The reasons why consolidation takes place in the accountancy sector

The Campbell Dallas and Springfords acquisition by Baldwins Accountants, part of the CogitalGroup, is an interesting development for the accountancy industry in Scotland. CogitalGroup was created in August 2016 and is backed by HgCapital the private equity group. Consolidations have been commonplace in the accountancy industry over the past thirty years, with the establishment of the Big Four with a global presence. Consolidation is driven by four factors.

1. Auditing as a key service line is a natural monopoly, driven by regulatory change and the need for technological investment, cited as a reason by Campbell Dallas behind the Baldwins acquisition.
2. Consolidation provides greater geographic coverage and a global network and foster the development of greater industry expertise. Campbell Dallas has recently been in the news for shortcomings in its audit of an unnamed insurance group in the 2011 and 2012 financial years where it was fined £45k and issued with severe reprimand by professional body ICAS. The investigation highlighted problems with its understanding of the specialist insurance industry.
3. The quality of accountancy services is difficult to evaluate, unless a failure occurs, after the work was completed. League tables based on fee income motivate consolidation as firms with greater fee income (scale) are seen as possessing a higher reputation.
4. Fee income per partner tends to be greater in larger firms. That is, larger firms can charge a premium for their services, which can then create greater scope for investment in technical support and technology.
At face value, consolidation appears an obvious strategy for small and medium sized firms to pursue. However, the strategy has been adopted by others in the recent past which resulted in business failure: ironic perhaps for an industry that offers insolvency as a service line. The failure of large scale consolidators Numerica (in 2005), Vantis (in 2010) and RSM Tenon (in 2013) are testimony to the problem. Issues surrounding successful consolidation include: not overpaying for an (unquoted) practice; ensuring the merged business achieves economies of scale, rather than a loss of focus; and managing issues surrounding an organisation that moves from being a partnership to a listed entity. Furthermore, the Big Four firms have in part achieved their market concentration by the creation of international brands. Consolidators, by contrast, develop international networks with diverse branding in different countries.