Parliamentary report prompts Big Four to prepare for forced break-up

22 May 2018

The Big Four professional services firms are preparing for state intervention forcing them to separate their auditing and consulting wings in the UK, after a damning parliamentary report further suggested that their sprawling advisory wings are leading to conflicts of interest. The attention drawn to the industry by the world’s largest firms could also have widespread implications for other market leaders in the future.

The largest members of the accounting and advisory world, headed by the Big Four – Deloitte, EY, KPMG and PwC – look increasingly set to face a state-enforced splintering of their businesses in the UK. The Big Four’s share of FTSE 350 auditing has increased from 95% to 98% over the past five years, despite a series of EU and UK reforms aimed at tackling a lack of competition since the 2008 financial crisis. With pressure subsequently mounting on UK authorities to tackle the gang of four’s dominance, the Financial Reporting Council (FRC), which oversees the British auditing market, recently made headlines when it said a break-up of the Big Four may be necessary.

This would not be the first time that state intervention forced the gang of four’s hand when it comes to divesting from consulting work. In 2001, the Enron scandal set a chain of events in motion that would ultimately lead to what was then the Big Five becoming the Big Four. After energy giant Enron filed for what was then the largest bankruptcy in US history, Arthur Andersen – the professional services firm which had audited the group – was convicted by a United States District Court of obstructing justice by illegally destroying documents relevant to an investigation into Enron’s collapse. Arthur Andersen subsequently had its license to audit public companies voided, effectively closing the business – and even when the conviction was overturned as the destruction of documentation was within the firm’s document retention policy, its reputation had been damaged beyond repair, causing the de facto dissolution of the former competitor of Deloitte, KPMG, PwC and EY.

Parliamentary report prompts Big Four to prepare for forced break-up

Following the Enron scandal, the remaining Big Four also came under pressure, as the perceived conflict of interest embodied by Arthur Andersen – which both audited and offered consulting services to firms – led regulators to believe that further companies could collapse due to book-keeping irregularities. Concerned that auditors might have gone easy on companies because of lucrative companion contracts for consulting, critics urged the firms to stop consulting for their audit clients.

This resulted in KPMG, PwC, EY and Deloitte all having announced plans to spin off their consulting wings by spring 2002. EY, PwC and KPMG went on to sell their consultancy practices to Capgemini, IBM, and Bearing Point, but Deloitte reneged on their decision by the following year, citing weakened demand for consulting, the declines in the stock market and the risk that added debt would pose to each part of the divided firm.

Despite the seemingly adverse atmosphere Deloitte’s consulting wing found itself in, since then, it has gone from strength to strength. Revenue growth for the UK wing of Deloitte has become increasingly driven by the robust pace of its consulting business, and by 2015, Deloitte was posting revenues of £2.7 billion for its year-end, of which Deloitte Consulting generated £687 million, and the practice has continued to develop in the following three years. Earlier in 2018 it was found to be the leading management consultancy in the UK.

The success of Deloitte’s consulting wing has prompted its Big Four competitors to rapidly return to the consulting space too. In order to boost these efforts, acquisitions have routinely been leveraged by the Big Four, for both niche and mainstream consultancies, to help them develop multifaceted and holistic offerings, which dominate the global consulting market. EY is presently working toward plans to grow its strategy consulting practice to over 2,500 professionals by 2020, while KPMG saw income from consulting in the UK hit as £850 million by 2014, a figure well in excess of its audit revenues of £445 million for the same year. At present, the Big Four make up around 40% of the global consulting market, but now Deloitte, KPMG, PwC and EY look to have become victims of their own success once more.

Mounting pressure

With Grant Thornton’s withdrawal from bidding for FTSE 350 audit tenders, which it claims cost the firm as much as £300,000 per attempt, calls for state intervention in the British auditing market gained further traction. As the Big Four still hold the vast majority of these major contracts, claims that the Big Four’s growing consulting arms make for conflicts of interest in their auditing duties have gained weight.

