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November 21, 2013

Editor’s comment: Advice versus assurance

BearingPoint, EquaTerra, PTRM, Drivers Jonas, Übermind and Optimum Solutions are just some of the advisory businesses acquired by the four global accounting giants in recent years. To add to the list, PwC announced in October it is in discussions to acquire global consultancy Booz & Company, which would add around $1.4bn to the firm’s annual advisory revenues.

Hopes of strong, maybe even double-digit organic growth appear to have been swept away with more pragmatic business views in recent years.

The Big Four appear to be more or less fearless of the effects advisory acquisitions might have on their business models despite, only a decade ago, the Sarbanes-Oxley regulation leading to a mass disposal of advisory capabilities of three of the Big Four firms. Since then, all firms have to some extent rebuilt their advisory capabilities or strengthened what was left of the old ones, but debates about whether to restrict the offering of non-audit services by audit firms are still very much active.

The EU is currently discussing such measures and potentially creating an additional ‘blacklist of non-audit services’ and several countries around the world have raised the issue and questioned the potential conflict of interest that could arise with providing advice to an audit client.

Despite such concerns, advisory has almost started to overtake assurance revenues in many Big Four firms. Globally, Deloitte is currently the only firm with higher advisory revenues than assurance, but in Australia, for example, PwC’s and EY’s assurance revenues only account for 31% and 35% of overall revenues respectively. The Big Four also vigorously argue that non-audit services and having a board skill set at the firm only strengthens the quality of audit and the standard of service they provide. ~

An increase in advisory investment at the Big Four is a likely response to the slowdown in growth, audit fee pressure and an increase in regulatory compliance, which seems to have halted audit services growth around the world.

The culture of ‘more for less’ has become the mantra in many countries and it appears firms are increasingly resorting to advisory work for those much-needed fees to support growth at their large international business. Advisory investments are deemed to be worth the risk for firm leaders as regulation in the market is far from decided.

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