PWC: is it too big for its boots?

On 1 July 1998, a new giant appeared on the audit and accountancy block ­ PricewaterhouseCoopers ­ created from the merger of the world’s fifth and sixth largest firms. Looking back, did its formation have a positive or negative impact?

In 2008 there are mixed views. In the more negative camp, Paul Boyle, chief executive of the Financial Reporting Council, says: ‘With hindsight, it’s unfortunate that the merger was allowed to go ahead, because it has left us in a more risky position than we otherwise would have been.’ This risk stems from the reduction of the big firms to just four, given Andersen’s collapse, coupled with the risk that another one could potentially disappear fast too.

Playing the ‘what if’ game, Boyle muses on what might have been had the Price Waterhouse and Coopers & Lybrand merger not been allowed by the competition authorities.

‘If PW and Coopers still existed, and if they were each half the size of PwC, they would be about the size of Ernst & Young,’ Boyle says. ‘No one is really going to say they would be too small to handle global clients.’ In other words, we wouldn’t necessarily have the concerns over competition and audit choice that exist now.

Did the competition authorities get it wrong? ‘I’m not saying it would have been possible for the regulatory authorities to make a different decision,’ Boyle says. ‘But it is an example of how something that is in the commercial interests of two parties to a transaction might not be in the public interest.’

Peter Wyman, head of professional affairs at PwC, disagrees. He proposes a very different outcome to the same ‘what if’ scenario. He says: ‘If the merger hadn’t gone ahead, it is quite possible, even by the time that Andersen had gone, that E&Y and KPMG and Deloitte & Touche, as they were then, might have moved so far ahead that we could have ended up with the Big Three, and then four firms following: Coopers, PW, BDO and Grant Thornton.’

The pre-merger view in Coopers, Wyman’s firm, was that the fifth and sixth placed firms globally would ‘topple out of the big league’. He explains: ‘We would not have had the ability to do everything necessary to invest in people, technology and emerging markets.’ The three largest firms, in contrast, did have. ‘Because they were bigger, they had more resource and were able to deal with the challenges of the late 90s, which were around globalisation and technology and specialisation. Those were three big trends happening at the same time.’

Wyman feels that the willingness of the authorities to approve the merger confirms the validity of this argument. ‘Otherwise the competition authorities would have put up the red flag,’ he says. ‘It was subject to a pretty exhaustive and quite long period of review. We ultimately made the case successfully to the competition authorities round the world, most particularly the Justice Department in the US and the European Commission, that it was in the capital markets’ best interests that the merger be allowed to happen.’

There has, however, been some debate about whether the merger of PW and Coopers, and the Big Four outcome, caused a rise in audit fees. Jeremy Newman, managing partner of BDO Stoy Hayward, believes research in the UK ‘shows a clear trade-off between the number of firms in the marketplace and a reduction in audit fees’.

Some others are unconvinced. These include Wyman, who sees no negatives arising from the merger. ‘I think it’s been good for the capital markets,’ he says. ‘The benefit of having a firm like ours, with the global reach and the depth of specialisation, has been entirely a factor for good.’

BDO’s Newman also sees an upside. ‘From a selfish perspective, if we hadn’t gone from the Big Six to the Big Four, people wouldn’t have been worried about competition and choice. With six there’s enough competition, with four there isn’t. So, over the last five or six years, we have had lots of opportunities to grow more rapidly, to gain access to more interesting work, than we would have had without these changes in the marketplace.’

The merger is, Newman suggests, ‘a prime example of the law of unintended consequences’. He says: ‘At the time of the merger I don’t think anyone focused as sharply as they are doing now on the impact a reduction in the number of firms could have on competition and choice in the audit market.’

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