The Big Four audit firms are doing everything in their power to get a foothold in management consulting in Germany.
Between them, Deloitte, EY, KPMG and PwC have long dominated the business of auditing corporate accounts. Now they plan to use their contacts to offering strategic advice to companies.
“The management-consulting ambitions of big public accounting firms should be taken very seriously,” said Dietmar Fink, professor of management consulting at Bonn-Rhein-Sieg University.
Consulting is a lucrative business, with considerably higher margins than auditing. And a new European Union regulation – which will require companies to change auditors every 10 years – is also pushing the Big Four toward consulting.
In Germany, the big players in consulting are now companies like McKinsey & Co., Boston Consulting and Roland Berger.
Brussels came up with the rotation regulation to break the Big Four’s power. Now it looks as if it will help concentrate it.
The industry giants are particularly targeting growth via acquisitions in the consulting business. Deloitte failed in its attempt to take over Roland Berger strategy consultants. But PwC pulled off a successful coup in 2014 when it acquired Booz & Co. consulting firm.
McKinsey is the biggest target for taking market share. With about €1.5 billion ($1.59 billion) in revenues and between 8,000 and 10,000 employees, they are more than twice as large as traditional management consultants.
The Big Four have a solid footing to mount their attack. According to Handelsblatt estimates, they audit 90 percent of the 160 companies listed on the leading German DAX, MDAX, TecDAX and SDAX stock market indices. Ten years ago, that figure was only 73 percent.
PwC also had talks with Roland Berger, but it wasn’t a good fit at the time, said Norbert Winkeljohann, head of PwC Germany.
The company is still on the lookout. PwC is now focusing on specialists in cyber security and digitalization, and recently bought Cundus, the Duisburg-based IT consultant.
Other examples include EY taking over the Mannheim-based logistics experts, J & M Management Consulting, in 2013. And KPMG expanded into logistics with its 2013 acquisition of BrainNet.
KPMG also acquired British IT consultants, Safira, and Berlin’s CTG. The latter is known in the industry as a small, but exclusive consulting firm, run by Count Nikolaus Kerssenbrock, an influential industry player.
The public accountants are putting together their consulting expertise like a jigsaw puzzle. Opportunities like Booz are few and far between, and Roland Berger, for example, wants to remain independent.
If there is nothing to buy, partnerships will be entered into. KPMG just concluded a big data deal with Microsoft, for instance, and PwC cooperates with Google.
The bosses of traditional strategy consultants like McKinsey or BCG strike a relaxed pose when asked to comment on the accountants’ offensive.
“We don’t even see them in the market,” said one source.
But KPMG or PwC already generate more than €400 million of revenue purely from consulting. It’s only a matter of time before they catch up with McKinsey or BCG.
The motivation for this venture into consulting can be traced to a new E.U. rule on rotating auditors. Beginning in 2016, companies will have to change their auditors every 10 years.
If they are no longer permitted to audit annual accounts in the long-term, the Big Four accounting firms at least want to provide consulting services. The industry expert, Mr. Fink, thinks the strategy has great prospects.
Brussels came up with the rotation regulation to break the Big Four’s power. Now it looks as if they are helping to concentrate it. Because of their long auditing mandates, the top companies know their clients and their problems. And they have access to top levels of management.
But that is exactly the problem, according to critics in the European Commission. They recall the collapse of U.S. companies like Enron and WorldCom, where auditors were also consultants.
Thanks to massive lobbying by public accountants, however, the European Union was unable to implement rigid regulations. Apart from rotation, the only other rule is that consulting fees must not be more than 70 percent of auditing fees. The original plan was for this figure to be 10 percent, which would have been tantamount to excluding consulting services from public accountants.
The industry’s defense is that the two businesses are now strictly separated, and clients themselves make sure there are no conflicts of interest.
“Every public accounting firm will have to think very carefully about which companies they audit and which they offer consulting services to,” said Klaus-Peter Naumann, head of the Institute of Public Accountants (IDW).
An IDW study analyzed what’s in store for the industry. When companies have to rotate auditors, Mr. Naumann predicts, “more mid-cap and small-cap German companies will switch from mid-sized auditors to the Big Four, than vice versa.”
Martin Plendl, the chief at Deloitte Germany, goes even further. Rotating auditors, he said, is “the opportunity of the century” to do new business – whether in audits or consulting.