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April 30, 2008

Championing the mid-tier cause

Regulation is beginning to drive market expectations within the accounting industry, according to the new leader of the European Group of International Accounting Networks. Chairman Andrew Brown speaks to IAB about how the body is tracking regulatory developments and other pertinent issues.

The European Group of International Accounting Networks (EGIAN) is a lobby group of non-Big Four professional services networks that has 21 members. The total combined fee income of members worldwide in 2006 was $26 billion, while within Europe the total combined fee income was $7.6 billion.

Brown says the major issue for EGIAN in the coming years will be the assimilation of regulatory forces and making sure the group has an input. “Obviously the European Commission is fundamental and we are going to see this year the national implementations of the Eighth Directive. There will be issues that come up where we may have to speak to the commission on certain areas of implementation,” Brown says.

“The biggest challenge for the commission is to monitor the implementation [of the directive] in all 27 [EU member] countries. Obviously, we want that to be done in as harmonised a way as possible because the more there is harmonisation of systems in each country then the easier it is for us to monitor the activities of our members,” Brown explains. “Examples of that are oversight and quality control systems. We would like to rely more on national oversight systems, we always have to do our own things but the more the oversight systems across Europe are harmonised the easier that becomes for us.”

EC influence In regards to establishing oversight within Europe, EGIAN has been closely monitoring debate over to what extent the EC will influence how national bodies should carry out inspections. Brown adds the US Public Company Accounting Oversight Board’s current consultation on full reliance of third-country regulators is of interest to EGIAN: “We have many more layers of oversight and inspection – it’s quite an expensive process to make people, files [and other resources] available. So the more people can co-operate at that government level, the better for us.”

Brown’s day job is international business projects director for Baker Tilly International. There is no time limit on his term as EGIAN chair, which he says takes up about two days of his time each month, but he expects to stay in the role for two to three years. “I’m looking forward to the next couple of years to see whether we can move the whole concept of the middle-tier networks more to the regulators and hence to the market, because I think more people need to know that there are alternatives to the Big Four in certain parts of the market. We are limited to what we can do for the large ticket audits, but there’s a lot of other business around,” Brown says.

Proportionate support EGIAN has defined positions on a number of industry issues including auditor liability, competition and choice, and the network definition debate. Brown explains that EGIAN is in favour of proportional liability. “Liability is a key issue for us and it does have some influence on our views of the opening up the audit market,” he says. Regarding competition and choice, he says there are limitations in what EGIAN members can do at the larger end of the audit market. “From a UK perspective, you look at Baker Tilly, Grant Thornton, BDO, and they are pretty big organisations [which] could feel in the local market that they are substantial, but everyone doesn’t have that everywhere. This is where the Big Four have the big advantage,” he says.

“I personally lived through the big expansion period of the Big Four in the end of the 1960s through to the 1980s and it was a fairly gradual process. The Big Four grew up as their multinational clients grew up – they followed their clients. So it’s been a gradual process [and] you’re not going to get a big market boom among the second-tier… Consolidation of mid-tier firms and mid-tier networks will not affect the Big Four dominance; it will only alter the relative positions of the mid-tier. We are really talking about different animals, but there are lots of parts of the market where we do compete head on with the Big Four, including the public sector.”

Brown explains that the network definition is a topical issue that varies from market to market. “The big unknown quantity is how will national member states decide whether or not a member in that country is a member of a network or not,” he says. “It may be you might have one of our members who doesn’t want to be a network and wants to be an association but the oversight system in one country may decide that the member is a member of a network and ask them to comply. So it’s a bit of an unknown quantity at the moment.”

Recruitment is another key issue for EGIAN members and Brown says many firms agree this is the greatest constraint they have on expansion.

Focussing on specialist services is also gaining in popularity and Brown predicts that mid-tier firms may look to acquire boutique practices as a way into specialist markets. “Audit will always remain a pretty key service but it may be the expansion may come from specialist services,” Brown explains.

Topical issues that Brown does not believe will have much impact on EGIAN members include firm ownership rules and inter-country mergers, such as the one that created KPMG Europe. “I think inter-country mergers… are unlikely to happen in the EGIAN members. I think more generally our members are more focussed on the local market. We may have greater regional co-operation,” Brown explains.

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