E&Y merger wins admiration of Big 4

Date: 24-04-2008
Source: Financial Times

Ernst & Young this week announced plans to merge its European practices and closely combine more than 40 others, setting the accountancy world abuzz. The move, considered revolutionary, has focused attention on what the rest of the Big Four accounting firms and their rivals will do.

E&Y plans to bring together a total of 87 countries, covering Europe, the Middle East, Africa and India, under a single management with a single profit-sharing scheme and region-wide investment decisions. The firm believes the structure will give it a competitive advantage over its rivals in serving global clients.

"This is clearly a step above and beyond what the other Big Four are doing. It suggests an ambition in terms of creating a global partnership that I have to admire," said Jeremy Newman, chief executive designate of BDO International, the fifth-biggest global network. "Will they pull it off? I don't know, but in terms of boldness, I'm sure there are others who will wish they were there first."

Professional services firms - covering auditing, tax advisory and consulting units - are actually networks of national partnerships.

Regulation has largely restricted ownership to auditors themselves, while the unlimited liability many also face, notably in the US, has encouraged the firms to maintain a legal distance from each other, even as they try and present a single united face to their clients.

"There's no question that all the global organisations, no matter what they say, are made up of multiple privately held firms, all of which have their own agenda," said David McDonnell, chief executive of Grant Thornton International.

"That's the likely route for us, but it is without a time-scale. It isn't to create a single worldwide business as such, but a network with far fewer and bigger firms."

KPMG already has KPMG Europe, an amalgam of the Swiss, UK and German firms. John Griffith-Jones, co-head of the combined firm, said the merger was going well, but that it had involved a lot of hard work.

"If E&Y are trying to make things as integrated as we have achieved with KPMG Europe, but with 87 firms at the same time, then that's one big step," he said. "All of us are facing the fact the world is becoming more global and the services and structures that we offer to clients need to reflect that."

Deloitte, however, is not planning any similar moves.

"The legal structure in itself is not the key thing. It doesn't mean it might not be an influencer, but it's not what is most important," said John Connolly, chief executive of the UK firm and chairman of the network's global management committee. "We could legally bring our firms together. The next question is 'then what?' - what are you going to do better in terms of serving clients?"

For that, all the firms will be watching E&Y closely.

"It is a lot more about how people behave, not just the legal structure. If they can get people to behave differently, (E&Y's move) will be a really significant shift," said Mr Newman.

The firm's 3,300 partners across the region are due to vote on the proposals next month and "yes" votes are not a foregone conclusion.

"We're all feeling our way," said Mr Griffith-Jones. "There needs to be a balance between the freedom of countries (partnerships) to get on and do what they think is best versus getting better co-ordination with our global clients."