History of the top 10 audit firms: what's changed since 2003?
31 Dec 2018
The demise of Arthur Andersen in 2002 was a watershed moment for the UK audit market. James Bunney looks at the history of the UK’s top 10 accountancy firms and how the Big Four firms - PwC, Deloitte, EY and KPMG - still dominate
31 Dec 2018
The 2002 carving up of Big Five audit firm Arthur Andersen followed the collapse of US utility giant Enron. It was absorbed by two firms, Deloitte & Touche and Ernst & Young, marking the demise of the last of the major accounting firms to retain the name of its founder.
Those that remained at the top of the table, today’s Big Four, have pruned and streamlined their names so much that their history is obscured.
‘A striking difference between the British accountancy profession 100 years ago and today is the present dominance of a few very large firms,’ wrote accounting expert Robert Parker FCA in his 1984 introduction to Papers on Accounting History. When Arthur Andersen collapsed, the Big Five became four.
The firm’s UK and Spanish offices were snapped up by Deloitte & Touche, and many of its global offices, including those in India, Australia and Singapore, joined Ernst & Young.
In the US, Arthur Andersen was convicted of obstruction of justice for shredding documents related to the audit of Enron. Although the conviction was unanimously reversed by the US Supreme Court in 2005, by this point the firm had surrendered its licenses to operate in the US, with Grant Thornton LLP acquiring seven offices and 43 US partners.
In the decade and a half since the dissolution of Arthur Andersen in 2002, the Big Four audit firms have dominated but many of their peers - well-known names in 2003, such as Baker Tilly, Tenon Group, Robson Rhodes, and Pannell Kerr Forster (PKF) - have either rebranded or been absorbed.
Having settled into their identities, firms are keen to expand their operations into as many fields as possible, making them less like the high street accounting firms that many descended from and more like the upstarts of Silicon Valley.
The comparisons between how things were in 2003 - the first full year after the collapse of Arthur Andersen - are apt because of the immense pressures again being brought to bear on the audit market.
Having survived the disruptions of international terrorism, the financial crisis of 2008, the emergence of sector-disrupting technologies, and political and social upheaval, the Big Four once more face the full weight of public pressure and regulatory scrutiny.
The Big Four
2018: £3.76bn (2003: £1.4bn) +168%
PwC was once PricewaterhouseCoopers, but it began life when William Cooper left the firm of Quilter, Ball & Co in 1854 to start his own practice on George Street in London.
Joined by his brothers, the firm became Cooper Brothers, and in this form it merged with US firm Lybrand, Ross Brothers and Montgomery, set up by Robert Montgomery - a man who, despite never having completed high school, was twice president of the American Institute of Certified Public Accountants (AICPA).
The addition of Canadian firm McDonald, Currie and Co resulted in Coopers & Lybrand.
Samuel Lowell Price went into partnership with William Holyland and Edwin Waterhouse in 1865. When Holyland dropped out to work alone the firm became Price, Waterhouse & Co, later losing the ampersand.
Price Waterhouse and Coopers & Lybrand merged in 1998. Since then, PwC has diversified its acquisitions, picking up consulting firms BearingPoint (2009), PRTM (2011) and Booz & Company (2013). PwC has led the UK market for decades - in 2003, it appeared at number one in Accountancy’s Top 60 Firms survey with a fee income of £1.4bn. In the 2018 survey, its fee income had grown to £3.76bn, an 168% increase.
2018: £2.4bn (2003: 754m) +224%
EY remains proud of its heritage as the brainchild of Glaswegian Arthur Young and Alwin C Ernst, a native of Cleveland, Ohio. Yet the firm itself began life as Whinney, Smith and Whinney and the founders never met, although they happened to die within days of each other in 1948. When it merged with Ernst & Ernst it achieved something singular.
According to the May 1980 issue of Accountancy magazine, the resulting Ernst & Whinney could ‘thus claim descent from three out of the first four presidents of the ICAEW’ - Frederick Whinney, John Young and William Turquand. Ernst & Young was formed by the merger of Ernst & Whinney and Arthur Young & Co. in 1989.
Many of Arthur Andersen’s global audit operations were absorbed by the company in 2002. In recent years, the firm has overtaken KPMG in terms of fee income, which has increased from £754m in 2003 to £2.4bn in 2018 - a percentage change of 224%.
2018: £2.34bn (2003: £1.01bn) +131.6%
Beginning its life as William Barclay Peat & Co in London in 1870, KPMG only took its present form in 1987 when Peat Marwick International (formed by the merger of William Barclay Peat & Co and Marwick Mitchell & Co) joined forces with Klynveld Main Goerdeler, an international group that incorporated Klynveld Kraayenhof, Main Lafrentz & Co. William Barclay Peat’s great-grandson, Sir Michael Peat, who started his career at KPMG in 1972 and served for a number of years as the Queen’s accountant, now sits on the board of Deloitte.
Recently, KPMG has been in the news for grabbing the largest number of FTSE 100 audits, overtaking PwC for the first time, and for announcing in November 2018 that it plans to abandon FTSE 350 non-audit services. In 2018 it reported fee income of £2.34bn, 131.6% more than in 2003.
2018: £3.58bn (2003: £1.24bn) + 188.7%
Deloitte Touche Tohmatsu Limited, known as Deloitte in the UK, traces its origin to William Welch Deloitte, an independent public accountant who was called in to audit the Great Western Railway (GWR) in 1849 following the collapse of an investment bubble known as ‘Railway Mania’.
