Audit Firm: Big4 Financial Performance 2015

The Big Four firms have recently announced their results for the fiscal year 2015. PwC has retaken number one spot from Deloitte as the world’s largest firm by revenue. KPMG is yet to announce its results.

A brief overview of the performance of these firms in comparison with the previous year is as follows.

PwC

PwC has recorded a global annual revenue increase of 10% to $35.4bn (£23.34bn), which represents its strongest growth in 10 years. Consulting now accounts for more than 30% of PwC’s total revenues after growing 18% to $11.2bn during the 2015 fiscal year. This was boosted by the acquisition of Strategy& (formerly Booz & Company) in April 2014. Revenues in PwC’s auditing division grew more slowly, rising 6.2 per cent to $15.2bn in a year marred by the profit misstatement scandal at Tesco, a PwC audit client.

According to Dennis Nally, Chairman of PricewaterhouseCoopers International Limited,

“As we look at the results for the last 12 months, all of our lines of service showed really positive growth – led by Advisory which is up 18%, Tax up 7% and our Assurance business notwithstanding some really difficult competitive market pressures – up 6%.”

DELOITTE

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries.

Deloitte member firms (Deloitte) reported aggregate revenues of US$35.2 billion for the fiscal year ended 31 May 2015 (FY15), representing 7.6 percent growth in local currency terms.

EY

EY announced combined global revenues of US$28.7b for its financial year ended 30 June 2015. This represents an 11.6% increase over financial year (FY) 2014 revenues in local currency, outpacing FY14 growth (which had increased by 6.8% over FY13).

All of EY’s service lines continued to grow in FY15 ahead of their FY14 growth: Advisory grew 17.6% (vs. 14.4% growth in FY14); Assurance 8.1% (vs. 4.5% in FY14); Transaction Advisory Services (TAS) 15.5% (vs. 6.5% in FY14); and Tax 10.3% (vs. 4.3% in FY14).

In FY15, EY headcount reached 212,000 globally – an all-time high.

A graphical representation of the performance of these three firms is shown for comparison purpose.

Head Count Graph

 Revenue Graph

KPMG

KPMG is due to report its 2015 results in December. KPMG International Cooperative ("KPMG International") is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. We are presenting here KPMG’s 2014 and 2013 performance comparison.

The KPMG network delivered strong growth and recorded-high revenues of USD24.8 billion for the 2014 fiscal year, an increase of 6.3 percent in local currency terms over the prior year (2013), recording growth across Audit, Tax and Advisory.

Head Count Graph

Revenue Graph

References:

• http://www.pwc.com/gx/en/about-pwc/global-annual-review-2015/campaign-site/pwc-global-annual-review-2015.pdf
• http://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/gx-gr15-summary-final.pdf
• http://www.ey.com/GL/en/Newsroom/News-releases/news-ey-reports-2015-global-revenues-up-eleven-point-six-percent
• https://home.kpmg.com/xx/en/home/media/press-releases/2014/12/kpmg-delivers-strong-growth.html

Audit Firm: Recruitment

Are you a recent accounting graduate and want to get hired at any of the big accounting firms? Here are some tips that will prove to be helpful in your search.

Curriculum Vitae: An employer will first meet you on paper through your CV. Prepare a good professional CV that defines your career goal, your education, past experience (if any) and your skills and expertise. CV is a marketing tool for a job seeker and you should use that tool to the greatest effect.

Cover Letter: The purpose of constructing an effective cover letter is to demonstrate your suitability for an organization by identifying how your past academic background and employment make you a top candidate.

Interview: Before going for the interview research the firm and understand the organization and job description. Dress appropriately for the interview, generally this means business professional dress. As it is rightly said that your energy introduces you even before you speak so try to make a good first impression on the interviewer. Ask some intelligent questions during the interview when asked about having any questions from your research conducted earlier on about the company.

Follow up: After the interview send an email to the employer and thanks them for the interview opportunity. This will not only enhance your image as a good communicator but will also ensure that the employer keeps you in the queue for potential selection. 

