The recession has finally spread to
the accounting profession in one of Europe’s worst-performing
economies. Core service lines are stagnant and fee pressure intense
but partners refuse to be downtrodden by the worst growth for many
years. Arvind Hickman reports.


Overall fee split chartItaly’s professional services firms have begun to feel the
pinch. The days of double-digit growth and firms bucking the trend
of a floundering economy appear over.

The Italian market grew by 3 percent to
combined fee income of about €1.4 billion ($1.8 billion). As Italy
has been in recession for well over a year, this is a respectable
result, but a far cry from last year where market revenues jumped
14 percent.

Core service lines remain flat or below par
with tax being a notable exception. Mandatory audit is stable but
due diligence work is down. Transaction and IPO-related work is
virtually non-existent as opportunities emerge for counter-cyclical

As a result of the recession, pressure on fees
is intense and delays in payments are more frequent.

Recruitment is being scaled back with a focus
on young talent due to lower demand for services and less staff

KPMG Italia, the market leader, grew 3 percent
to revenue of about €416 million in the year to 30 September

PricewaterhouseCoopers Italy (PwC), the second
largest firm, reported a decline of 3 percent to €370 million in
the year to 30 June 2008. This was largely due to the firm losing
important clients as a result of Italy’s nine-year audit firm
rotation rules and a significant merger in the banking sector.

Another factor has been the ‘disappearance’ of
the IPO market, which has affected revenue in all core service

Four other firms, networks or associations
reported declines in growth when compared with their previous
financial years. They are PKF International, HLB Italy, IGAF
Worldwide and GMN International.

The largest mid-tier firm surveyed is Mazars,
which grew 9 percent to €30.5 million in the year to 31 August

BDO International’s Italian firm acquired
three firms in 2008, Studio Sala e Associati, Studio di Consulenza
Aziendale, and Legale e Tributario. The firm generated fee income
€15 million in the year to 31 August 2008, the result of 99 percent

Only EuraAudit Triveneto (124 percent)
bettered BDO’s growth, while RSM Italy (41 percent) and Crowe
Horwath (21 percent) posted strong results.

In Italy, RSM International is comprised of
the audit firm RSM Italy and Synergia Consulting Group, a network
of tax and advisory firms. These two entities have been represented
separately in tables.

Synergia recently joined RSM from HLB
International. The addition means RSM International is the largest
accounting network outside of the Big Four in terms of revenue,
with combined fee income of €36.8 million.

Competition fierce

Audit is mandatory for companies
listed on Italy’s stock exchange, Commissione Nazionale per le
Società e la Borsa (CONSOB) and non-CONSOB listed clients that meet
certain criteria.

The CONSOB market is heavily concentrated and
the Big Four audit more than 95 percent of clients. Firms, networks
and associations that have one or more firms with a CONSOB licence
have been marked as such in the fee table.

In last year’s survey, PwC noted that 70
percent of its fee income was derived from audit, while this year
audit work contributed to 67 percent of overall fees. The firm
reported that audit revenue fell by €21 million due to a loss of
key clients.

“We have a nine-year rotation in Italy for the
audit of listed companies and therefore we have lost some important
clients due to this rotation rule,” PwC managing partner Pierangelo
Schiavi says.

In Italy, audit contracts are set in stone and
can only be broken in extraordinary circumstances. Although serving
the same client for a long period creates a sense of security, it
can also generate apprehension for firms if clients suffer
reputation damage or hold back payment, both a growing concern in
the current economic climate.

It also means that new tenders are fiercely
fought as opportunities to audit large companies are harder to come

Another factor for PwC’s audit decline is the
loss of one of its largest clients. SanPaolo IMI, previously one of
the top five banks in Italy, merged with Bank Intesa in the fiscal
year 2006-2007 to create the second largest Italian bank, Intesa
SanPaolo. This revenue hole surfaced in PwC’s latest financial

Although mandatory CONSOB audit work remains
stagnant, firms are finding more Sarbanes-Oxley (SOX) work for
clients listed on US capital markets.

