Ireland’s Big Four becomes the ‘Big Five’

Posted on October 9, 2015 · Posted in Accounting & Business

The accountancy market in Ireland is set for a significant consolidation, part of an international trend of mergers and acquisitions. Across the globe, smaller firms of accountants – and consultants – are being bought-up by larger competitors, thereby reducing the number of firms in each country. In Ireland, the proposed acquisition by Grant Thornton of RMS Farrell Grant Sparks is an important step in that process.

 

Assuming the regulator gives the merger the go-ahead, it will confirm Grant Thornton’s position as fifth largest accountancy firm in Ireland and strengthen its standing. Together the two firms have a turnover of €134m – more than twice the size of sixth largest firm BDO, whose turnover is €55m. More importantly, it will also move Grant Thornton into a much more powerful competitor to the Big Four. The smallest of these in Ireland is EY, whose 2014 turnover was €166m.

 

RSM Farrell Grant Sparks is the seventh largest accountancy firm, with a 2014 turnover of €32.5m, compared to that of Grant Thornton, whose income was slightly over €100m. Together, the firms would hold 5% of the accountancy market in Ireland, with more than 50 partners and 750 staff. RSM Farrell has offices in Dublin and Longford, while Grant Thornton has offices in both these locations, plus Cork, Galway, Limerick, Belfast and Kildare.

 

ACCA has a particular interest in the merger. Liz Hughes, head of ACCA Ireland, explains: “ACCA is a strong tradition in both these firms.” Fergus Condon, chairman of ACCA Ireland and a member of the ACCA’s Global Forum for Corporate Reporting, is a partner in Grant Thornton’s financial accounting and advisory services department. Former chairman of Grant Thornton Ireland, Paul Raleigh – now the firm’s global leader for growth and advisory services – is another FCCA.

 

The deal has been agreed by Grant Thornton and RSM Farrell, but (at the time of going to press) is subject to approval from the Competition and Consumer Protection Commission. (If the phase one review does not hit any problems, a positive decision was due to be taken on or before 14 September. If there are problems, the process will go to a phase two review and a later decision.)

 

A formal intention to merge was notified to the Commission on 4 August. According to the details filed, both firms provide accounting and audit services, tax advisory and compliance service and corporate finance advisory services. But only Grant Thornton provides an insolvency service, following RSM Farrell Grant Sparks disposal of its insolvency practice to Duff & Phelps last year. The fact that the merger will not dilute competition in the insolvency market reduces the risk of the merger being vetoed on competition grounds. RSM Farrell Grant Sparks, unlike Grant Thornton, is also describes itself as providing “ancillary services such as company secretarial and outsourced payroll services”.

 

The firms clearly expect the proposal to be approved by the Commission – they see it as strengthening the competitive landscape by creating a powerful challenger to the Big Four, rather than diminishing competition between mid-tier firms. “This consolidation will serve to increase competition within the larger Irish firms, particularly in the areas of audit and taxation, as well as the growing market for corporate finance advisory services,” says Grant Thornton’s managing partner, Paul McCann.

 

He adds that there is a clear rationale for the tie-up. “RSM Farrell Grant Sparks is a firm that fits well with the overall culture of Grant Thornton,” he explained. “The addition of its accounting expertise, professional experience and diverse clients will see substantial opportunities for Grant Thornton’s growth in the Irish market and should result in significant market synergies.

 

“Grant Thornton is the fifth largest accounting firm in Ireland and is the sixth largest accounting network in the world. It has member firms in 130 countries and we know from experience that clients who are engaged in any type of international business value access to our professional colleagues all over the world.”

 

In the two firms’ joint statement, Jim Mulqueen, managing partner of RSM Farrell Grant Sparks, added: “This is a very positive move for both businesses. We see this as a great opportunity to work with like-minded partners and the skill sets within our respective firms complement each other very well.  All of this provides an enhanced service offering which will provide clients with access to an even greater range and depth of experience and skills.”

 

This merger follows others taking place in the mid-tier market in Ireland over recent times. Last year, Baker Tilly Ryan Glennon – one of Ireland’s top ten practices – merged with Portlaoise firm Bardon Molumby, creating a business with over 150 partners and staff. The expanded firm intends to use this as a springboard to take on a further 50 new people. At the end of last year, Mazars similarly announced plans to expand through the creation of new jobs – spread in its case between Dublin and Galway.

 

Nor is this Grant Thornton’s first expansion move: back in 2008, it merged with accountants and insolvency practitioners Foster McAteer. This proved excellent timing, enabling the enlarged firm to be appointed administrator or examiner to many businesses hit by the recession, significantly growing the merged insolvency practice and establishing it as one of the market leaders in insolvency and corporate recovery. ACCA was strongly represented in both firms: founding partner of Foster McAteer, Brendan Foster, was at the time of the merger President of ACCA Ireland.

