The decline of accountants

Too much paperwork is a constant gripe of any businessman, and the burden never seems to ease. Over the last few years, the admin piled on by accountancy firms in the corporate finance space has increased dramatically, so much so that some GPs are now considering whether getting an accountant on board is even worth it, giving rise to increased business to the corporate advisory boutiques. Tom Allchorne reports.

One reason behind this is Sarbanes-Oxley, the US financial and accounting disclosure act. “The US divisions of accountancy firms have imploded,” says Howard Leigh, managing director at Cavendish Corporate Finance. “They don’t really carry out M&A transactions anywhere like the level they used to, and this has proved a real problem for European private equity firms selling companies to US corporates.”

The consequence, argues Leigh, is that more and more firms are turning to the independent boutiques. Whereas accountancy firms are hampered by Sarbanes-Oxley, constantly on the lookout for any potential conflicts, corporate finance firms are able to skip past this. “In corporate finance you need to be fleet of foot,” says Leigh.

There can be no doubt that the rise of independent corporate finance boutiques has challenged the big four’s formerly vice-like grip on the marketplace. While the likes of PricewaterhouseCoopers and KPMG may have the resources the boutiques lack, they can find themselves held back by their sheer size and the red tape now imposed on them in the post-Enron world.

Accountants have to be careful about conflicts of interest, but with the boutiques, the risk of conflict is low. James Stewart of ECI says: “Boutiques can be more flexible and can approach more corporates or private equity firms because they don’t have a prior relationship with a potential client.” These constraints have not only had an effect on business but also staff turnover. Stewart says: “Good, quality people have been attracted to boutiques from accountants so there has been an increase in the level of expertise that boutiques now possesses.” The use of independent boutiques has become much more widely accepted as a result of this movement of knowledge.

How accountancy firms are reacting to this is open to question. Leigh argues they are not doing anything about it, and are happy to offer other services. “They are making huge sums of money by providing advice on Sarbanes-Oxley and other regulations. Private equity advisers are not deal originators any more, they are doing wrap-around services like due diligence.”

Stewart says the accountants are fighting back because they are able to offer a greater depth in-house, from corporate finance to financial and commercial due diligence. “It’s a trade off between greater flexibility because there’s no inherent conflict between the divisions of a boutique, or the depth of services offered by a member of the big four.”

Stewart, for his part, says he has never had a problem with accountants taking too long to get signed up to a deal. On the Racal Acoustics deal, which saw ECI back a £52m MBO in August, the accountants had two weeks to complete the transaction.

Tom Lamb, UK managing director at Barclays Private Equity, says accountancy firms taking longer to sign up to a deal and losing business is not something he has seen, but did admit that “the accountancy firms are probably feeling a bit of pressure from the boutiques and also the investment banks, some of whom are coming into their space due to the lack of very big deals at the moment.”

Lamb says Barclays uses a range of accountants and boutiques, and decides based on who is in the best position: “Who do we think is best placed to do this deal? Who has the best sector expertise, who knows how to sell a company and knows how to market it?”

David Ascott, head of private equity at Grant Thornton, says his firm has never lost a project because of taking too long to sign up or not being able to take a view, although he does admit Sarbanes-Oxley has affected the business: “It has created opportunities because the audit clients on the big four have to engage independent advisers on transactions. As we aren’t focused on auditing plc’s, we see this as a net benefit for us.”

The increasing amount of legislation that now governs the accounting industry has undoubtedly created a space in the market that independent boutiques have been able to exploit, and as such the amount of deals boutiques now undertake has significantly increased. Leigh says Cavendish is now the fifth most internationally active corporate adviser in the UK, and a large reason for this is because the large corporates are now going out-house.

For their part, the accountants don’t seem too worried, not least of all because Sarbanes-Oxley has actually created more work for them. The increasing number of corporate advisory boutiques can equally be put down to the declining number of investment banks offering such a service since 2000 (although this has changed recently, and a number now operate in the mid-market area), as to the rise in accounting regulation. The use of a boutique over an accountancy firm ultimately comes down to whether the accountant is allowed to advise a client; when this isn’t an issue, it comes down to how a private equity house feels about a particular firm, regardless of whether or not they are a boutique or an accountant.