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Numbers game = good medicine

THE withdrawal of Sterling Financial Services’s prospectus is unlikely to halt the wave of consolidations sweeping through the accounting profession – given the experience in the medical field.

Two WA companies – Sterling and the Financial Services Group released prospectuses in February to fund their consolidation activities. Both were expecting to consolidate six accounting practices each.

Sterling has since withdrawn its prospectus because it received new opportunities that it wants to con-sider but there are others waiting in the wings, looking to follow the example of the corporatisation of medical practices which has exploded in the past year.

In the medical profession, companies such as Endeavour Healthcare, Medical Care Services, Foundation HealthCare and Mayne Health have been snapping up general practitioner practices.

Only this week, MCS shelled out for Australia’s third biggest pathology group, Victorian-based Gribbles, in a deal worth $192 million.

They bring a corporate approach to these practices aimed at improving their profitability.

GPs have been suffering due to the diminishing returns from Medicare patients. Doctors receive $22 a patient from Medicare but need an hourly return of about $300 to keep their practices viable.

What makes these consolidated GP practices profitable, besides improvements to back office systems, is the ability to control practice referrals.

Most medical consolidators have interests in pathology and medical imaging practices and, in some cases hospitals, and expect their GP practices to refer patients to them.

Accounting consolidators are taking a similar approach. They want their accountants to act as GPs and refer their clients to the firm’s financial planning people.

With accounting consolidations the end game appears to be gaining greater control of funds under management.

Accountants have been losing out in the financial planning arena because their workload has been too high due to the GST.

The consolidators also believe it will give some firms the chance to shed “troublesome” clients.

They believe the back office systems and information technology they bring to the firm will make them more profitable.

However, this does not sit well with most accountants.

Institute of Chartered Accountants in Australia national vice-president Geoff Brayshaw said it was very hard for accountants to give up their relationships with their clients.

“There is years of tradition involved. It’s a very personal thing. The relationship between the client and the partner is the goodwill

that is in the practice,” he said.

“The client-partner relationship extends beyond service. It goes all the way to debt-collecting. Clients almost expect the partner to deliver the bill personally. They get upset if an office manager rings up chasing payment.”

CPA Australia WA director Justin Walawski said the general rule was 80 per cent of the firm’s profit would come from 20 per cent of its clients.

But he believes accountants will find it hard to shed their less valuable clients.

“There is a genuine concern about what will happen to those clients,” Mr Walawski said.

“The easiest solution while they are under the pump with the GST and the Business Activity Statement would have been to shed some clients. But they worry about where those clients will go.

“Besides, in many cases it’s the slow hard slog work that leads to the business advisory work and the higher end stuff where CPAs can use their training.

“Accountants have to build up trust with their clients, particularly when they are small businesses.”

Mr Brayshaw said using accountants to cross-sell financial products to their clients would not be well received.

“It’s basically converting the service to a product and I don’t think a lot of clients will like it.”

Mr Walawski said that cross-selling approach would not sit well with CPAs.

“But in accounting, finance and law the demarcation lines are very grey. When these services are combined in a multi-disciplinary practice the lines are firmed up a bit and that’s a good thing. It stops people over-stepping the mark,” he said.

Consolidation within the accounting practice is not new. The big six firms became the big five with the merger of Price Waterhouse and Coopers and Lybrand to create PricewaterhouseCoopers.

These firms are also creating multi-disciplinary practices to generate more value from their clients.

Consolidation is not likely to spell the end for small accounting practices either.

Mr Brayshaw said it was likely a lot of clients will fall out of the bottom of these consolidated entities.

And partners or associates of these consolidated groups would leave firms in order to pick them up.

WA accounting firms such as Barrington Partners were created by accountants who became dissatisfied with life in a big firm and decided to set up their own practice.

“Someone will always make a good business out of someone else’s bad business,” Mr Brayshaw said.

Hayes Knight partner Greg Hayes said small accounting firms were under a lot of pressure and tried to cope through merging.

“Or they turn to larger groups for access to capital. Access to technology is one of the main drivers for seeking this capital,” Mr Hayes said.

“It’s probably the top 300 or 400 accounting firms in Australia that control about 60 per cent of the revenues. Organisations are going out to see which firms are going to partner early.

“In a sense there is also a level of opportunism at play. There is a new business model being created and early players in the market are usually rewarded.

“The big challenges are branding and blending the systems and culture of the organisations.”

Besides mixing the culture of the firms, there are problems with conflict of interest.

The recent merger of Brandsma Crockett and Hall Chadwick raised a conflict issue.

One firm was representing Monteath Properties and the other

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