“I would say overall that audit has been
stable. We had a growing market due to changes in corporate law,
which led to SOX for Italian companies,” Schiavi says. “For
example, we are an auditor of [oil and gas companies] Eni, which is
also listed in New York and we had huge engagements related to
their SOX activities.”

RSM Italy grew its revenue by 40 percent to
€3.1 million in the year to 31 August 2008. This was largely
organic growth in a relatively flat market and included new
projects in mandatory audit and transaction support services. RSM
Italy partner Stefano Bianchi notes another reason for strong
growth was more referral work within RSM International.

In 2008, Moore Stephens went through a phase
of restructuring to bring all of its audit firms under one
umbrella. This includes the firms Moore Stephens Concorde,
Prauditing, and Axis, a CONSOB-licensed firm.

“This firm is purely for auditing purposes. In
Italy we distinguish the Moore Stephens firm working in auditing
from the Moore Stephens firm working in tax and accounting, which
is important from a professional point of view to reduce any
conflict of interest,” Moore Stephens Italia chairman Giuseppe
Barranco says.

The audit firm will be modelled on Moore
Stephens London, including the same quality-control regime. The
restructured firm will provide services in audit, due diligence and
specialised inspection work.

Barranco says audit growth among firms has
flattened out in the past financial year, despite an increase of 30
percent over four years.

“The market is very content. There are many
small audit firms fighting in the non-CONSOB market. In Italy there
is a war of price and also of quality,” he adds. “This year, I
think growth of 10 percent can be considered.”

Moore Stephens reported 3 percent growth to
€10.6 million in the year to 31 December 2008.

DFK Italia executive director PierGiuseppe
Ferri notes the association’s mandatory audit revenue is “in line
with our expectations and with the past years”.

A new listed market?

Italian audit firms could soon
receive a major shot in the arm if regulators hatch plans to launch
an Italian version of the Alternative Investment Market, which
would appeal to non-CONSOB entities.

Schiavi says that Borsa Italiana, the company
that runs Italy’s stock exchange, is seeking to launch a capital
market that will be less onerous for non-CONSOB entities to

“We are doing some meetings with potential
clients about this easier way to be listed,” he says. “This special
listing procedure is easy for middle-market companies where you
don’t need the whole process like a prospectus and there is no
regulator. You need only audited figures and some financial
institutions that are willing to buy 10-20 percent of the

Schiavi says Italy has a relatively small
number of listed companies (about 300) compared to other countries,
including the smaller economies of Spain and Greece.

Barranco says talk about a second capital
market have been ongoing for many years.

“This could be useful for medium-sized
companies that are really in trouble with access to credit because
getting credit from the banks is not so easy,” he says.

Barranco predicts in the next 2 to 3 years
there will be a big development in audit.

A mixed bag

Firms note that advisory services
produced a mixed bag of results due to a dwindling number of
transactions and IPO activity (see page 1). There was a general
increase in demand for counter cyclical services but not all of
these services reached the dizzy heights firms had hoped for.

“There are a couple reasons,” Schiavi says.
“First of all, the financial sector in Italy has not been affected
like in other countries. Secondly, the real economy for the moment
is not healthy but we don’t have huge clients or potential clients
with significant problems in surviving. Therefore, for the moment
there is not so much restructuring work.”

Bianchi observes an increase in demand for
forensic litigation support. He says business planning is also on
the rise as clients seek to meet tougher covenant conditions from

Another area that shows promise is IFRS
advisory work for non-listed companies. In Italy, IFRS is only
compulsory for listed entities but is increasingly being used by
non-listed companies with consolidated accounts and international

“We have two clients that are not listed
companies and are applying IFRS so we assist them on the IFRS
transition,” Bianchi says.