Stephen Haddrill, Chief Executive of the FRC, has publicly voiced such concerns about regulators’ failure to tackle the dominance of the Big Four. This was perhaps most markedly illustrated by the Big Four’s alleged “feasting” on the collapse of construction firm Carillion. The firms each held numerous auditing and advisory roles with the company, costing a total of £72 million before Carillion entered administration in January – at which point PwC picked up a further lucrative contract to oversee the group’s winding down.

A subsequent Parliamentary report into the collapse of Carillon by two select committees produced a scathing assessment of the work of an auditor KPMG in particular – which also faced an FRC investigation for its role at Carillion – though members of the Work & Pensions and Business committees also bombarded internal auditor, Deloitte, and EY, hired to advise on a turnaround, with criticism in the critical paper. PwC was left to handle the insolvency as the least conflicted among the four, however, it had also advised the company on pensions and the Government on Carillon contracts – implicating the entire Big Four in subsequent calls for action from MPs.

A break-up scenario now appears to increasingly be on the cards, and could involve one of two options. The largest auditing firms either face being forced to split into two smaller multidisciplinary firms; or being made to sell off their consulting wings to create audit-only businesses. This second option is notably the one backed by Stephen Haddrill, as he and the FRC continue talks with the UK’s Competition and Markets Authority about a potential investigation of the audit market, five years after the last competition investigation into the workings of the accountancy industry.

While the Big Four are naturally attempting to assuage such concerns, executives from all four and the next largest UK audit firms, Grant Thornton and BDO, have all confirmed they had planned for a potential break up, in case regulators force them to split their audit and consulting businesses.

Quote Bill Michael, Chairman of KPMG UK

The most striking admission came from Bill Michael, Chairman of KPMG’s UK business, who confirmed his firm had been thinking about break-up scenarios “for some time” as the current business model of the Big Four is increasingly becoming seen as “unsustainable”.

He went on to tell the press, “We are an oligopoly – that is undeniable…I can’t believe the industry will be the same [in the future]. We have to reduce the level of conflicts and…demonstrate why they are manageable and why the public and all stakeholders should trust us.”

PwC meanwhile stated it had forged a contingency plan for a break-up, which covers “a range of scenarios that could threaten the existence of the firm”. EY likewise said it was “working alongside regulators and standard setters, the profession can evolve to best serve business, investors and stakeholder needs.” BDO, the UK’s sixth-largest auditor, has also put precautionary plans in place should regulators decide to “ring-fence” audit work.

While the firms have prepared for their worst case scenarios, not every executive took such a conciliatory tone in addressing the matter, however. Speaking to the Financial Times, UK Chief Executive of Deloitte, David Sproul, told reporters from the Financial Times that creating audit-only firms “would be to the detriment of the capital markets”, while Grant Thornton, issued a statement that the UK’s fifth-largest accounting firm, “fundamentally do not believe that this is the solution to the existing systemic issues in the audit market.”



Accenture's push into the creative sector is an identity crisis

18 April 2019

In its latest push into the creative sector, Accenture Interactive acquired New York and London-based ad agency Droga5 earlier this month, adding illustrious clients such as HBO, Amazon and The New York Times to its roster of clients. With the latest in a long line of similar purchases, Accenture Interactive further demonstrated its ambition of becoming the globe’s leading trusted advisor to chief marketing officers. Yet according to Ben Langdon, Chairman of Class35, Accenture’s strategy may be heading in the wrong direction.

A press release on Accenture’s website announcing the acquisition sits next to a quote stating that “brands aren’t built through advertising” – a huge contradiction from a consultancy firm hell-bent on becoming the ‘CMO agency of choice’. It’s not alone of course. The entire consulting industry wants a piece of the creative pie right now. In addition to Accenture Interactive, recent acquisitions by PwC Digital, IBM iX, and Deloitte Digital meant that in 2017, for the first time ever, four of the world’s ten largest creative agencies were consultancies.

