And the winner is . . . PricewaterhouseCoopers.
PwC had a record-breaking 2011, with total billings of US$29.9 billion. Deloitte, the biggest revenue earner in 2010, was pushed to second place with its 2011 sales of US$28.8 billion.
All the Big Four accounting firms had a remarkable 2011, actually. According to our friends over at
Big4.com in
The 2011 Big Four Firms Performance Analysis , PwC, Deloitte, Ernst & Young and KPMG “had a blockbuster year in 2011, their combined revenues reaching an all-time high of US$103 billion.”
Does it matter? Perhaps it does, for CFOs – or more to the point, investors and other stakeholders – who care about how the company’s external auditor performs in relation to its peers. In terms of reputation, the top revenue earner can be regarded as the world’s accounting firm of choice, and as such, is perceived to be the leader in terms of resources, experience and expertise.
The 2011 results is a reversal of the 2010 league table, when Deloitte nabbed the top spot with billings of US$26.578 billion, just US$9 million more (a paper-thin difference of 0.03%) than PwC’s US$26.569 billion. PwC came roaring back last year – its revenues are 1.5% larger than Deloitte’s.
Ernst & Young came in at No. 3, with revenues of US$22.9 billion, up 7.6% in US dollar terms from US$21.2 billion in 2010. But fourth-ranked KPMG is catching up. Its billing reached US$22.7 billion last year, up 9.7% from US$20.7 billion in 2010 – a growth spurt that’s two percentage points more than E&Y’s.
Revenues of Big Four Accounting Firms
Counting on Emerging Markets
The global economy’s recovery and strong GDP growth in emerging markets (especially Asia) in the first half of the year accounted for a significant part of the Big Four’s record performance. Asian revenues surged 17.4% to US$17 billion. That’s the seventh year in a row that Asia was the fastest growing region for the audit firms.
At 17%, Asia is still the smallest region in terms of Big Four revenues – EMEA (Europe, Middle East and Africa) accounted for less than 44% last year, while the Americas had 40%. However, slower growth in total revenues in Europe (5.4% from 2010) and the US (9.9%) could mean that Asia will eventually equal or surpass these two developed regions.
It remains to be seen whether 2012 will be another historic year for the Big Four. Europe’s financial crisis bubbled over late last year and now threatens to spill over to emerging markets, particularly open, export-oriented economies like Hong Kong, Singapore and Taiwan.
But the Big4.com analysts are upbeat. “The outlook for 2012 and beyond is quite optimistic,” they reckon. “Revenue is expected to grow at a good pace, with help from emerging markets, advisory services, conversions to IFRS and favourable economic conditions.”
Whither Ernst & Young?
Last year, CFO Innovation speculated about the impact of lawsuits on E&Y, including those brought against it in connection with Lehman Brothers’ 2008 bankruptcy. The New York State Attorney General had sued the firm for accounting fraud, bringing the total number of lawsuits to three. The UK’s Accountancy and Actuarial Discipline Board also opened an investigation.
“Will E&Y take a hit to its reputation and lose business because of its legal and regulatory problems?” we asked. The answer seems to be no, at least not in 2011, if the 7.6% increase in revenues is any gauge. Indeed, billings from assurance services shot up 5% in US dollar terms, although it is advisory services where Ernst & Young really shone – up 17.5% to US$4.3 billion.
In terms of geography, E&Y did particularly well in Asia Pacific and Japan (the firm counts these two markets separately, and excludes India, which is grouped with Europe, Middle East and Africa). Total combined billings for Asia Pacific and Japan ex-India came to US$3.8 billion, up 14.8% from 2010.
But the US lawsuits and the UK investigation are continuing, although Ernst & Young may escape the worst. A year after the New York Attorney General’s suit, the US Securities and Exchange Commission has not issued a Wells notice, which would have formally signalled that the SEC might also file a civil suit.
Ernst & Young, along with KPMG, got good news from Japan, too, where the two audit firms had gotten embroiled in the Olympus accounting fraud scandal. An independent legal panel convened by the camera-and-medical-equipment giant concluded that any perceived shortcomings in the work done by E&Y, which became Olympus’s external auditor in 2009, and KPMG, the previous auditor, do not make them legally liable.
Audit and Advisory
In any case, audit services may be becoming less of a focus for Ernst & Young and the other firms. While assurance remains the biggest line for the Big Four, its share of total revenues in 2011 fell to less than 47%, from 52% in 2004.
In contrast, advisory – comprising non-audit and non-tax services such as transaction advisory, risk management and business consulting – increased its share sharply to 31% of total revenues in 2011, from just 22% in 2010.
Still, the Big4.com analysts note, “audit is a steady business, as publicly traded clients renew auditor services each year with some increases in annual fees.” The growth has been moderate, however, “with PwC growing fastest at 6.5% and Deloitte growing slowest at 5.1%.”
PwC is the leader in audit services, reaping US$14.4 billion in billings from this line last year – that’s 15% larger than No. 2 in audit services Deloitte (US$12.3 billion) and could be regarded as a vote of confidence from CFOs in PwC’s audit skills and reputation.
