What would an accounting firm do if the international network it belongs to decides it should become part of an integrated entity serving the China market? For some partners and staff of Grant Thornton Hong Kong, the answer is to move to rival BDO. “We consider BDO, which is run independently in Hong Kong and China, respectively, as a model that suits us better,” Patrick Rozario, chief executive of Grant Thornton in Hong Kong, told the South China Morning Post.
Which is just fine with Albert Au, chairman and CEO of BDO Hong Kong.
“It was a real golden opportunity for us because this sort of thing just doesn’t happen every day,” he says. The en masse admission of specialists from an accounting firm founded in 1949 will double BDO’s size overnight to more than 1,000 people, if the deal is finalised by the end of the year. In Hong Kong and China, says Au, BDO will become as large as any of the Big Four firms in those two markets combined.
Au spoke to CFO Innovation’s Cesar Bacani on how the union came about, the implications on clients and the accounting sector, and other issues.
Is this really a merger of two accounting firms?
I would not call it a merger. It is more of an admission of partners and the employment of all their professional staff over to our firm, because they are all joining BDO.
All 500 are joining BDO as individuals, not as partners and employees of Grant Thornton?
That’s correct. They are leaving the Grant Thornton International network as their member [firm], the entire lot. We’re talking about picking up the entire firm’s people. So you can imagine why I said in my interview with the SCMP that I thought it was a real golden opportunity for us because this sort of thing just doesn’t happen every day.
It’s not like a situation where the firm disintegrates and people leave in all directions. This is not the case. A firm of that size, with a track record of more than 50 years – the firm originated originally in 1949 – it’s a very rare opportunity. It is a rare opportunity for us to take up the talents from that firm en masse.
How did this come about? Did you actually make the first move and say: why don’t you come over here?
Obviously this sort of thing, it doesn't happen overnight.
We have had a very successful merger that took place only last year. We took over the member firm of Horwath, one of the top mid-tier firms in Hong Kong. I think the people in Hong Kong in our profession took notice of that and I guess they have been following that merger very closely. Everybody’s thinking that if you have a merger, you’re going to have fallout. Is it working? Is it successful?
I like to think that merger turned out very well. Every partner that came over, every staff that came over, they are still with us today. I think that perhaps gave the GT firm in Hong Kong, when they were considering a move, that level of comfort. Not to say that the Big Four have a poor track record [in mergers or en masse admission], I’m not implying that. But I guess [Grant Thornton accountants] said: Hey, this is good, they have done it well.
We actually started talking quite some time ago. And we said: hey, wait a minute, we just started our merger with Horwath, so we didn’t want to take it up during that time.
So the talks with them came about the same time as the merger with Horwath, which was in May last year?
Not the same time, but shortly after that. It’s not like we were talking to both firms at the same time.
I can’t remember the timing. but I think it’s after their managing partner disappeared.
Did the initiative to talk come from the GT partners?
I would say it’s mutual. I like to talk to my competitors all the time, and one thing led to another. It’s not like they knocked on our doors. It’s like a very mutual thing. We have had talks and it was time to think about it and so . . .
And from your point of view it was good that they seemed to be acting in concert, all for one, one for all.
We would not have it otherwise. It would be easy to just pick from the debris, but you would lose a lot of value.
Are all 500 or so coming over to BDO?
There are a few fallouts, but I would say practically everyone is coming aboard.
Are they automatically admitted into the BDO partnership or do they need to go through the usual vetting and seniority steps . . .
Obviously we have done very detailed due diligence on the firm, on all aspects, and obviously our findings have been very satisfactory. So we’re not picking heads. Rather, we are offering them the same terms to join us. We have mapped out all their salary levels and benefits, so it’s a very detailed exercise we have done. We will have them come in as equals because to do it otherwise would not be good. If they are partners in their firm, they will join as partners. If they are managers, they will join as managers.
If some of those people are named specifically in the lawsuits involving Mr. Diaz-Azedo, will they now escape liability?
I am not familiar with that part. The lawsuits are still ongoing and that’s with their old partnership. That obviously would not disappear. That will continue.
But the people who have joined BDO, if they are named in the lawsuits, it will be in their individual capacity? BDO will have nothing to do with it?
That's correct. Of course, from our perspective, we would definitely want to see that they come out amicably with respect to the lawsuits. After all, after they join us, they will become partners of BDO, even though our firm would not have anything to do with their past problems.
What about the clients they will be bringing over?
We have done all the due diligence on the clients as well, to make sure that there are no conflicts in terms of providing the same services to the same client, that sort of thing.
And have you found some conflicts and have those been dealt with?
Not at all. Luckily we were not providing services to their clients and vice versa. So there were not conflicts in that respect. That turned out to be a very, very good fit. Our firms’ businesses complement each other very well.
THE NEW GT HONG KONG
Wouldn’t Grant Thornton International say, hey, these are our clients. Why are you taking them?
Clients are not chattels like real estate or equipment. Clients have minds of their own. It is not like we’re taking in all these [GT Hong Kong] people on the condition that they bring [GT Hong Kong] clients with them. Clients don’t rally to you unless they are happy with your services.
