There was a wonderful outbreak of what we in the press always like to term ‘merger mania’ among accountancy firms almost 30 years ago.
The much-prized annual Christmas card from Accountancy Age magazine depicted frenzied elves rushing from firm to firm conducting merger talks, while a disconsolate Santa Claus stood in front of a graph showing toy production plunging and clutching a letter saying ‘Last Year’s Audit Pending’.
Chaos did ensue. You can put the technical aspects of a merged firm together but the cultural issues take a lot longer. In those days, as now, the firms merging tended to duck them. It was easier to appoint two heads of one service line and hope that sooner or later one would push the other down the metaphorical lift shaft.
Money motivation
Then, as now, the motivation comes from the same quarter: a vision of a shedload of cash now. Partnerships are all very well and there is much talk of leaving a legacy for the partners of the future but every so often they espy the possibility of a vast fortune, or even a modest one.
The memories of the bank deregulation that allowed American banks to buy out the London market all those years ago still burns bright. In those days the number of swimming pools across the Sussex Downs visible to an incoming Gatwick flight seemed to grow exponentially month by month. Hence the number of firms in recent years happy to welcome private equity promises.
Those purchasing do very well, while the purchased find ever diminishing returns
Nothing changes. Different players, same story: medium-sized firms envious of the perceived wealth of partners in the global giants; small-town firms happy to be consolidated under a private equity umbrella with the promise that profits and valuations will soar.
But, as so often happens with private equity interventions those purchasing do very well, while the purchased find diminished and ever diminishing returns. Among the consolidated smaller firms systems are synchronised, offices closed, personal and seamless contact is shredded and, of course, fees are increased. It is no longer a happy place to be, particularly for clients.
Diminishing enthusiasm
Once upon a time there was a vogue for estate agents to sell out to insurance companies on the expectation that they could sell more products through each other. That never happened, either. Currently, consolidators are finding that selling their assembled groups of accounting firms on is proving a difficult task. Far from offering the touted price, investors are showing little enthusiasm not only for the price but for the over-hyped idea as well.
Regulators eventually wake up and rummage around for a policeman’s helmet to wear
The latest to come on the block, the UK firm Xeinadin, consisting of well over a hundred assembled accounting firms, has seen its proposed investor payday scrapped or, er, delayed. Meanwhile, regulators eventually wake up and rummage around for a policeman’s helmet to wear.
There are obvious dangers to a world where independence is seen as central to the concept of an audit that is useful to the investment community and one that is accurate and reliable. The more that the ground shifts beneath audit firms, the more likely that there will be tears before bedtime or, at the very least, the collapse of a client in a mass of recriminations. The more the industry consolidates, the more likely it will fall foul of conflicts of interest, cultural frictions and a slippery slope of the quality of the work.
Iosco, the global group of securities regulators and financial market authorities, has said that it worries about ‘the growing interconnectedness between private equity activities and the audit sector’. This month it announced ‘an exploration of the growing interconnectedness between private equity activities and the audit sector’. The risks to audit and the quality of its work are obvious.. The sound of stable doors being slammed can be heard all around the world.