But Deloitte is the star in fast-growing advisory work, reporting revenues of US$8.6 billion last year from this non-audit, non-tax line. That’s up 14.9% in US dollar terms from 2010. PwC checks in only at third, at US$7.46 billion, outpaced by KPMG’s US$7.54 billion. Ernst & Young brings up the rear with combined advisory and transaction revenues of US$6.3 billion.
Will advisory becomes as much a bread-and-butter line as audit is today? Possibly, but it seems unlikely to end up as the tail that wags the dog. At the end of the day, accounting and auditing are still the core competency of accounting firms, with advisory (and tax services, which account for a quarter of total revenues) arguably an extension of that core business.
Indeed, there are political and regulatory noises emanating from Europe about accounting firms and advisory services. Noting the rise of advisory work by accounting firms, Europe’s Financial Services Commissioner
Michel Barnier said last year : “How can you be wholly independent? We have to limit or even prohibit non-audit services for audit clients.”
That’s the European Union, but the way things are going, accounting standards and regulations in one part of the world eventually spill over to the other markets, including Asia.
Counting on Asia
The Big Four’s 2011 financial results once again highlight the growing importance of Asia Pacific for the accounting business.
“All the firms have grown [in Asia] at exceedingly high rates since 2004, with the result that combined revenues have more than doubled from US$7 billion in 2004 to US$17 billion in 2011,” reports Big4.com.
PwC is Asia’s favourite accounting firm; the region showered it with US$5.1 in revenues last year. Deloitte is second with US$4.2 billion, followed by KPMG (US$4 billion) and Ernst & Young (US$3.8 billion).
PricewaterhouseCoopers is also the fastest growing accounting firm in Asia, notching a 20.7% gain in 2011 compared with 2010. But Deloitte (16.7%) and KPMG and Ernst & Young (both 16.6%) are growing significantly as well.
The markets driving the Asian advance are the usual suspects – China and India – and somewhat surprisingly, developed economy Australia. The Big Four firms do not break down revenues into individual countries, but their annual reports typically single out some markets for special commentary.
Thus, we know that revenues at Deloitte Australia and Deloitte India surged in excess of 25% in 2011, while sales at Deloitte China grew more moderately at 8.3%. Ernst & Young India saw billings rise by 22% while Ernst & Young China experienced an 18% increase. Ernst & Young Japan, however, ended 2011 essentially flat, with revenues falling 0.3%.
The PwC annual report made no special comment on individual markets, but it did mention that revenues increased 14% in Asia and 38% in Australasia (which includes Australia, New Zealand and Indonesia).
Outside of emerging Asia, Brazil is turning out to be a fertile place for Big Four growth. “KPMG noted that 2011 revenues in Brazil grew 22% and Deloitte reported that Brazil revenues grew in excess of 20%,” the Big4.com report said.
Accounting as Career
The data that Big4.com mined from the Big Four firms’ annual reports validate the belief that the accounting, auditing and advisory business is virtually recession-proof. At the height of the global recession in 2009, the Big4.com researchers estimate, the four companies added about 85,000 new people to the rolls, assuming attrition rates of 10% (Big Four attrition rates were running at 15% prior to 2008).
“In 2010, assuming that attrition rates held steady at 10%, new hires would be 55,000 or 200 per business day in one of the toughest job markets in recent history,” Big4.com reports. “In 2011, assuming that attrition rates again held steady at 10%, new hires would be 98,000 or 390 per business day.”
“Truly, Big Four firms are huge seekers of talent with correspondingly very busy recruiters even in a period of deep recession,” the report concludes.
But breaking into the partnership ranks is a tougher proposition. “Partners form an elite class within these large partnerships, and only one in about 20 people belongs to this exclusive club,” Big4.com observes.
It estimates that the Big Four firms had 35,000 partners in 2011 atop the base of a pyramid comprised of 493,000 professionals. This means one partner was responsible for 14 professionals last year, a heavier workload than the 1:11 ratio in 2004.
The revenue-per-partner bar has also become higher. In 2004, the typical partner was expected to bring in and manage US$2.1 million in revenues. This metric has been creeping up in subsequent years. In 2011, revenue-per-partner was US$3 million.
“Clearly,” says the Big4.com report, “making partner is only the beginning of a series of demanding client development and professional responsibilities.”
What’s in Store in 2012
The unsettled problems of Europe notwithstanding, Big4.com believes 2012 will be another good year. “The firms have demonstrated tremendous global breadth and depth to benefit from any growth or even changes in their client base,” the report asserts.
The “solid factors” that will drive growth include:
- Improving global confidence and business growth
- Higher penetration into emerging markets, particularly Asia
- Selective Big Four acquisitions in 2011 to enhance consulting expertise, which should start to pay off in 2012 and beyond
- Increasing financial sophistication in Brazil, Chile, East and South Africa and the Middle East, creating demand for Big Four audit, tax and advisory services
- Impetus to cross-border M&A from low interest rates, improving equity markets, strong Japanese yen and a weakening euro
- Acceleration in adoption of IFRS standards across the world in 2012 and beyond, necessitating external assistance from Big Four auditors
About the Author
Cesar Bacani is Editor-in-Chief of CFO Innovation
Related articles
0 comments
Print
Digg