Some of the key soft skills that employers these days are looking for are:

• Problem solving and analytical thinking
• Initiative and drive
• Team player
• Communication skills (written and verbal)

Some of the key technical skills employers look for in young graduates aspiring to join the auditing profession are:

• Financial accounting and reporting
• Tax strategy, planning and control 
• Risk management and internal control
• IT Skills

Additional Thoughts

Some very useful information can be obtained from the websites of the big Four firms about their recruitment process and policies.

• EY
• PWC
• Deloitte
• KPMG

Audit Firm: Vault Top 50 US Accounting Firms

Vault.com, an online careers site, has unveiled its annual ranking of the best accounting firms to work for in the U.S. Vault uses the following survey methodology to rank the audit firms.

Methodology: “When Vault asks accounting professionals what matters most to them in choosing an employer, they continually tell us that although prestige is important, it's not the only determining factor. In addition to prestige, accounting professionals find the following factors extremely important: firm culture, type of work, location, work/life balance, compensation, business outlook, and training opportunities.

As a result of these findings, Vault has compiled a weighted formula that reflects the issues job seekers care about most. We believe that this formula showcases those accounting firms deemed the Best to Work For. The Vault Accounting 50 is based on the following:

• 40 percent prestige
• 20 percent firm culture
• 10 percent work/life balance
• 10 percent compensation
• 10 percent overall job satisfaction
• 5 percent business outlook
• 5 percent formal training

The top 10 Accounting/Auditing Firms in US at the Vault top 50 for 2016 are as follows.

1. PwC (PricewaterhouseCoopers) LLP
2. Ernst & Young LLP (EY)
3. Deloitte LLP
4. KPMG LLP
5. Grant Thornton LLP
6. BDO USA LLP
7. McGladrey LLP
8. Plante Moran
9. Moss Adams LLP
10. Crowe Horwath LLP

You can see the complete list of Top 50 Accounting firms by Vault at the under mentioned address:

http://www.vault.com/company-rankings/accounting/vault-accounting-50

Additional Thoughts

Accounting Firms should develop a congenial and friendly working environment for its employees and young graduate trainees so that they are developed and groomed professionally. A culture that promotes leadership, diversity, ideas generation will not only nurture the employees to grow professionally but will also bring good reputation for the firms locally and globally.

Chinese Companies Need Vigilant Audit

Some of my readers have shown their interest to the assurance services in BRIC in the comments to the last post. And guess what? The recent issue of The Economist contains the article “Accounting in China”, which reflects my concerns about audit of companies from BRIC in general (see link). The beginning of the article is quite appealing:

“CAN you trust Chinese accounts? Many investors fear (and several short-sellers are betting) that the answer is “no”. Sino-Forest, a big forestry firm listed in Toronto, is a case in point. Last year Muddy Waters, a short-seller, accused it of running a Ponzi scheme, which it denies. On January 31st Sino-Forest released the final report of independent investigators into the charge. Insiders crow that the gumshoes found no smoking gun. The gumshoes grumbled that, lacking access to all the evidence, they were “not able to reach definitive conclusions”.

America’s SEC is trying to force the Shanghai office of Deloitte Touche Tohmatsu, a big Western accountancy firm, to hand over papers related to Longtop, a Chinese software firm that was delisted by the New York Stock Exchange last year. Deloitte refuses, saying this would violate Chinese laws on “state secrets”. Deloitte may have a point. If it co-operates, its local staff could be jailed under Chinese law.”

So, this is the question, which had to be raised sooner or later: can be the companies transparent while operating in the conditions of non-transparent political system? There are no big traditions of Chinese government accountability to citizens of China. The market incentives to provide true and fair financial statements are seem to be not enough.

How to deal with this issue?

China need not take all the blame for the failure to provide true financial statements. The problem is common for all emerging markets. It could be said that the reason for that is not necessarily deliberate misrepresentation. Errors might happen due to lack of knowledge, the absence of open communication tradition.

According to the article in The Economist one of the Big4 bosses acknowledged the issue and insisted that “the Big Four have greatly increased their vigilance in China”. To generalize this comment one can state an implicit rule for the audit of financial statements in emerging markets: the financial statement risk for all companies originated from emerging markets should be assessed as "high" at the beginning of audit unless otherwise could be proven. The proof of lower risk assessment could be obtained after one or two years of audit, which would provide evidence about low susceptibility of systems to errors and effective control system.