PwC’s tax and legal services business, the
smallest of its core service lines, increased its share of the
firm’s overall revenue by 3 percent, following growth of nearly €10

“We started in 2006 with our new tax and legal
practice and since then we have had good growth,” Schiavi explains,
adding that tax demand linked to M&A has not fared so well.

Partners speaking to this publication note the
performance of Italy’s economy has varied by sector. Manufacturing
has suffered as consumers cut spending on luxury goods but Italy’s
financial services market has performed better than western
European counterparts.

According to the International Monetary Fund,
Italy had the worst-performing economy in 2007 (1.5 percent GDP
growth) and the second worst in 2008 (-1 percent GDP growth). The
forecast for 2009 is even more glum (-4.4 percent GDP growth).

Schiavi says the major effects of the
recession have been a reduction in consultancy and advisory work as
well as pressure on fees.

“There have been less mergers and
acquisitions, which normally involves more than one line of
service. In the consulting business, there has been less spend
dedicated to consultancy by our clients,” he says.

“The second side of the crisis is related to
the fact that our clients have some financial difficulties and
therefore it is a bit more difficult to increase our fees or to
cash our invoices. We have seen certain delays in payments from
some clients.”

Ferri notes there is pressure on medium-sized
firms to also reduce fees.

“I understand that sometimes clients ask to
reduce the professional fees, considering the economic crisis,” he
says. “I know also that considering the particular moment, it is
acceptable to try to reduce the yearly fee but we are speaking of
extraordinary cases.”

Bianchi adds: “The conditions are tough and
they are looking for more added value from auditors. We are
spending more time in audit work [due to economic conditions] and
it is extra work for the same fees,” he says.

Schiavi explains that fee pressure is not an
issue with clients that are locked into 3 to 9 year audit
engagements, but firms are taking fee reductions of between 10 to
20 percent for new contracts.

A focus on youth

Almost all firms note that
recruitment will be scaled back in the coming year to mitigate
lower demand across the board.

“On the audit side we are planning to recruit
an additional 5 to 10 people. Last year, we recruited more than
that, we also recruited more senior level staff. But this year we
will focus on junior level and graduates,” Bianchi says.

Graduates will also form the backbone of PwC’s
recruitment plans for the coming year. Last year, PwC hired 700
graduates but this year recruitment could be 10 percent less.

DFK Italia will look to increase its ranks by
5 percent, focussing on young professionals.

A trend likely to gather pace in the coming
year is consolidation among smaller firms. RSM Italy says it is
looking to merge with or acquire other audit firms in order to grow
and become more competitive.

Ferri believes that as the economic downturn
proceeds, “it is reasonable to think the small audit firms will
rethink their dimension and find professional alliances in order to
reach a sufficient mass”.

Despite modest growth and a bleak economic
outlook, firm partners prefer to look on the bright side and focus
on opportunities over the coming year.

“If I look to our profession and business,
which is a multi-competency business, with audit, advisory, tax and
legal, then I am quite optimistic that we will recover in the short
term,” Schiavi says. “We will have a difficult 2009 but I expect a
good recovery.”

Barranco believes 2009 will be a year when
firms will fight to sustain growth, but 2010 could herald the start
of a new economic cycle.

RSM’s Bianchi believes there are new
opportunities in business planning, internal audit, assurance and
risk management.

“I don’t think there is going to be massive
growth,” he says. “Also, because IPOs are almost dead, I would see
that we will be much more focused on core businesses like internal
audit, risk management, compliance and audit. There are
opportunities because regulation and compliance are key in this
moment. I am quite optimistic.”

Optimism aside, this year’s report highlights
a massive drop in the growth of firms. This trend should continue
for at least 2009.

Advisory services related to transactions have
taken a battering and audit remains flat but there are
opportunities for firms to play more of a business advisory role.
Fee pressure will continue and audit contracts fiercely fought. For
the time being, the years of double-digit growth are over.

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