Deloitte’s successful audit of GWR led to the widespread adoption of his methods, contributing greatly to the history of modern accounting practices and leading some to call him ‘the father of the modern consultancy firm’.
Touche Ross, the first large accounting firm to automate its bookkeeping in 1952, merged with Deloitte Haskins & Sells in 1989. In 1993 it adopted the name Tohmatsu from Tohmatsu Aoki & Co, a member of its international network founded by Nobuzo Tohmatsu, an admiral in the Imperial Japanese Navy-turned-bookkeeper.
For a while, the firm could not use the Deloitte name in the UK as it was being used by Coopers & Lybrand Deloitte, but eventually adopted the brand as Deloitte and Touche before becoming more simply Deloitte.
With the breakup of Arthur Andersen, Deloitte took possession of its UK offices, with around 200 Arthur Andersen partners joining the firm’s existing six hundred. In 2016 it announced that its UK and Swiss firms would merge with member firms in Belgium, Denmark, the Netherlands and Finland to create Deloitte North West Europe with 28,000 partners and staff. In 2018 it earned £3.58bn, nearly three times what it earned in 2003.
Ex-Deloitte partner John Connolly, who masterminded the merger with Arthur Andersen UK, has recently made waves by founding accounting firm CogitalGroup in 2016 as a potential challenger to the Big Four. In December 2018 the firm announced annualised global revenues topping £450m.
The mid-tier firms
2018: £490m (2003: £216m) +127%
The ambitious striking out of a senior accountant at Ernst & Ernst in Chicago and the 1924 founding of Alexander Grant & Co marks the beginning of Grant Thornton. Grant's commitment to providing services to mid-sized companies is still held by what is for the moment the fifth-largest firm in the UK.
In 2007 Grant Thornton acquired Robson Rhodes, which was the 12th largest accountancy firm in the UK with revenues of £85.5m in 2006. Despite its turnover it was in debt to the tune of £45m and its collapse added around 65 partners to Grant Thornton, creating a vacancy in the international network RSM, which was eventually filled by Tenon.
In 2003 the company earned £216m in fees, compared to £490.8m in 2018 - an 127% increase overall, but a drop from the £499m it earned in 2017.
2018: £468m (2003: £193.5m) +141.8%
Founded in 1963 as Binder Seidman International when firms from the UK, Netherlands, Germany, US and Canada joined forces, BDO did not take its present form until 1973 when it adopted the name Binder Dijker Otte & Co. BDO merged with Binder Hamlyn in 1988, and in 1994 Stoy Hayward merged with BDO Hamlyn to form BDO Stoy Hayward, with the new firm becoming the UK member firm of BDO International.
In 2013 it merged with PKF (UK) LLP, retaining its name, and in 2018 announced that it was acquiring certain parts of Moore Stephens LLP. It has remained the sixth-largest accounting firm in the UK for 15 years, with fees in 2003 (£193.5m) having more than doubled to £468m in 2018. Its merger with Moore Stephens will give it a gross annual revenue of £590m, pushing BDO into fifth place.
2018: £314m (2003: £157m) +100%
For most of its recent history RSM was known as Baker Tilly. The founder of Tilly & Co, John Henry Tilly, was a member of the first council of the ICAEW in 1872. Its 1988 merger with Baker Rook brought together a number of different firms with a history stretching back into the nineteenth century.
In 2015, the collapse of listed consolidator RSM Tenon, a top 10 firm in 2003, with £80.4m in debts led to the £1 purchase of its 2,300 partners and staff in 35 offices by Baker Tilly, which left its own international network (Baker Tilly International) to join RSM. RSM reported £314m in fees in 2018, exactly double the £157m it reported in 2003.
2018: £134.4m (2003: £77.3m) +73.9%
Founded in 1907 as Moore, Partridge & Co, Moore Stephens has retained virtually the same name for a century, as it became Moore Stephens & Co in 1918, dropping the ‘&’ in 1986.
The most dramatic change to befall the company happened in November 2018, when it was announced that certain parts of Moore Stephens LLP will merge with BDO in 2019 to create a combined firm of 5,000 people and a gross annual revenue of £590m. The new firm, which will retain the name of BDO, will overtake Grant Thornton to become the UK’s fifth-largest accounting firm.
A network of accountancy firms rather than a firm in its own right, PKF UK includes firms such as PKF Cooper Parry, PKF Littlejohn Frazer and PKF Johnston Carmichael that once took their place in the Top 75. The name comes from PKF International, formerly Pannell Kerr Forster, which traces its origin to Pannell Fitzpatrick & Co, founded in 1869.
The UK arm of PKF merged with BDO in 2013, creating a vacancy in the international network, which was filled gradually by independent regional firms. Since then, the PKF name has continued in the UK market as part of a network structure.
2018: £181.3m (2003: £61.1m) +197%
Youthful compared to most of the firms in the top 10, Mazars is descended from a practice founded by Robert Mazars in Rouen in 1945, which he then headed for four decades. In 1995 it merged with Guérard Viala, creating the Mazars CARL partnership, and merged with UK firm Neville Russell in 1998.
In 2000, it absorbed Dutch firm Paardekooper Hoffman and in 2007 became one of the founding members of the Praxity Alliance. In recent years it has merged with German practice Roever Broenner Susat (2015) and Chinese firm ZhongShen ZhongHuan (2016).
Its earnings in 2018 (£181.3m) have nearly trebled compared to the £61.1m it earned in 2003.
About the author
James Bunney is content editor at Accountancy Daily