Luke Johnson: Big four accountancy firms need a shake-up

The serial investor on why the accountancy profession needs to open up, the future of financial markets and why antique furniture has never been better value.

by Luke Johnson
Last Updated: 09 Oct 2013

The accountancy profession is an oligopoly and I fear it is bad for business generally. The dominant four firms - PwC, Deloitte, KPMG and Ernst & Young - between them command annual audit fee income of almost £8bn. The next three players (Grant Thornton, BDO and RSM Tenon) together are smaller than Ernst & Young alone. After that, there are virtually no practices with over £100m of annual revenues.

I'm not suggesting that the big accountants act as a cartel, but I do worry that there is a serious lack of choice for fast-growing companies seeking heavyweight auditors and sophisticated advice. Consolidation within the industry has been relentless. There is gossip that even more mid-tier firms might combine, leaving their customers even fewer options. These mergers have led to a lack of diversity quite different from the legal profession, where there are at least 20 major law firms to which any substantial corporate client can turn. The tragic demise of Arthur Andersen, thanks to its involvement with Enron, was a disaster for clients, staff and the profession alike. No doubt such perilous legal threats are one reason why accountants have huddled together for safety.

This is not a criticism of the quality of work or even the prices charged by the major accountancy firms. But I think for markets to function well and for clients to have real alternatives - after issues like conflicts of interests have been eliminated - there are simply too few serious players at present. Moreover, this concentration leads to a risk of uniformity and herd-like behaviour that cannot be healthy for industry or the economy. Perhaps one day there will be major breakaways from the giants, where batches of partners quit to start up afresh. Such initiatives would be good for all concerned - because bigger is not always better.

A recently published book called The Clash of the Cultures - Investment vs speculation is one of the most powerful critiques I have ever read of the institutional investment system. It is written by a legend of the US mutual fund industry called John C Bogle, who founded the Vanguard Group, one of the largest money managers in the world.

The author is an expert on the subject and a serious thinker. He exposes how the current model of public company ownership suffers from a 'double agency' defect. Neither the executive managers of the business nor the money managers buying shares in that business are principals - they are both playing with other people's money. This leads to perverse incentives, short-termism, managed earnings, fee overload and a happy conspiracy among all the supposed gatekeepers to keep the merry-go-round whirling.

So, for example, share turnover in the US was 250% last year; capital formation, which should be core purpose of a stock market, has shrunk to a sideshow - trading activity now represents over 99% of what the financial system does. For savers and indeed the economic future of the west, such behaviour is profoundly damaging: as The Economist states, the stock market is not fit for purpose.

While Bogle's conclusions are not startling news, he explains the dilemma in a brilliantly lucid and accessible way. He also offers a range of solutions - some simple, some much harder. This involves tackling the vested interests of the City and Wall Street, and reforming the retirement system. Bogle's great advantage is that he was not an observer but a participant in the circus for 60 years, and is trying to improve it now.

For, as he says: 'Ideas are a dime a dozen; implementation is everything.' I strongly recommend this book to every stockbroker, banker, fund manager, public company director and policy maker concerned with governance, savers and the future of financial markets.

It is not simply companies that are investing much less in tangibles like plant and machinery, and instead buying software: consumers are also switching their spending away from things and towards intangibles.

So younger people are turning away from car ownership, and renting homes instead of buying them. Increasingly, they spend their cash on experiences like holidays, digital tunes and dining out, rather than physical goods.

An extreme example of this is the collapse in demand for antique furniture. For hundreds of years, middle-class couples furnished their homes with valuable collectibles: no longer. In recent years, prices of classic household items have in many cases fallen dramatically, destroying their reputation as a store of value. Those setting up home do not want 'brown' tables and chairs - they like the modern, minimalist look, with bright articles that are not heirlooms but probably bought from Ikea.

There is an argument that many pieces are now being sold so cheaply at auction in home clearances that they are real bargains. The Antiques Trade Gazette runs a fantastic website at www.the-saleroom.com, which enables one to bid online in real time at live auctions, of which there are many around the country almost every week.

I am a complete amateur, so have no idea if any of this stuff will appreciate, or perhaps be unsellable again. However, there are many beautiful items being sold every day for very modest sums - especially compared with the cost of fashionable new furniture from trendy designers. My father, who collects pictures, has always operated by the maxim that one should only ever buy art to admire - not as an investment. On the same basis, decent antique furniture for home use strikes me as a fair two-way bet right now.

Luke Johnson is chairman of Risk Capital Partners

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