View all newsletters
Receive our newsletter – data, insights and analysis delivered to you
December 31, 2008

Recession strikes profession


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 consulting.

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 attrition.

KPMG Italia, the market leader, grew 3 percent to revenue of about €416 million in the year to 30 September 2008.

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 lines.

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 2008.

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 growth.

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 by.

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 report.

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 list.

“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 share.”

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 banks.

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 interests.

“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 million.

“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.

To view full size images click on them

Fee data

staff data


Staff data

Firm movemants

NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. A roundup of the latest news and analysis, sent every Wednesday.
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy


Thank you for subscribing to International Accounting Bulletin