Mid-tier audit firms prepare to make most of shake-up

Grant Thornton‚ SA's fifth-biggest accounting firm‚ recently merged with PKF Johannesburg in a deal that boosted its annual revenue to R454m and its staff complement by nearly 200 people to 851. This followed its merger with two black professional services firms‚ TIS/Fintis and Rebahale‚ in March.

Mazars‚ the smallest of the mid-tier firms in SA‚ has also been on the acquisition trail. It merged with PKF's Pretoria and Bloemfontein offices last month and with Grant Thornton's Cape Town office earlier this year.

This has left PKF with a minuscule presence in the South African market.

In the past 12 months Mazars added 21 new partners and directors‚ and five new offices. Mazars says the mergers‚ coupled with organic growth‚ have seen the firm grow by 30% in the past year.

Grant Thornton says it grew more than 10% in 2012. The big four accounting firms - PwC‚ Deloitte‚ Ernst & Young and KPMG - grew on average at just over 6%.

Consolidation will continue

Grant Thornton's chief executive Andrew Hannington says he does not see an end to the ongoing consolidation taking place in the South African market. This is a sentiment echoed by Mazars SA's national chairman Hilton Saven.

"In the current economic environment‚ consolidation is a viable strategy for many professional firms and Mazars has taken advantage of these opportunities to continue to build its business nationally on the basis of shared values and a complementary business model‚" Saven says.

He says the profession is going through a significant change. "The regulators in many countries overseas are concerned about the dominance of the big four in the profession."

There has been support from these regulators to create alternatives to them‚ he says.

Mid-tier firms in SA have taken note of these changes internationally and are preparing themselves to ensure they can capitalise on any new business opportunities. To do this they need to have the people and footprint‚ though it is not just about having dots on a map‚ according to Saven. He says it is important that any acquisition or merger fits in with the businesses culture and philosophy.

"The status quo is not going to stay the same. It is going to change. There is going to be an opening and an opportunity‚" he says.

Regulatory change

Grant Thornton Global's chief executive Ed Nusbaum‚ who was recently in SA‚ says that while the move towards consolidation is being driven by regulatory changes‚ clients' need for "consistent‚ high-quality service throughout the world" is also a factor.

This has gained importance as companies look to expand operations globally‚ including in Africa. "Clients have increasing multinational and global demands."

He says there will be continuing consolidation among global accounting firms in order to deliver that service.

Hannington says the same is happening with its clients in SA‚ which are increasingly venturing not only out of their home cities but across borders as they seek new markets. "We need to be going with the clients otherwise we lose relevance," he says.

The audit firm also believes it will be a beneficiary of the changes in rules on how long an audit partner can work on a client. As it stands‚ the Companies Act requires that just the audit partners rotate every five years.

Internationally many countries are considering legislation to force companies to put out their audits to tender in a bid to loosen the stranglehold on the industry by the big four firms.

Rotation of audit firms

The UK is considering a proposal that will force companies to change their auditors every five years. Grant Thornton predicts that if that happens‚ it will double its FTSE 250 audit work by 2017.

It comes as no surprise then that Grant Thornton supports audit firm rotation.

In SA it has an 11% share of the audit work from JSE-listed companies and Hannington believes that‚ as in the UK‚ the audit firm is well positioned to benefit when companies look for new audit firms.

"We are finding that when they do have a rotation then some of the big firms are putting their work out for tender. We are at last now seeing opportunities every five years. It is good for us‚" says Hannington.

He says anything below the top 40 stocks on the JSE is the company's sweet spot. "We are currently at 11% market share but we would love to grow that to 20%."

Nusbaum says he supports audit rotation as it does not make sense for one company to have the same auditor for up to 50 years‚ as it has happened in some cases.

"It's not going to solve all the problems in the world‚ I think it will be naive to think that just changing auditors will fix all the problems. But in those areas where the regulators want to rotate auditors we fully support it."

That is already starting to happen‚ allowing the mid-tier audit firms to finally challenge the dominance of the big four. The race is now on as to who will benefit the most. And for that‚ size will count.