touche uses the fact that its staff work in ‘multifunctional teams’ encompassing ‘assurance and advisory, management consulting and tax’ as a selling point. ‘We said at the end of last year there is no intention to split up the firm, which is still true today,’ a UK spokesman said this week. KPMG announced plans last month to incorporate KPMG Consulting. It will be 19.9% owned by US networking giant Cisco Systems, which will invest more than $1bn in the firm’s Internet services business. The planned listing of its consulting arm was hit by regulatory problems last year.
CONSULTING: A RICH SOURCE OF BUSINESS (£M) Audit/business Consulting and UK total fee advisory/tax other services income PwC* 977.3 611.8 1589.1 KPMG 569.0 298.0 867.0 Ernst & Young 383.8 249.1 633.0 Deloitte & Touche 291.4 271.8 563.2 Arthur Andersen* 356.4 108.6 465.0 Figures based on Accountancy Age Top 50. * estimates based on global figures.