Business Analysis: How the humble accountant joined the ranks of the City's rich kids

Buoyed by extra fees from tougher laws introduced to ensure companies get their figures right, in the wake of accounting scandals such as Enron and Parmalat, the nation's bean counters are also much busier because of the introduction of new international accounting standards.

While economic confidence about the future is volatile, actual corporate profits are soaring, helping the accountancy firms expand not just their tax and audit work but newer areas of business such as management consulting and mergers and acquisitions (M&A) advice.

Deloitte & Touche, one of the big four accountancy and professional services firms, raised the bar in the pay stakes yesterday when it announced annual UK results for the year to 31 May.

It disclosed that, not only is its chief executive, John Connelly, the country's highest paid accountant at £3.63m a year, the group's 600 partners are, on average, the best remunerated in the profession.

Mr Connelly revealed his partners were now paid an average of £700,000 a year, with many earning more than £1m. However, he refused to say exactly how many people at the partnership were into seven figures. Deloitte's average figure comfortably beats the biggest City law firm, Clifford Chance, which pays £644,000 according to The Lawyer magazine. However, the lawyers Slaughter & May, Linklaters, Freshfields and Herbert Smith all pay their partners more than £700,000.

Mr Connelly's pay rose £764,000, or 26.6 per cent, widening the gap substantially over his three counterparts among the big four, all of which will announce annual results over the next few months. Mr Connelly's rise to the top of UK accountancy has come about despite being reprimanded by the profession's official watchdog for his role in the Barlow Clowes scandal before he took over as Deloitte chief executive in 1998.

An official investigation by the accountants' Joint Disciplinary Scheme into the affair, which cost the Government £150m in compensation, concluded that Mr Connelly's "professional efficiency, conduct and competence ... fell below the standard that should be displayed by, and may properly be expected of a chartered accountant who is the second partner on work done and services provided as reporting accountants".

Deloitte has always maintained the JDS report lacked balance and rejected its findings. This year, Deloitte crossed swords again with the JDS, trying to gag the watchdog from publishing a number of complaints concerning Deloitte's auditing of the casino business Capital Corporation. There was also a complaint published against Deloitte's UK chairman, Anthony Scicluna.

While Mr Connelly was initially successful with his injunction, it was later overturned. "The concern we had was that a lot of the damage can be done simply by the announcement that an investigation is taking place. I absolutely believe we will establish it is an unfair criticism," Mr Connelly said.

Such regulatory distractions have not stopped Mr Connelly aggressively pursuing his stated strategy of being the pre-eminent professional services firm and he is unapologetic about his tactic of poaching the best talent from rivals.

Over the year he has brought in 20 new partners from outside. Some of these have come from traditional rivals, such as Ernst & Young and PricewaterhouseCoopers, but he has been casting his net wider too by poaching partners from the elite City stockbroking firm of Cazenove and the consultancy groups McKinsey, IBM and Accenture. "It's part of our strategy because we want to offer a broad range of skills," Mr Connelly said.

Deloitte's revenues in the year to 31 May grew 8.8 per cent to £1.36bn and pre-tax profits were up 11.6 per cent overall at £419m. Deloitte's audit and consulting practices were the fastest-growing in terms of profits. Auditing was up 20.3 per cent at £117m and consulting was up 32 per cent at £78m.

Judging by Deloitte's upbeat figures, the accountancy profession seems to be in rude health.

Eric Anstee, the chief executive of the Institute of Chartered Accountants in England and Wales, said: "The complexity of accounting standards will continue to provide demand for expertise in that area but on the back of that, accountancy firms are seeing higher wage costs. The shortage of good quality accountants is causing some concern. The City investment banks, for instance, are still saying that good accounting people with a mathematical background are being sucked into the hedge fund business."

According to the 2005 AGR Graduate Recruitment Survey, accountancy firms were the biggest recruiters of university leavers, who can expect to earn £22,000 a year.

But there are clouds on the horizon. One of the big issues is the liability of auditors when things go wrong with a company's accounts. The accountancy profession has been lobbying the Government to introduce limited liability for auditors when shareholders sue because of fraud or incompetence.

At the moment, auditors have potentially unlimited liability, a situation which has seen Ernst & Young, for instance, being sued by the directors of Equitable Life for £2.3bn, although that has since been reduced to £650m.

The accountants seem to be winning the argument and the Government has published proposals in its Company Law Reform White Paper suggesting auditors' liabilities should be limited and in proportion to their share of the blame.

Many powerful shareholders are not convinced that life is so simple. They are worried that the new international accounting standards being adopted in the UK may fatally undermine the quality of audits. They claim the new standards are too derivative of US standards and will encourage box-ticking audits rather than allowing audit professionals to exercise their judgement on whether, in their opinion, a company's accounts are a "true and fair" view of its financial health. They also complain the standards have been steamrollered in without proper consultation.

One upside for audit clients from the introduction of limited liability - and a potential problem for the big four accountants - is that it will embolden second-tier accountancy firms to compete against the big boys for the larger corporate accounts.

This may well put a brake on the cost of audit fees which, according to Mr Connelly, are still rising satisfactorily for the big four.