Accountants take on ‘big four’

The entry of Melbourne accounting firm Pitcher Partners into the local market will be followed by more big changes among second tier accounting firms. Mark Beyer reports.

TALK to just about anybody at a second-tier accounting firm and they agree on at least two things.

First, they loathe the term ‘second tier’ because of the connotation of second rate.

Second, they all want to be recognised as the main alternative to the ‘big four’ accounting firms – Ernst & Young, KPMG, PricewaterhouseCoopers and Deloitte.

Perth’s second-tier firms are a hive of speculation as they strive to rise above the pack and stand out as market leaders.

At least four of the second-tier firms are involved in merger discussions or other strategic initiatives to lift their profile and capabilities.

Others are pursuing organic growth and are hoping that tighter regulation and the drive towards audit independence will help them achieve faster growth.

To date this hasn’t had much impact, but there is a hope, and in many cases an expectation that listed companies will have to allocate their audit and other accounting work to a range of firms to avoid conflicts of interest.

BDO managing partner Geoff Brayshaw said companies were starting to allocate work such as valuations, tax advice and experts’ reports to accounting firms other than their auditor.

“The market believes there is some advantage in doing that,” he said.

“It gives them more flexibility.”

Grant Thornton managing partner Geoff Kidd expects the audit independence issue to drive more change in future.

“We are just starting to see the beginning of that,” Mr Kidd said.

He expects the main opportunities for second-tier firms will come in non-audit areas such as tax advice.

“We think the big four will want to maintain their dominance of auditing,” Mr Kidd said.

Judging by recent experience, it is rare for companies to switch auditors.

One of the few Perth examples is Coventry Group, which switched from second-tier firm BDO to KPMG.

Osborne Park-based Solar Energy Systems moved in the other direction, switching from KPMG to small, West Perth firm Dry Kirkness.

Price can be a driver of change, as companies weigh the benefits of paying $500 an hour to a partner at a ‘big four’ firm, or about half that rate to a partner at a smaller firm.

In order to compete effectively with the big four firms, the second-tier firms recognise they also need to offer a full-service capability.

A prime example is Melbourne-based Pitcher Partners, whose local operation was formed from the merger and rebranding of Norgard Clohessy and boutique tax adviser Ceglinski & Co.

Pitcher’s Perth office already has a strong insolvency practice, plans to expand its business services and tax practices, and will establish new audit and corporate finance units from scratch.

Managing partner Bryan Hughes believes Pitcher will be helped by the relative youth of its partners, in contrast to other second-tier firms that will need to deal with “generational change”.

Tax partner Mark Ceglinski, formerly of Ernst & Young, said Pitcher could differentiate itself by matching or exceeding the expertise of the big four firms in targeted areas.

Over the coming year, Pitcher aims to expand to eight partners and up to 50 staff.

That would take it close to the current size of PKF, which has just lost insolvency partner John Carello and business services partner Richard Dickson.

Managing partner Neil Smith said PKF’s growth strategy was to lift partner numbers from seven presently to around 12 over the next three years.

This would allow the firm to achieve critical mass in its targeted service areas.

“Our strategy in WA mirrors PKF’s national strategy, which is to be recognised as a clear alternative to the big four,” Mr Smith said.

“We intend doing this by consolidating the strong position we already hold in the Perth market through targeted growth.”

One area PKF will be leaving to others is insolvency, on the basis that there are few cross-sell opportunities between insolvency and other practice areas.

The largest second-tier accounting firm in WA is RSM Bird Cameron, which has 22 partners and nearly 150 staff.

RSM’s numbers are boosted by its network of rural offices, though national chairman Kim Hutchinson said only four WA partners were based outside of Perth.

Mr Hutchinson said RSM was constantly assessing growth opportunities, mostly from small accounting practices looking to merge with a bigger firm.

He said small firms found it increasingly difficult to meet regulatory and compliance standards and keep up with constant changes to the tax system.

The target market for RSM, like many second-tier accounting firms, is the ‘middle market’ – smaller listed companies as well as unlisted and family companies.

“Where I think we compete significantly better than the big four is partner accessibility and pricing,” Mr Hutchinson said.

RSM executive director John Heggie believes one of its strengths is full financial integration, in contrast to other second-tier firms operating as a loose-knit federation.

“Behind the sign there is not a lot of substance,” Mr Heggie said of his competitors.

Not surprisingly, it’s a suggestion that rankles with other firms, who highlight the value of their brand.

“To hang your shingle out, you have to go through a rigorous appraisal,” Grant Thornton’s Geoff Kidd said.

Some groups are making a bigger financial commitment to the national federation.

PKF, for instance, has a national service company funded by each of the State firms.

Managing partner Neil Smith said the national company provided technical expertise and support that otherwise would not be available.

An increasingly important selling point for accounting firms is their national and international network.

Bentleys MRI Perth, for instance, is part of Moores Rowland International, which is currently the world’s eighth largest accounting network and aims to become the sixth largest within five years.

Perth partner Geoffrey Hick has been closely involved in developing MRI’s international business model, which is designed to ensure ‘seamless’ service standards across borders.

Being part of an international group can be a double-edged sword, as Grant Thornton discovered when its Italian firm was enmeshed in the collapse of dairy group Parmalat.

Contrary to the suggestions of some competitors, Mr Kidd insists the Parmalat scandal is nothing more than a temporary hiccup for the local practice.

“We haven’t seen any real direct impact,” he said.

Bentleys MRI is aiming to lift Australian revenue from $60 million this year to $100 million by 2007.

Mr Hick said the group would be pursuing both organic growth and mergers.

Executing a merger is acknowledged to be a challenging exercise, particularly a merger of equals.

This was illustrated by the failed 2002 merger of Hall Chadwick and MGI Bridge Partners, which lasted just seven months.

But that episode has not stopped many other firms pursuing the same objective.