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January 30, 2011

Editor’s letter: Global firms show steady recovery

Photo of IAB editor Arvind HickmanGlobal accounting firms have made a steady recovery in the past year following the horrific 2008/2009 fiscal year, where any revenue growth was a cause for celebration.

Our 2011 world survey, launched this month in London, reveals that 80% of networks and 60% of associations posted revenue growth. This is a huge turnaround from our report last year, where only 20% of networks increased global revenue.

Although it is true that some developed markets, such as the US and Australia, have struggled in the past year, firms grew in the majority of countries we surveyed.

It too early to suggest this whole recession business is dead and buried, especially as some governments, such as the UK, implement severe austerity measures that could yet destabilise GDP. However, it is important to note that a lot of countries did not even have a recession. China, India, Brazil, and several other emerging economies continued remarkable growth while the West looked on.

The global financial crisis is not quite as ‘global’ as some might suggest and it is these fast-growing ‘new’ economies that are the engines of growth for accounting firms.

The emerging economies may only contribute 20% of PwC’s global revenue but this will rapidly change as the power base shifts to more fertile ground.

Should governments intervene?

As Europe and other regions debate on how to tackle audit market concentration one question that will inevitably come up is whether governments should play a greater role to encourage more choice in the marketplace. At present, we have a situation where most of the largest multinationals in the world are audited by four firms – PwC, Deloitte, Ernst & Young and KPMG.

The fear held by regulators is that if one of these large firms collapses the world’s capital markets could be doomed, or something along those lines.

I, for one, do not believe a Big Four collapse would be as catastrophic as the Battle of Armageddon but I do believe Big Four bias exists and needs to be addressed in a sensible and fair manner.

For a long time, auditors have been adamant that market forces, and not politicians, should provide robust solutions to dilute concentration. But a few prominent voices, within and outside the profession, have given up on a market-led solution and are calling for government intervention.

The first sensible step is to abolish restrictive contractual lending clauses, often imposed by banks, which force companies to select Big Four auditors. These clauses discriminate against the mid-tier for no plausible reason and should be outlawed.

Perhaps shared audits, where mid-tier firms take on subsidiary work from a Big Four multinational client is worth considering, as long as it does not affect audit quality.

Another suggestion is that governments should encourage public sector work to go to non-Big Four firms where such work is reasonable for the mid-tier to carry out.

BDO chief Jeremy Newman believes encouraging public sector bodies to consider a non-Big Four firm by tweaking public sector procurement policies could set an example to the private sector. But wouldn’t this merely impose another type of ‘restrictive’ mechanism that goes against the Big Four?

The Big Four are outstanding firms that train the brightest finance professionals in the world. Improving competition must not be an exercise in weakening them, it must be focused on strengthening the rest of the pack.

I suspect the real battle for the mid-tier needs to be won at the grassroots level – training enough mid-tier captains of finance for the market to take a different course. The Big Four have built an influential alumni over many years through huge investment and unless the mid-tier can come up with an answer to this, Big Four bias is set to stay – unless, of course, the Battle of Armageddon is no myth.

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