Professional Services Monitor: Today

Nick Land, chairman of Ernst & Young in the UK, will retire from the firm in two months. In very interesting interview with Accountancy Age, Mr. Land recounts key developments during his 11 years as firm chairman, including:

• On the sales of E&Y’s consulting practice, “I’m absolutely sure that was the right strategy and that there was a real advantage in going first.”
• On the Ernst & Whinney/Arthur Young merger in 1989, “I think we did that merger very well. Mergers are never easy. We did exactly what we tell our clients to do ­ have a 100-day plan and smash the organisations together.”
• On whether E&Y aggressively courted Andersen clients in 2001-2002, “‘I’m not conscious of us rushing to clients of [Andersen’s]. I think it was clients rushing to us. There was no sense of wishing to undermine Andersen. It unfolded in front of the world. We were as surprised as anybody else.”
• On professional services competition, “I don’t understand how you create a fifth truly global competitor. Maybe cleverer and brighter people will work out how that is done. These firms weren’t created overnight they built up because they were responding to the marketplace.”

Mr. Land also touches on E&Y’s efforts in creating a new business risk consulting practice, one that he says is very different from the “through and through” IT practice sold to CapGemini. This is a very interesting interview given by a leader who has seen a great deal during his career.

In the past week, several items have popped regarding talent, recruiting and human resources in professional services. Some news is good, some is bad, and is some good for organizations other than the Big Four.

First, Ernst & Young won several workplace diversity awards from DiversityInc magazine. The 2006 DiversityInc Top 50 Companies for Diversity is billed by the magazine as the “most objective, empirical arbitrator of national standards for diversity-management success.” Ernst & Young ranked 24th on the overall top 50 list, and sixth on a top ten list for gay, lesbian, bisexual and transgender employees.
Ernst & Young also received a separate award for being among the best places to work in Canada. The Great Place to Work® Institute ranked E&Y 13th out of 30 employers on its 2006 Best Workplaces in Canadalist. This institute is the same organization that produces the 100 Best Companiesin the US for Fortune magazine.

Next, CFO.com ran an article earlier this month, “The People Who Count,” about the ever increasing battle for qualified CPA’s.

The Big Four have doubled their assurance staffs in the past five years and are expected to nearly double them again in the next five, thanks largely to Section 404 of Sarbanes-Oxley. Smaller accounting firms, their client rosters expanding thanks to new rules on auditor independence, are also upping the ante. Add to that a precipitous plunge in the number of accounting degrees granted in the late 1990s and disaffection with corporate finance jobs, and suddenly the labor pool is roiled by a perfect storm, one that CFOs readily admit is difficult to navigate.

This competition for talent has naturally raised salaries, as much as 25% over the past several years. Furthermore, the problem is long term. Allan Koltin, of PDI Global Inc., predicts that current 20% overdemand of CPA supply will continue for 10 to 15 years. CFO.Com does find a positive, at least for its corporate readership, in the fact that turnover in public accounting firms is at 17% annually at the largest firms and 15% at smaller firms.

And on a positive note, the Deloitte Foundation announced a $4 million gift to the University of Illinois to fund the school’s newly created Center for Professional Responsibilities in Business and Society.

The development of the center, which is dedicated to educating future generations of business leaders about their professional responsibilities, will be led by the Department of Accountancy within the College of Business at the University of Illinois at Urbana-Champaign. Under the $4 million, eight-year commitment, Deloitte will become the university’s sole founding partner for the center. Additionally, the center’s annual conference will be known as the Deloitte Symposia on Professional Responsibility.

James Quigley, Deloitte’s CEO, also noted that the U of I has produced more of Deloitte’s professionals and partners than any other institution.

Links: “Ernst & Young RANKS NO. 24 on the 2006 DiversityInc Top 50 Companies for Diversity List”, CFO.Com: The People Who Count, Deloitte Foundation Supports Ethics Education with $4 Million Gift to U of Illinois Center for Professional Responsibilities in Business and Society

A study conducted by CRA International (formerly Charles River Assoc.) using data provided by each of the Big Four found that SOX 404 compliance costs fell by 30%, according a WSJ/Dow Jones article.

Costs for larger companies – those with a market capitalization of greater than $700 million – dropped by an average of 44%, to $8.5 million, while costs for smaller companies with a market capitalization of as little as $75 million dropped by an average of 31%, to $860,000, according to the survey.

