Andersen near to pounds 1m per partner

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The Independent Online
ARTHUR ANDERSEN, officially declared last week as the third biggest accountancy firm in the UK in terms of turnover, is understood to have generated profits of nearly pounds 1m per partner last year.

This is more than twice as much as the next best, Ernst & Young, and nearly three times more than the biggest firm, Coopers & Lybrand.

The overall conclusion of an exclusive analysis by the Independent on Sunday is that the 2,700 partners in the UK's big-six accountancy firms are earning considerably more than had previously been thought.

In five of the big six firms, the average profit per partner ranges from between pounds 340,000 and pounds 418,000.

These figures have never been revealed before. They illustrate that the big firms have successfully offset the effects of the recession on fee income in audit, corporate finance and consultancy by keeping costs under control. As salaries are the biggest single cost by far, this has meant redundancies. The big six firms have shed more than 2,300 staff this year, on top of large shake-outs in the recession.

The figures in the table come from detailed calculations of firms' costs. The revenue figures are taken from published information.

The firms provide information about staff numbers, broken down by professional fee- earners and support staff such as secretaries.

Using information known about student recruitment, managerial grade structures and associated pay levels, it is possible to work out average employment costs.

Much information is also available about property costs. Coopers & Lybrand is known to pay pounds 17m per year for Embankment Place in London. However, Price Waterhouse's main building in London, Southwark Tower, was rented in the 1970s. Although there are review clauses, the firm is not paying premium rents for the building.

The firms have told us the average level of professional indemnity costs and legal fees for defending negligence suits is 8 per cent of audit fees.

We assume that all professional fee earners have their own personal computers. These are powerful machines with expensive software. The machines and the software can cost as much as pounds 5,000 per employee. They are depreciated over three years.

Although firms have expensive mainframes, a charge for these has not been included since the firms have had the machines for a number of years, so it is assumed they have been fully depreciated.

Education costs have been calculated on the assumption that firms spend pounds 1,500 in course fees per student, and run up large in-house training costs for qualified staff, managers and partners.

The crucial ratios for partnerships are fee income per partner and partner staff ratios. The higher these ratios, the more profitable the practice - as is clearly reflected in Arthur Andersen's figures.

A lot of the figures have been corroborated by senior partners of the firms.

Colin Sharman, senior partner of KPMG Peat Marwick, said: 'The major cost drivers are head count, buildings, professional indemnity and technology. Once you have these under control then you have profitability under control.'

Ian Brindle, senior partner of Price Waterhouse, said it was increasingly likely that accountancy firms would incorporate in the next few years to defend themselves against liability. When that happens, there will have to be greater disclosure. In the meantime, this sort of analysis is the best guide to partnership profits.

----------------------------------------------------------------- WHAT THEY MAKE AND WHERE IT GOES ----------------------------------------------------------------- Firms C&L KPMG AA E&Y PW TR Turnover pounds m 560 497.6 433.3 388.4 384.6 342.5 Less Fee-earner salaries 157 154 98 111 98 97 Other staff wages 63 40 27 34 38 28 Rent and rates 56 63 15 42 40 40 Professional indemnity 20 16 7 13 12 10 Computing 8 8 5 6 5 5 Training 6 6 4 4 4 4 Stationery 4 4 3 3 3 3 Marketing 16 14 12 11 11 10 Net profit pounds m 230 193 262 164 171 145 Number of partners 677 594 270 392 415 354 Average partner share pounds 000 340 320 970 418 412 409 ----------------------------------------------------------------- Firms: Coopers & Lybrand, KPMG, Arthur Andersen, Ernst & Young, Price Waterhouse, Touche RossFigures from author's research -----------------------------------------------------------------