The irresistible rise of Arthur Andersen

Most large accountancy firms' growth rates are up - but one continues to expand ahead of the pack, writes Peter Carty
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The Independent Online
The largest accountancy firms are showing improved performance as they take advantage of shaky economic recovery, according to results released today. Nearly all of them are growing again, albeit rather slowly in one or two cases. Most encouragingly consultancy - sometimes seen by clients as a frill in the hard times - has shown the strongest growth with the majority of firms expanding by more than 10 per cent.

One surprise is the poor performance by Price Waterhouse, whose fee income actually dropped by 0.4 per cent. "Slow recovery out of recession continues to impact on all our services and the prospects for any significant improvement are not much in evidence," said the UK senior partner, Ian Brindle. On top of this Price Waterhouse has been hit by a sharp fall off in insolvency income. Its corporate recovery division saw revenue fall by 22 per cent. The other large firms also saw insolvency fees tumble, though none as severely as Price Waterhouse.

Partner numbers are falling at almost all firms, with Coopers alone shedding 70. The picture for other professional staff is mixed. While Touche Ross added 427 professional staff, several other firms shed staff - most notably KPMG, which has reduced its head count by 181.

The inevitable success story is Arthur Andersen as it climbs up another place in the table to grab second position. Andersen UK's managing partner Jim Wadia downplays the notion of a final assault to seize the number one slot. "We don't set that as an objective or as a challenge," he said. "Ultimately you can only get to number one if the marketplace accepts you." Steady expansion is the aim. "On occasion you get the opportunity for making a significant leap - like the Binder Hamlyn transaction. But beyond that we go for consistent, significant growth," he said.

The link up with Binder has added about pounds 60m of fees to Andersen's total. But more significant than the size of the addition are the strategic blocks of plc clients it represents from Binder's London, Leeds, Manchester and Newcastle offices.

Mr Wadia says the Binder association has to be bedded down before further amalgamations can be considered. Binder remains loosely tied to Andersen, retaining its name as a part of Andersen's international network. There are no plans for full absorption, according to Mr Wadia: "The clients are saying they like the way we are managing the association; they like the separate identity."

As well as benefiting from the Binder association, Andersen has also achieved impressive organic growth of 9 per cent. So what is the secret of the firm's success? "Quality client service," said Wadia.

What really sets Andersen apart is, of course, Andersen Consulting, which provides the firm with more than half its income and is growing at a much faster rate than the rest of the firm, this year at 12.4 per cent. Andersen Consulting's focus on implementation of largescale IT projects for clients has consistently paid off. The market for this type of service is far from mature and also involves the use of relatively high numbers of consultants. Other firms' consultancy services tend more towards traditional high- level niche advice.

Other large firms typically derive only around a fifth of their revenues from consultancy. They are much more reliant on the audit and accountancy market which typically yields about 40 per cent of their income: Andersen gets a mere 20 per cent from this source. The audit market is mature and is increasingly characterised by cost-cutting.

Controversy about artificially low tenders rumbles on. Firms are keen to distance themselves from such accusations. "We price competitively but not at levels where the quality of our work suffers or it becomes unprofitable," said the Coopers & Lybrand chairman, Peter Smith. "We are winning new work at fees which are rarely, if ever, the lowest tender," declared the KPMG senior partner Colin Sharman.

Given the relatively moribund state of the audit market it is not surprising that Andersen's Jim Wadia says that there is no strategy to equalise growth across both sides of his firm. "It's not a management challenge for us - they're two different businesses," he said. In any case, he pointed to vigorous performance from Andersen's accounting and tax arms. "We are showing top of the market growth rates on both sides."

At KPMG, which was elbowed into third place by Andersen despite its own strong set of results, the senior partner Colin Sharman echoed this line on Andersen. "We're not terribly troubled," he said. "They're a different kind of firm to us." KPMG is currently in the throes of a reorganisation which began in February. Mr Sharman hopes that future results will improve further on this year's strong starting position.

Back at Arthur Andersen, Mr Wadia says that a strategy of consistency also explains the firm's very high fee per partner ratio - at pounds 1.39m well ahead of the other firms. During the 1980s boom the firm did not succumb to the temptation to create large numbers of new partners, preferring to maintain the quality of the partnership. It has therefore avoided accumulated surplus which dilutes earnings and requires culling.

A possible downside of high fees per partner is that some clients might feel that they do not get enough partner time. Extra partner contact is a selling point stressed heavily, in particular, by medium-sized accountancy firms. Mr Wadia's response is to invoke his clients again. "If our clients felt they weren't getting enough partner time they would be telling us," he said. "That is not happening."

This year's accountancy results might mark the beginning of the end of an era. If KPMG proceeds with its incorporation plans it will have to give much fuller disclosures. Mr Sharman reveals that the partnership is to meet this month to discuss incorporation further. However, he is not anticipating drastic changes in reporting: "We'll continue with these sets of figures for the time being." Such hesitance is understandable. The final unveiling of partners' emoluments can only add to the furore over directors' pay.

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