So just what it is that Accenture wants to achieve from this? For one thing, it’s clearly trying to be a digital transformation business. A one-stop creative shop rivalling more traditional models, it wants to lure CMOs in with the promise of lower ad spend and a “more impactful customer experience”. At the same time, though, it’s still in thrall to those same slinky, shiny branding and advertising agencies it’s attempting to disrupt. The Droga5 acquisition and that of Karmarama a few years before are both testament to this.

There’s a fundamental problem with this, though. Digital transformation businesses don’t sell to CMOs. These people have enough on their plates trying to transform their own marketing skills in order to keep up with an ever-changing market – they just don’t have the time or the energy to concern themselves with digitally transforming a whole business. If Accenture’s purpose is digital transformation, then going after creative agencies is barking up the wrong tree.Is Accenture's push into the creative sector an identity crisis?

Worlds apart

Perhaps more importantly, these two industries are worlds apart in terms of the way they think. Creative agencies are all about ideas, campaigns and consumers. Digital businesses, on the other hand, are customer-driven – they think in terms such as lifetime value, measurement, and efficiency. Customer-led thinking is an entirely different beast to consumer-led thinking.

The reality is that the arrival of digital and an all-encompassing obsession with technology, measurement and social has led to the death of agencies in a reductive, zero-sum, efficiency-focused battle with brands. Indeed, agencies have become so obsessed with the latest tech fads, they’re beginning to forget how brands work. Worse still, they’re beginning to forget how brands are built. And, by forgetting, they’re destroying their own values.

Killing creativity

All things considered, it really feels to me as though Accenture is a chip leader in a game it doesn’t understand. Expensive acquisitions like these show that they’ve got the big money, but they don’t appear to have any idea what they’re doing with it. Take talent, for example. The best talent in the creative industry right now is out in the market; it’s not tied to any one agency. Both agencies might well be at the top of their game, but why would a consulting firm waste so much money on buying them when they could hire high-quality creative talent on a contingent basis instead?

As their presence in the top 10 creative agencies shows, there is a growing trend in which Accenture, like many of the other big players, are buying up agencies as if they were nothing more than keywords. What they’re really buying, though, is a collection of credentials, clients and IP. Unfortunately, the talent that created those credentials aren’t going to stay at the business, the clients that hired the agency in the first place won’t be interested in buying what is basically just another part of Accenture, and the IP never really existed to begin with.

Droga5, for example, was one of the few agencies that did great brand work the old-fashioned way – undoubtedly something that made it attractive to Accenture in the first place. The irony, though, is that by leading it further away from the way of working that made it so special, the consulting giant will kill its creativity.

“Accenture Interactive has been dazzled by its ambitions to become the CMO agency of record…. But, in flashing its cash, it is spending millions on acquiring nothing of any value.”

If pressed, the recently acquired agency staff at Accenture will tell you just how dysfunctional the new arrangement is. They’re largely unfulfilled. Rarely do they feel their work has any sort of meaning or purpose. What’s more, the different disciplines have found little or no common ground, and find it hard to work together as a cohesive whole. It’s not surprising, then, to see talented people leaving in droves.

Beyond the window dressing 

It’s clear, then, that consulting firms and creative agencies are no easy bedfellows. But in his company’s defence, Accenture Interactive’s Senior Managing Director for North America, Glen Hartman, described its culture as being “far, far away from what a stereotypical consulting firm would look like. Our office and studios look a lot like Droga5’s.”

In demonstrating a belief that office design equates to workplace culture, this statement serves as an illustration of how confused Accenture is right now. It wants to justify its new strategy so badly, it’s started dressing like a creative agency. But if you look beyond the window dressing and see that you and your partners are speaking a different language with a different purpose, selling to different people in a different market, there’s no getting away from the fact that you’re different.

Accenture Interactive has been dazzled by its ambitions to become the CMO agency of record, and it wants to dazzle others with its new direction. But, in flashing its cash, it is spending millions on acquiring nothing of any value.

Related: Space between consulting firms and creative agencies is converging.