What about GT Hong Kong’s relations with the GT International network? Presumably they have done whatever they need to do to withdraw from that network?
GT is a very big organisation. I don’t think that they [GT Hong Kong] would leave on bad terms. Quite amicable, I’m sure.
So what happens to Grant Thornton in Hong Kong after all 500 current partners, principals and employees leave?
I’m not involved on that side, so I don’t really know. You can visit their website
where they have a press release [on the way forward]. They say they aim to build up to a hundred people in a year’s time.
They have announced the appointment of a new member firm that will start off as Jingdu Tianhua Hong Kong, which will be renamed Grant Thornton. What I find interesting is that this office will be part of the network of ten offices of Grant Thornton China, which GT International says will provide “seamless access to 65 partners and over 1,500 professionals across mainland China and Hong Kong.” What do you think of this strategy?
I don’t get it, to be honest. Hong Kong is not just any city. Hong Kong is a major financial centre. But basically that’s the way GT International perceives is the way forward for their China strategy, I suppose. You’ll have to ask them the rationale they have in their strategy [that required] turning a 500-strong firm into a 100-person branch.
Hong Kong geographically is a dot on the map, but it’s a very big and very substantial financial market. Just last week you saw the IPO of AIA, which raised something like US$20 billion. Just like that. And now we’re talking about people like Prada going to list in Hong Kong. It’s not how big the place is, it’s how important it is in the world map of international finance.
We’ve got Russian resource companies, Manulife from Canada, HSBC, and of course Petrochina. They all have to file their accounts here, so there’s plenty of work. You’re not dealing with a local market. You’re dealing with an international financial market.
BDO does have a China member firm that the BDO/GT Hong Kong combine will be plugged into, right?
Absolutely. Their top line exceeds RMB1.2 billion [US$180 million]. People-wise, they are at 6,000 [partners, principals and employees], so together with us here in Hong Kong, we are actually as big as the Big Four [in Hong Kong/China]. BDO is right up there competing with the big boys. In Hong Kong, actually, we are also getting closer to the smallest of the Big Four in terms of people.
THE NEW BDO
So what is the value proposition this new BDO/Grant Thornton will bring to the table?
Globally, regulators and governments are concerned about the concentration of the markets within a very few selected firms, which we call the Big Four. Not to say that they have created a situation which is untenable, but you see many of the Big Four providing different services to the same client. So, for example, a big bank may be audited by two of the Big Four, and maybe the third and the fourth provide other services [such as advisory or tax advice].
For a big corporate to move to another Big Four firm is difficult, if not practically impossible, because of conflict of interest situations. This lack of choice at the top tier is actually creating problems for the market. I think it will become more credible for the stakeholders to now say yes, we can choose BDO because they are now of a significant size that could handle our audit or other services.
You will be strengthening your other services aside from auditing?
Without a doubt. Size without sophistication is meaningless. So if you have a thousand people of like mind providing the same services, it’s not going to help us. Once you have built up a significant size, obviously you can maintain quality on the service that you’re providing, but the most important step must be to specialise. If you’re targeting big organisations, their appetites and their requirements for services also become more sophisticated.
They cannot hire just one auditor to do everything.
Exactly. Due to conflicts, due to different niches in the market, one firm may be stronger in one area than the others. So yes, that’s absolutely in the cards. We’ve got to provide a more sophisticated range of services, things like helping clients list on the capital markets.
This is absolutely very important for us. Everybody is now targeting China as the area of growth, so we need to strengthen our advisory services there. Another example is our international tax advisory service. Your clients are doing more and more cross-border transactions and once you do that, you’ve got to deal with tax implications in various jurisdictions.
Response From Grant Thornton International
Dear Mr Bacani:
Grant Thornton expelled its former Hong Kong firm in September. They did not choose to leave, they were told to leave.
Success in China is critical to the long term ambitions of Grant Thornton and we are committed to an integrated approach to serving clients across the China market, including Hong Kong. While many partners in the former Hong Kong firm supported that strategy, their leadership was unable to agree amongst itself and separation became the only option.
Grant Thornton China immediately set up a new firm in Hong Kong, Jingdu Tianhua Hong Kong, led by a group from our original Hong Kong firm, with support from the 1,500 partners and staff across mainland China. The issue is not about one member firm controlling another but about the respective firms working closely together, serving clients in a cohesive manner and in a seamless way.
So it is disingenuous, or possibly wishful thinking, on the part of BDO to suggest that Grant Thornton is pulling out of Hong Kong. Many partners and staff from the former Hong Kong firm have already contacted the new Grant Thornton firm and clients will, of course, decide for themselves whether to move to BDO, or remain with the integrated, 'one firm' approach of Grant Thornton.
For our part, the new firm, which will adopt the Grant Thornton name in due course, is up and running, led by highly experienced and regarded senior partners. We expect combined China/Hong Kong revenues in excess of RMB 2 billion and 5,000 partners and staff by 2015.
Head of International Communications
Grant Thornton International Ltd