PracticeAccounting FirmsTop 50:on closer inspection

Top 50:on closer inspection

The top 50 results look good, but our reporter explores the reality behind the numbers

On the face of it, the continuing rate of growth among the firms in the
Accountancy Age annual Top 50 survey looks pretty impressive. But to get a true
picture of the situation we need to look behind the statistics and examine what
they really represent.

For the vast majority, a significant element of growth has been through
merger and acquisition rather than organic growth. Recently there has also been
an increase in the movement of partners (and sometimes entire departments)
between firms.

Therefore growth in this sector has come at the expense of an overall
shrinkage of the marketplace.

What is far more significant is establishing which business sectors are
growing. Although assurance work still represents a huge chunk of fee income, it
is not a growth area.

Client demand for specialist work means that the real potential for growth
lies in added value services and the current spate of mergers is fuelled by the
need for firms to increase the range of advice they can offer in what is now an
intensely competitive marketplace.

Organic growth for most practices is around 5-6% (that is, inflation plus a
couple of percentage points). Anything less than this and the firm should
consider itself in trouble. Thus a rate of over 10% where the entire growth is
from M&A may not, of itself, be an indicator of health.

As for the sustainability of double digit growth: again, this is likely to
continue for some time, but similarly the driving force will be the demand for
specialist services.

Any growth in assurance work will be as a result of movement from one firm to
another and will be price led. Within five years I would expect to see most of
the firms in the Top 50 showing an even 50-50 split between assurance and
special work.

Those firms that currently rely heavily on assurance work will have to run a
very tight ship to maintain profitability, but I do not expect to see any of
them in the Top 50 in the future.

New entrants will be those who keep their fingers firmly on the commercial
pulse and manage to snap up the tastiest boutique practices or poach specialist
departments.

One thing we have not considered is whether all this activity bodes well for
clients. Further shrinkage in the marketplace will undoubtedly reduce their
choice, but will the plethora of services available under one roof compensate?
The jury is still out.

Phil Shohet is director of Kato Consultancy

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