I agree that this proposal could be viewed as a strict and reactionary one, but I stated it to initiate discussion of what could be done regarding accounts provided by BRIC and other emerging markets. I expect you to share your valuable ideas in the comments, and we might discuss them.

PS Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. The rules and explanations regarding subject are here.

Audit Firms: Financial Performance 2011

What do we know about financial performance of accounting firms, especially the Big Four firms? I planned to do some analytics in this area and provide my readers with results this week. However, the smart guys from Big4 site have already done this work and all I want to do is to provide some additional considerations.

Thus, this blog post is going to discuss revenues of accounting firms.

Big4: Business as usual

The Table 1 represents revenues of the Big4 accounting firms and growth rates.

Table 1: Big4 Revenues and Growth Rates 

Figure 1: Combined Big4 Revenues

I would consider following points:

First, generally the Big4 firms have overcome consequences of financial crisis, i.e. revenue of 2011($103.6 bln.) exceeded the pre-crises level of 2008 ($101.3 bln.). However, E&Y did not manage to achieve pre-crisis revenues.

Second, PwC showed good performance in 2011 with 10% growth and regained dominant position in Big4 after it was given in to Deloitte in 2010.

Third, Deloitte is distinguished by the highest compound annual growth rate (CAGR) for the period of 2007-2011. Meanwhile, E&Y has reported the lowest CAGR of all Big4 firms.

Big4 Audit Services

The blog is about audit, so we can’t avoid talking about audit fees percentages in total revenue, which are reported in Table 2.  J

Table 2: Big4: Audit Fees Share in Total Revenue

Figure 2: Combined Big4 Audit Fees Share in Total Revenues

The sharp decrease of E&Y’s audit fees share in 2008 should not mislead us. The issue is that E&Y reported the combined figures of assurance and advisory services before 2008. That is why, for illustration purposes I depicted tendencies in audit/assurance revenues starting from 2008 year.

The tendency of decline in audit & assurance services might indicate two issues. First, the accounting firms are eager to provide consulting/advisory services, especially in economic crisis time, when clients need some advice on how to improve their businesses. Second, clients might be dissatisfied by the level of assurance services provided: accounting firms can not provide in this area something special because of strict unification of reports, or e.g. some clients wanted to delist themselves from stock exchanges. Anyway, this is a very deep and serious issue, which deserves to be discussed separately.     

Non-Big4 Accounting firms

I decided to compare information about Big4 firms with 2 big accounting global networks, BDO and Grant Thornton International (GTI). I picked up these 2 firms because they publish their reports online and information was rather accessible. According to Accountancy Age global ranking BDO and GTI, occupied 5^th and 7^th places respectively in 2010.

Table 3: BDO and GTI Revenues and Growth Rates

Figure 3: Combined BDO and GTI Revenues

Remarkably, the combined revenues of BDO and GTI are 2.4 times less than their closest Big4 rival, KPMG! BDO has shown good CAGR for 2007-2011, and what could be also mentioned is that the decline in revenues of -2% in 2009 was the lowest comparing with Big4 and GTI. Regretfully, GTI was not able to achieve pre-crises revenues ($4 bln.)

Non-Big4 Audit Services Share

I made the same exercise here as in case with Big4 to provide information about audit revenues, see Table 4 and Figure 4.

Table 4: BDO and GTI: Audit Fees Share in Total Revenue

Figure 4: Combined BDO and GTI Audit Fees Share in Total Revenues

Quite interesting is that the tendency for audit and assurance services growth in BDO and GTI differs from the one shown by Big4 firms. Both firms increased share of audit fees in structure of their revenues in 2009 (from 50% to 53%), and were able to keep these fees on the same level.

Unfortunately, the picture here could be distorted by BDO reporting. The firm reports audit and accounting under the same line. Though report does not specify what sorts of “accounting” services are provided, it might be suggested that these are the services related with help to clients in financial statements compilation, i.e. having non-assurance nature.

Comments are welcomed!

If you have anything to add about performance of Big4 or the other global accounting firms, please feel yourself comfortable to leave a comment. Maybe you have some insightful information about accounting firms’ balance sheets or cash flows J

PS Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. The rules and explanations regarding subject are here.

Sources: 

1. Reports and press-releases placed on the web-sites of the mentioned firms.

2. Big4.com analysis.