Grant Thornton, Britain’s fifth-largest accounting firm, disclosed a 4 per cent fall in full-year revenue to £378 million yesterday as profit per partner slumped by 19 per cent to £201,000.

Scott Barnes, the firm’s chief executive, said that its performance was solid in light of the financial crisis, although it continued to lose ground on larger accountancy rivals, such as Deloitte, KPMG and Ernst & Young.

That will come as a blow to many in the market who had hoped that Grant Thornton and BDO, its closest competitor by size, would challenge the dominance of the “Big Four”, also including PricewaterhouseCoopers, in the audit market.

Mr Barnes said: “Overall, our performance has been encouraging and provides a sound base for future growth.”

Two years ago, before the global financial crisis began, Mr Barnes’ predecessor laid out ambitious plans to increase the firm’s revenues to more than £500 million by 2011, yet since taking the helm at Grant Thornton in January, Mr Barnes, a corporate recovery expert, has spent much of his time making cuts.

About 200 rank-and-file staff and 50 partners were let go this year, while a further 150 employees were moved internally. Mr Barnes said that the shake-up was necessary because the firm had been left bloated after a merger with RSM Robson Rhodes, then Britain’s twelfth-biggest accounting firm, in July 2007.

“We ran into the recession with too much cost,” he said. “With hindsight, we probably should’ve moved toward rationalising that at an earlier stage.”

Despite the timing of the merger, Mr Barnes pointed out that it was a good move as it boosted the firm’s presence in London and strengthened its forensic and financial services practices. “Ask our partners and 99 per cent will say it was strategically the right thing to do,” he said. “I don’t actually think we’ve seen the benefits of the merger yet and we will over the next two to three years.”

Unlike most of its competitors, Grant Thornton has expanded its audit practice, increasing fees by 3.4 per cent to £121 million. Mr Barnes said the firm had raised its share of the market by targeting big private companies and smaller listed ones.

Grant Thornton audits 277 listed clients, according to Hemscott, which places it fourth among City accountants, ahead of Ernst & Young, although the Big Four has maintained its stranglehold on larger clients.

Grant Thornton had double-digit growth in its corporate recovery and forensic businesses, which generated fees of £75 million and £17 million, respectively. But its corporate finance practice — which specialises in deals worth up to £50 million — was badly hit by the downturn, falling 33 per cent to £44 million.

Mr Barnes expected deal activity to pick up towards the end of next year and restructuring and insolvency to remain busy for at least the next two years. Profits will pick up again in 2010, he said. The firm is aiming to double profit per partner to around £400,000 within three years. Mr Barnes said that the firm planned to increase the number of trainee accountants it hires next year from 177 to 200.

Last month, BDO reported a 5 per cent slump in full-year revenue to £335 million. Even if the two firms were merged, they would be only half the size of the smallest Big Four accountancy firm, Ernst & Young, which had revenue of £1.4 billion.

Many observers, including the Financial Reporting Council, the accounting watchdog, are concerned that the dominance of the Big Four has restricted competition, particularly in the audit market.

The rumour mill
Alex Spence: Analysis

Two years ago, Grant Thornton unveiled ambitious plans to increase revenue to £500 million. It had just acquired RSM Robson Rhodes and appeared set for rapid growth. There was talk that it could close the distance on Ernst & Young and break the Big Four’s lock on blue-chip audit and advisory work.

That would have been welcomed by regulators, professional bodies and investor groups, which have become concerned in recent years that the dominance of Ernst &Young, Deloitte, KPMG and PricewaterhouseCoopers could be stifling competition.

However, the prospect of Grant Thornton or BDO eroding the gap now seems fanciful. Both firms were hit by the financial crisis, with their revenues shrinking. Both have made redundancies and cut partners and are focused now on improving profits rather than expanding.

So while the Financial Reporting Council is eager to stimulate competition, it seems there is little that can be done.

Announcing its results yesterday, Grant Thornton scotched rumours that it was involved in merger talks with Ernst & Young. Rumours of a tie-up have been rife for several months, but Scott Barnes, chief executive, said they were baseless: “That’s absolutely not true and I’ve no idea where it comes from.”

Ernst & Young is under pressure to strengthen its UK operations, yet it would have little to gain from acquiring Grant Thornton other than adding bulk. And regulators would almost certainly block a takeover by a Big Four member of a firm in the next tier.

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