Yesterday the Department for Business, Energy and Industrial Strategy (BEIS)launched a public consultation into the quality and effectiveness of audit. The consultation, led by Sir Donald Brydon, is the next step in a process which has the potential to significantly overhaul the industry. But could this heightened scrutiny of the ‘Big Four’ and their traditional strangle hold on audit actually hasten their expansion into other areas of professional services, namely the legal profession?
Lawyers, particularly those in the bigger City firms, may have been relieved to see their accounting cousins brought closer under the microscope by the government yesterday. In opening its independent review, the BEIS has invited stakeholders to have their say on, amongst other things, the purpose, scope and quality of the audit process and have until 7 June 2019 to offer their views and recommendations.
As such, the consultation is the next stage in a process which could herald the end to the monopole enjoyed by the ‘Big Four’. But far from stalling the growth of these financial power houses, it could in fact encourage them to focus yet further energy on breaking further into the legal market.
EY sent shockwaves across the professional services market last week, following the announcement of their agreement with Thomson Reuters to acquire Pangea3. Pangea3 is a leader in Legal Managed Services providing legal outsourcing services to in-house legal departments across the globe. Its purchase, as stated on the EY website will allow EY Law to further broaden its “depth and capacity to serve corporate legal departments around the world”. Mark Weinberger, EY Global Chairman and CEO commented that “this new enhanced offering will make EY one of the leading professional services organisations for global legal advisory services and legal operations services”.
The announcement comes less than a year after the accounting giant swooped in to swallow up Riverview Law in September 2018. Seen against this backdrop, a breakup in the audit market could perversely play into the hands of the accounting leviathans. Commenting in ‘The Times’ last week, former city lawyer, Tony Williams observed that, “the restrictions that have held them back to some extent in expanding their legal services could soon go away.”
It would be misleading to assume that the ‘Big Four’ are poised to completely conquer the legal market should their grasp on the audit sector be weakened. They still have a long way to go. Nevertheless, it should be remembered that the likes of PWC, EY, KPMG and Deloitte with their devastatingly sophisticated international networks and their eye-watering financial firepower have the means to invest and build highly sophisticated legal service offerings.
Should the revenue stream of audit show signs of faltering, the ‘Big Four’ will have all the more reason to look to newer, more profitable areas of growth. Some commentators have already observed that the work of mid-tier City firms may be under threat. It is unclear whether the top accountancy practices have the legal expertise to mount a serious challenge for such work at this point.
That said, the ‘Big Four’ are certainly not shy of investing in quality talent. One of the more recent acquisitions was veteran Allen & Overy banking partner Michael Castle who became managing partner for Deloitte Legal in January. His departure from the Magic Circle law firm is designed to enable Deloitte to realise their “sky-high ambitions… for Deloitte Legal in the UK”, as put by Matt Ellis, managing partner for tax and legal, Deloitte north west Europe.
Whilst the reform of the audit sector could well close the door on the dominance previously enjoyed by the ‘Big Four’ it could well force another even further open.