How the mighty have grown

FIRST there were eight. Then five. But with the demise of Arthur Andersen, there are just four giant accountancy practices left. It is good news for the survivors. They can earn billions and effectively monopolise the most lucrative work - providing auditing and other services for Britain's biggest companies.

And with Chicago-based Andersen out of the way, the remaining Big Four in global accountancy are effectively British-based firms. Better still, regulation is patchy. Government plans for a tough disciplinary regime are running two years late - and counting. And even more agreeably, the Government has changed the law so that accountants now enjoy limited liability. This means that the partners in a practice are shielded from troublesome lawsuits that might be launched by aggrieved shareholders of defunct companies whose financial ill-health went unnoticed by their auditors.

There is, of course, one small downside to all this - the esteem in which the accountancy profession is held by the public has plunged as it emerges that financial chicanery at Enron, WorldCom, Xerox and other huge corporations went unchallenged, and even encouraged by their auditors. The public impression of the accountant has shifted overnight from bore to villain. This is particularly galling for the estimated 150,000 accountants in Britain. Only about a quarter are even entitled to audit company accounts.

The remainder include tens of thousands of people beavering blamelessly in the innocent fields of local government finance and unglamorous-cost accounting. And of those 40,000-odd qualified auditors, only the top 2,000 or so will work for the giant City practices. Most make their living checking the books of local businesses and ensuring their clients claim all the appropriate tax reliefs.

There are about 20,000 accountancy firms in Britain. And 68 of the FTSE 100 companies are audited by just two of them - PricewaterhouseCoopers and KPMG. The gap between the giants and the rest was always wide, but in recent years it has become a gulf. Before its demise, Andersen, smallest of the Big Five, had revenues about three times greater than those of the next firm on the list, Grant Thornton. PricewaterhouseCoopers - the top firm in the City and worldwide - has revenues 26 times the earnings of the tenth-ranking British practice, Baker Tilly.

Accountancy in total makes up one% of the UK economy, and just under a sixth of the contribution of the City and financial services to gross domestic product. The biggest 50 UK accounting firms employ about 57,000 accountants and nearly 100,000 support staff. Since Andersen's collapse, there has been little need to advertise for qualified City accountants. Its partners are transferring to Deloitte & Touche. The Big Five is now the Big Four.

Not only do big international companies now have even less choice in terms of audit services, they also have little guarantee in terms of global standards. For while their auditors in, say, the Far East, may call themselves PWC Singapore or whatever, they are usually only affiliates rather than wholly owned and there is little central control of standards.

The shrinkage also makes less practical any idea of changing the law to force such companies to 'rotate' the audit every few years. Until recently, it was all very different. No partnership, whether in accountancy or law, could contain more than 20 partners. A little-noticed change in the Seventies removed this ceiling, and a wave of mergers at the end of the Eighties shrunk the Big Eight accountancy firms to just five (see below).

But the accounting revolution is not just about size. It is also about services. Traditionally, tax advice and auditing - the process of ensuring that company accounts give a 'true and fair' picture - formed not only the backbone of City accountancy, but also the peak to which an accountant could aspire.

Tax and audit is still the biggest fee generator, but there has been an explosion in other activities. Some, such as insolvency - or so-called 'business recovery' --are logical extensions of the accountant's trade. Others, most notably management consultancy, are not. By the end of the Nineties, the giant practices had even stopped calling themselves accountants, preferring the more general ' professional services firm'. The endgame was for the huge practices to compete with investment banks on big takeovers, mergers and flotations and do everything themselves.

Meanwhile, new technology was eating into profits from auditing, as computerisation allowed audit packages to be bought off the shelf. The big firms responded by using audit as a 'loss leader', on the back of which they could sell expensive consultancy and corporate advice services.

Given that auditors are supposed to act as a public watchdog, the conflicts of interest are glaringly apparent. Blowing the whistle on a company's creative accounting when wearing the auditor's hat could cost a firm millions of pounds on the more lucrative consultancy side.

Regulators, principally the Department of Trade and Industry, have appeared indifferent. But the City's Big Four are also the world's Big Four, and America's financial supervisor, the Securities and Exchange Commission, is planning reforms that could force accountants to offer solely tax and audit services and spin off all other activities.

Of course, the commission has no remit in Britain, but none of the Big Four is going to shut itself out of the huge US market. It is ironic that it will take a bastion of free-market capitalism in the US to clean up the British accountancy profession.

THE BIG FOUR...

PricewaterhouseCoopers

SENIOR PARTNER: Samuel DiPiazza (right).

REVENUE: £14.9 bn (up from £13.8bn in previous year).

HISTORY: In 1849, Samuel Price started a London practice. William Cooper founded his London firm five years later. In 1865, Price merged with Holyland & Waterhouse to form Price Waterhouse. In 1957, Cooper Brothers merged with the American William Lybrand business. In 1998, Coopers & Lybrand merged with Price Waterhouse.

KPMG

SENIOR PARTNER: Mike Rake.

REVENUE: £1.4bn (increase of 18% on previous year).

HISTORY: London firm of William Barclay Peat was founded 1870. US practice of James Marwick merged with Roger Mitchell in 1897. Peat and Marwick Mitchell merged in 1911. The Dutch firm of Piet Klynveld joined forces in 1979 with Deutsche Treuhand-Gesellschaft and McLintock Main Laferntz to form KMG. In 1987, Peat and KMG merged, creating KPMG.

Ernst & Young

SENIOR PARTNER: Nick Land.

REVENUE: £722.2m (up from £625.6m in the previous year).

HISTORY: Arthur Young, a Scots expatriate, founded a practice in Chicago in 1906. Brothers A.C. and Theodore Ernst of Ohio founded Ernst & Ernst in 1903. In 1924, both firms allied themselves with British practices - Young with Broads Paterson and Ernst with Whinney Smith & Whinney. In 1979, Ernst & Whinney was created, and ten years later Ernst & Young was formed.

Deloitte & Touche

SENIOR PARTNER: John Connolly.

REVENUE: £822m (up from £689m in previous year).

HISTORY: William Deloitte set up in London in 1854, specialising in railway accounting. In 1849 he became the first independent auditor, examining the books of the Great Western Railway. Deloitte opened a US office in 1893. George Touche qualified as an accountant in 1883. By 1989, Deloitte Haskins and Sells merged with Touche Ross.

...AND THE FALLEN AMERICAN GIANT

Arthur Andersen & Co

SENIOR PARTNER: Aldo Cardoso.

REVENUE: £6.2bn in 2001 (up from £5.6bn in 2000).

HISTORY: The firm was founded by Arthur Andersen in Chicago in 1913. Andersen was one of the first accountants to offer corporate advice. In the Fifties, Andersen Consulting was formed. It split from Andersen at the end of the Nineties to become Accenture. Andersen is disintegrating, its reputation severely damaged by its alleged failings as auditor of Enron and WorldCom. UK partners are transferring to Deloitte. There is talk of overseas partners joining KPMG.

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