BusinessCorporate FinanceSpinning of corporate finance arms

Spinning of corporate finance arms

If you'd have asked most pundits in the middle of September to predict likely casualties over the next three months they would probably have predicted bankruptcies in a whole range of industries, but not many would have thought that a major power company would be the first to go in late 2001.

Enron was the seventh largest company in the United States and more attention is being paid to the role of the auditors than any other adviser. This one bankruptcy could have a far bigger impact on the corporate finance divisions of accountancy firms than currently realised.

When I first predicted, over a year ago, that corporate finance divisions of accountancy firms will eventually have to be spun off due to inherent conflicts of interest, this was generally derided.

Firms installed Chinese walls to prevent problems, but the reality is that more time is spent in trying to justify why a particular fee can be earned than is ever spent policing those walls.

How many times have you seen a situation when a profitable piece of corporate finance work was turned away because the conflict was deemed irresolvable?

The reason none come to mind is that the justification culture is endemic and somehow or other, a way will be found to protect a fee opportunity rather than let it slip into the hands of a competitor.

Some would say that, because of these conflicts, corporate finance is not a natural product for accountancy firms and the necessary ingredients of entrepreneurial hunger, independence and capital are often best found outside of the profession.

Others will point out that, historically, a huge proportion of corporate financiers have been chartered accountants, and there is no reason why those skills can’t be practiced from a large professional services firm.

On balance the latter argument has won to date.

Following Enron it will be interesting to see which firm will first spin out its corporate finance department. It has happened in other countries.

My partners in South Africa are just that.

They span out from a Big Five firm who surprisingly took a 20% stake in the new business. We will then see which of the corporate financiers in the accountancy profession are the real entrepreneurs.

Howard Leigh, a director of Cavendish Corporate Finance Limited.

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