Ernst & Young and Other Converts to Profitability Growth

Ernst & Young, KPMG PricewaterhouseCoopers and Deloitte & Touche are dropping clients "in droves," according to Audit Analytics, a Web-based research firm that tracks auditor changes, opinions and fees.
In 2004, the Big Four resigned from 210 public companies, compared with 152 in 2003 and 78 in 2002. Instead of dropping clients, other well-known account firms, such as BDO Seidman, are increasing fees by 40-100%.

The reason: The extra work required by the US financial disclosure law Sarbanes-Oxley makes it much harder to make a profit on smaller clients. Sarbanes-Oxley, passed in the wake of the Enron, WorldCom and other corporate scandals, requires companies to increase the transparency of their accounting and makes top executives personally liable for their accuracy. The result has been to increase the amount of oversight required.

In general, the auditors are not increasing the size of their staffs or hanging out "clients wanted" signs to increase market share. Instead, they are concentrating on maintaining and increasing profitability, even if it means fewer clients. James Turley, chairman and chief executive office of Ernst & Young, put it bluntly during Congressional testimony in last September: "Our client acceptance and reacceptance processes have been reengineered with an increased focus on determining which companies we really want as audit clients...."

The accounting firms are just joining the ranks of other firms, such as Ford and Best Buy, that are abandoning the false gods of sales ("let's increase sales by 15% next quarter") or market share ("let's be #1!") growth. These companies have realized that pursuing sales or market share growth results in the acquisition of unprofitable customers, which hurts the bottom line. They are realizing that the key to success is profitability growth. Sometimes that means turning away or turning down those who are likely to unprofitable. It's a lesson that all brands must learn.

There's another lesson here, too: If you're a mid-sized firm, start looking now for financial audit alternatives.

Comments

[Mike Smock]

Hi Nick,

Agree that sales and share without profitabilty are false gods. And the smaller enterprises discarded by the Big Four offer an interesting opportunity to other audit firms to grow - assuming it can be done profitably.