 

With the merger, Mick McAteer FCCA became a partner in Grant Thornton’s insolvency practice and is now advisory head of recovery and reorganisation in Grant Thornton Ireland. He was a leading figure in several important insolvencies at the centre of the financial crisis, including as joint administrator – with Grant Thornton Ireland’s managing partner Paul McCann – for Quinn Insurance.

 

An important consequence of the merger is that RSM Farrell will leave the RSM network. RSM has itself gone through significant changes internationally in recent times. This is a rare loss for the RSM global network – it recently changed its name from RSM International to RSM – which has expanded steadily in recent years. In a major coup, the UK Baker Tilly firm will in October leave the international Baker Tilly network to become the UK arm of RSM. This follows a deal two years ago in which the UK Baker Tilly firm acquired RSM Tenon.

 

There is no doubt the merger of Grant Thornton with RSM Farrell is also extremely significant in the mid-tier market, not just for what it means in Ireland, but also as a signpost to how the global market is evolving. Aidan Clifford, ACCA’s technical director, Ireland, explains: “I think this will really worry the Big Four given that we now have the EU black list of banned non audit services and the Irish government announced that they were going for 10 year audit rotation – not 10 +10 as per the UK.

 

“I also notice a backlash from students to the 12 to 14 hour days in the Big Four and a move towards industry and mid-tier for many graduates.  Mid-tier are selling themselves as the accountants for entrepreneurs and telling students that the Big Four are the accountants and auditors for the people who mind businesses for their US parent company.  This is not true of course, but there is a grain of truth in it.”

 

The merger represents a leap forward for Grant Thornton, believes Ronnie Patton, senior lecturer in professional accounting practice at Ulster University and a member of ACCA’s Council and Public Sector Network Panel. ”The merger should take them close to the Big Four – it moves them into that range,” he says. “It creates blue water between them and BDO, so I do wonder if it will spark a number of consolidations. I think that would be a good competition move. The merger should increase competition, which is a good thing, both for clients and for recruitment. A number of people are worried about the lack of competition to the Big Four.

 

“In terms of ACCA students, while it’s hard to predict if there will be any additional opportunities overall, the merged firm will certainly be competing for the best recruits – which is good news for anyone seeking to begin or develop their career.

 

“Many students already have a very corporate outlook by the time they are in their last year as undergraduates. They have their eyes firmly set on the Big Four and if they don’t get in, they are very disappointed. They have no ‘Plan B’. Hopefully the merger can help give them an alternative career path.”

 

Despite this, there is a view that the importance of the merger has been over-hyped. Another accounting academic in Ireland, who asked not to be name, argued: “The proposed merger will have no immediate impact on the ‘competition’ for audit/accountancy services in Ireland.  It is simply an amalgamation.  The new formed firm, using the old title of Grant Thornton, will have about 5% of the audit/accountancy market in Ireland.  I think it irrelevant to talk about the ‘Big Four’ when in reality one could talk about the ‘Top Five’ or the ‘Super Six’.  Clearly Grant Thornton are consolidating their position.

 

“Increased competition will only be achieved through cost and/or quality.  As long as established audit firms submit ‘low tenders’ for audit – on the assumption that more lucrative non-audit work will be forthcoming – it will be difficult for GT to compete on the basis of cost.  By reputation – and they were not involved in the audit of ‘dubious’ firms – GT are solid and ethical performers, so it is inevitable that they may attract more interest from companies.  However, this will take time, I feel.

 

“The ‘rotation’ of auditors will take a long time to filter through the system.  It will also be very difficult to break into the ‘old boy network’.  Furthermore, the Big Four accountancy firms have much greater contacts in high places. If greater competition in the audit market is required, then new rules regarding the role of non-audit work must be introduced.  Of course, this will never happen.”

 

Even if it is right that the new ‘enlarged fifth’ firm will have difficulty in challenging the Big Four, there can be little doubt that for the mid-tier market the merger of Grant Thornton with RSM Farrell is very significant news indeed.

 

 

Box

 

The number of audit firms in the UK and Ireland is falling. According to the latest figures produced by the Financial Reporting Council, there were 6,622 registered audit firms at the end of 2014, down from 6,962 a year earlier. This represents a reduction of 4.9% in audit firms during 2014, following a drop of 11.2% in 2013. There is evidence to suggest the main factor behind this change is consolidation by the mid-tier as they take over smaller firms. While Big Four income grew by 4.3% in 2014, there was a 15.1% rise in fee income among the largest firms outside the Big Four.