Ernst & Young warns business confidence is likely to fall further

Ernst & Young, one of the Big Four accountancy firms, yesterday painted a gloomy picture about the economic environment in the coming months and warned that business confidence was likely to fall further.

Nick Land, the chairman of the giant accountancy firm, said: "We don't have any great expectations. The prognosis for the next six to 12 months is low corporate activity and it is more likely that business confidence will drop further than improve."

The downbeat forecast comes as Ernst & Young and its rivals have already suffered a dramatic drying up in their business this year. Mr Land said: "Our business is based on companies doing things like mergers and acquisitions. But in April 2001 there was a fairly significant slowdown in corporate activity and that has dropped further during this financial year."

The slump in business has forced Ernst & Young to reduce its headcount by 600 to 7,500 in the UK. Other accountancy firms have also felt the pinch, including KPMG, which slashed 800 staff in September and notified those who had to go by e-mail.

Ernst & Young managed to boost income from fees by 4 per cent to £754.4m in the 12 months to 30 June. The increase was primarily due to the firm handling a number of large corporate restructuring projects including the Railtrack administration. Fee income was also flattered by the acquisition of a number of businesses belonging to the collapsed accountancy firm Andersen.

Ernst & Young said its corporate finance department showed the most resilient performance in revenue growth, achieving an 11 per cent increase compared with 2001.

Across the firm as a whole, the profits made by Ernst & Young's partners fell from an average of £449,000 in 2001 to £378,000 in 2002.

Ernst & Young and other accountancy firms are awaiting a decision from the Government about how they will have to reform themselves in an effort to stamp out potential conflicts of interest.

Critics believe the current structure is flawed with firms offering auditing services, which includes the undertaking to detect any wrongdoing by companies and report it to the financial authorities, and consultancy divisions which make lucrative fees from tax advice and other services.