Globalisation is now the buzz word in the accountancy profession. The big firms feel they have to become bigger and more broadly spread geographically in order to offer their multi-national company clients a better service. Mergers have become the order of the day.
This week, two of the big six firms - Ernst and Young and KPMG - announced plans for a merger which would create the world's biggest firm. Last month, another two of the big six - Price Waterhouse and Coopers and Lybrand - announced merger plans.
Whether these proposed mergers take place or not will depend on the approval of regulators and competition authorities in Washington, Brussels, London, Tokyo, Dublin and other markets. This week, Colin Sharman, the chairman designate of a merged Ernst and Young/KPMG, put the chances of both mergers being approved as "better than fifty-fifty".
The mergers would not lead to unfair market dominance, he insisted. On the big six shrinking to the big four, he said: "I think a choice of one in four is pretty acceptable." International regulators will examine the proposals under a number of headings including the impact on competition in the market and the impact on the availability and choice of service provider for clients. Not all of the big six firms are strong in all geographic markets and in all service areas.
But the accountants' contention that they must merge because their multi-national clients are demanding all the services they require in all their geographic markets from their chosen firm of accountants has been questioned by the Association of Chartered Certified Accountants.
The ACCA argued that the mergers were unnecessary and will result in a further reduction of choice for clients. The big six firms are "global enough" already, according to ACCA head of communications, Bob Reynolds. KPMG and Ernst and Young do not need to merge because each is already providing services across the world, he contends.
Their merger plan was a direct result of the Price Waterhouse/ Coopers and Lybrand announcement because they feared it would leave them exposed. They probably felt that clients might consider their capacity to deliver was not as strong and they might lose clients and staff to the larger competitor, he suggested.
He set out his case: say a financial director of a multinational firm employs one of the big four to do its audit, another to carry out tax work, a third as corporate finance consultants and a fourth to investigate a specific development/investment project. Then say something goes wrong and the firm has to be investigated by regulatory authorities. Who can the regulators call on when all of the big four firms are in receipt of fee income from the multinational and the smaller second layer of accountancy practices may not have the expertise to carry out a global investigation?
Mergers have been going on in the accounting world for a long time. All the current big six have grown through mergers. But most people thought that it would stop at six big dominant firms, according to Mr Reynolds. Now it looks like the market will shrink to a big-three globally, he said. If the Price Waterhouse/ Coopers and Lybrand merger is approved some 50 of the world's top 100 companies will be audited by one firm - assuming the clients remain with their existing firms. If that merger and the Ernst and Young/KPMG merger proceeds, Mr Reynolds estimated that about 90 per cent of the top 100 companies audits would be carried out by three global firms.
In a post merger situation the top three global firms, based on current figures, would be: Ernst and Young/KMPG with annual fee income of £10 billion sterling; Price Waterhouse/Coopers and Lybrand with £7.5 billion; and Andersen with £6 billion.
For the big firms, the advantages of merging are: building scale, wider geographic spread, extending service competencies, rationalisation where operations overlap and improved ability to invest in expensive and rapidly changing technology.
The disadvantages include: possible adverse reaction from existing clients; the danger of losing clients where conflicts of interest arise; the time it takes (estimated at 18 to 24 months) to merge systems and people in firms which will often have very different cultures. KPMG and Ernst and Young played down the risk of adverse reaction from clients: "Chairmen and chief executives understand what we are doing and respect it. Finance directors where they have expressed views have talked about lack of choice," according to Mr Sharman. It was ironic, he added, that those companies expressing worries about lack of choice in the audit market were the same large multinational companies with global ambitions which were pushing their financial advisers to provide global services.
Mr Reynolds suggested that the mergers, if approved, could benefit Andersen. It has said it plans to concentrate on organic growth. It has pulled away from a big merger twice because of potential client conflict issues. In the Irish market a merged KPMG/Ernst and Young would be the clear market leader in fee income terms with £70.2 million, assuming the firms could retain their existing client bases.
Price Waterhouse/Coopers and Lybrand would have £62.3 million. The merged firms would move ahead of their next nearest rivals, Deloitte and Touche with £25.5 million and Arthur Andersen with £24.5 million.
The impact on the Irish market is likely to be increasing polarisation between the "Big" firms and the larger number of medium and small firms. Some small firms have been growing very rapidly by specialising in niche market areas, showing that there is plenty of scope for profitable growth outside the big league.