What is interesting about this study is that it apparently took into account information not publicly disclosed by companies or the firms. Companies must disclosed fees paid to their external auditor of record, but nothing is required with regard to other consultants or even audit firms not involved with the 10K financials.

The survey of 58 larger public companies and 66 smaller companies found that external audit costs aren’t the primary component of expenses. Instead, the survey said that the external audit accounts for about a third of the cost of complying with Section 404 of the Sarbanes-Oxley law. The costs of documenting internal controls and hiring outside consultants to help out account for two-thirds of compliance costs, the survey said.

PricewaterhouseCoopers International has announced the sale of its Global Mobility Programme to Weichert Relocation Resources Inc., of Morris Plains, NJ. PwC’s GMP helps put PwC employees into international assignments with firm clients. Weichert is “one of the world’s largest relocation and assignment management companies, we offer a broad portfolio of services, extensive global resources, enterprise-wide capabilities, and truly integrated technology. As a uniquely independent organization, we’re also agile enough to proactively anticipate our clients’ needs and keep them one step ahead of the trends and rulings that will shape their programs.”
From the press release, it’s unclear whether this affects just the US part of this PwC service, or whether it is an international acquisition. It somewhat unusual to see third-parties purchasing Big Four practices or divisions. Even more remarkable is that GMP appears to be more of an internal service or competency of the firm, rather than a service provided directly to clients.
Link: WRRI AGREES TO ACQUIRE PwC’s U.S. GLOBAL MOBILITY SERVICES PRACTICE

USAToday has an article on rule many CEO’s can agree on, The Waiter Rule.

… CEOs live in a Lake Wobegon world where every dinner or lunch partner is above average in their deference. How others treat the CEO says nothing, they say. But how others treat the waiter is like a magical window into the soul.
And beware of anyone who pulls out the power card to say something like, “I could buy this place and fire you,” or “I know the owner and I could have you fired.” Those who say such things have revealed more about their character than about their wealth and power.

In other words, The Waiter Rule says that a very true measure of a person’s character is how one treats another that one has no compelling reason to treat with kindness. I observe this constantly with myself and others, and it’s never led me wrong.
Links: CEOs put stock in how people treat waiters

The Times Online has a different take on yesterday’s report issued by the UK Financial Reporting Council.

A LONG-AWAITED report into the dominance of the Big Four accounting firms was welcomed by auditors yesterday after it declined to make any policy recommendations.
…
However the report… did not find any evidence of anti-competitive behaviour by the Big Four firms and did not make any recommendations on how mid-tier accountancies could win their share of the lucrative audits.

An article in yesterday’s The Scotsman implied a different conclusion to the report.

The UK’s Financial Reporting Council has released a report studying the dominance of the Big Four in the UK market, according to The Scotsman. One of its conclusions, according to the article, is that the dominance of the Big Four hurts competition. In the UK, the Big Four audit 97% of the FTSE 350; for comparison, the Big Four audited 986 of Fortune 1000 in 2005. Furthermore, this study shows that 88% of the FTSE companies would not consider a non-Big Four firm.

Many large listed companies in the UK said they had an effective choice of just two or three audit firms and some, notably banks and insurance firms, said they had no choice at all, the report showed.
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“The near 100 percent combined market share of the Big Four in auditing large companies is not regarded as healthy for competition or choice,” the report said.

The article also quotes Steve Maslin, head of Assurance Services for Grant Thornton, as saying, “The skills that are needed to audit an AIM (Alternative Investment Market for smaller firms in the UK) company are no different than those required for a large FTSE 350 company.” The skills are similar but the scale can be much different. Towards this, Peter Ryan, head of professional affairs for PWC in London, said, “PWC has invested a huge amount of money over a long period of time to get the breadth and depth of expertise both in the UK and around the world.” Second-tier firms have very solid capabilities, but only the capacity to serve a given number of clients with worldwide needs.
The report does touch on a more pressing problem with Big Four concentration, the risk of a firm failing. The loss of a firm would create “serious problems for some companies and a loss of investor confidence,” which we saw very painfully in the Andersen collapse.
This report bears an issue date of April 12, 2006, so there’s certain to be more reaction later in the week.

The Full Report “Competition and choice in the UK audit market” can be downloaded from the FRC website.

Fortune has posted the 2006 edition of the Fortune 1000. For the first time in a few years, there’s a new #1. ExxonMobil displaced Wal-Mart at the top spot.
Links: http://money.cnn.com/magazines/fortune/fortune500/full_list/