EFFORTS to encourage greater diversity of choice among big accounting firms were dealt a blow by the Financial Reporting Council yesterday. Charged with a responsibility to survey the market for bean-counting services, the FRC was decidedly less than complimentary about the strengths of second-tier firms.
The language used was measured — you would expect nothing less from a number-cruncher’s number-cruncher — but it is hard to avoid concluding that the FRC thinks that Baker Tilly, Grant Thornton, BDO Stoy Hayward, RSM Robson Rhodes, and PKF are not up to the job of competing side by side with the Big Four.
The FRC raises no significant questions about the second-tier firms’ ability to perform the functions they perform at present. Lists of current clients, it is only right to emphasise, have nothing to fear from yesterday’s report. Nor will the world cease to function properly if efforts to create a fifth or a sixth premier division accountancy firm fall flat.
But it would be good if the Big Four — Deloitte, KPMG. Ernst & Young and PricewaterhouseCoopers — were joined in the senior league by at least one other player. It feels, instinctively, that four accountants represents a narrow choice. Moreover, conflicts of interest might narrow the field from four to three — two UK- based multinational giants might be unhappy about sharing the services if a single accountancy firm. Meanwhile, an individual customer might care to switch accountant. The choice can narrow remarkably quickly.
Second-tier players — more politely referred to as “other significant firms” by the FRC — are caught in a Catch 22. They can get bigger only if they win more bigger accounts. But they will win these only if or when, they manage to get bigger.
The specialist expertise required by the largest of multinationals is a barrier preventing second-tier firms from making the upwards shift. A large and complex insurer provides substantial accounting challenges. Multinational clients also require accounting presence and expertise in all different parts of the world. Second-tier firms will not make up the ground quickly, and may not be able to make it up at all.
At the same time, plenty of client companies may want wider choice, but none is comfortable with the thought of being the first to take on a firm with secondary credentials.
The FRC’s view that second- tier firms lack the resources required to keep abreast of regulatory changes as they affect multinationals entrenches the Catch 22 position.
But while the FRC report may create unease among those who would like to see the Big Four become the Big Five or Six, the task is not impossible. There are two obvious ways forward, and neither is especially palatable. The first, preferable route will see the bigger of the second-tier firms slowly build themselves up to a position where they can compete with the Big Four. A merger of two or three might speed up the process. Diversity among accountants may come more rapidly if one of the big firms gets embroiled in an expensive piece of liability litigation and blows up. Although one of the established Big Four firms would disappear, the accountants would not. As they resettle, competition could well be enhanced.
Jobs question
THE days when a million people out of work would have been seen as a token of utter failure in economic management are long gone. Yet, for all that, it will not be without significance if we soon see the unemployment back at this level.
Low unemployment has been among the Government’s proudest boasts, so if the slow but inexorable upward creep in the claimant count does take it back to the million mark, it will be a highly uncomfortable moment for ministers.
Whatever ministers may like to boast, the jobs market numbers are a signal reminder that past boom times for the economy have given way to a period in which things, although far from disastrous, look set to be bumpier and more uncertain, as Mervyn King, the Bank of England’s Governor, has often warned us that they would.
The Bank has pinned its hopes for a decent economic expansion this year on the recovery in consumer demand, on which Britain remains too dependent, being sustained. The unemployment figures are one big question mark over that bet, which is now set to be tested after the artificial boost to the high street from World Cup-related spending.
In the meantime, with scant sign of a manufacturing revival to pick up the slack if the consumer slows again, rising joblessness will be one more argument likely to keep base rates on hold through the autumn.
Sweet music
EMI shareholders will convene at today’s AGM to the strains of chanteuse Corinne Bailey Rae. Once the music has died down, there is no reason for the harmony to stop. It is not clear if Warner will buy EMI or vice versa, but either way the British company should do well.
Focusing on mergers is usually a poor substitute for a successful strategy, but the £200 million of potential annual cost savings is a sizeable prize. It is possible that EMI could buy Warner and make a hash of it, but every other scenario is positive. Warner may yet come up with a fancy bid for EMI, delivering immediate value. The British company may yet put together a renewed tilt for Warner, which would still generate value, pitched at around $33 to $34 per Warner share. Or both can give up, leaving the companies to fend for themselves until the courtship begins again.
Unlike other media, music has survived the digital crisis. Pirates have been sued out of existence in developed markets, and the market is coming back to growth. Digital is more profitable than pressing CDs, and any global business with three or four companies has got to be attractive. With that kind of noise in the background, EMI bosses are right to resist a sale for less than a knockout price. That is comfortably beyond yesterday’s 306p.
Stately MG
FOR many petrol-head enthusiasts, the thought of one of Britain’s great sportscar marques being built by Americans for a Chinese company is as unappealing as buying a milk trolley. The decision by Nanjing Automobile to manufacture MGs in Oklahoma will horrify those who hold the racing green sacred, and may also threaten the long-term future of the Longbridge factory. But as the United States is by far the largest auto market, the decision to base MG there may give this brand exactly what it needs most: a future.
