Accounting networks and associations
Encyclopedia
Accounting networks and associations are professional services networks
whose principal purpose is to provide members resources to assist the clients around the world. The networks and associations operate independently of the independent members. The largest accounting networks are known as the Big Four (audit firms). There are currently 30 recognized networks and associations.
's (PCAOB) regulations provide for inspection of non-United States firms. Without a network with common standards and internal means of communications, conducting the required audits would not be possible.
There were other profession-based factors which favored the growth of accounting networks. As a result of competition for the audit work, consolidation was inevitable. These include the fact that a network can establish a brand
. A brand establishes the credibility of the network and allows the individual members to charge more. Creating a brand is very difficult when all of the members of a network are providing essentially the same services.
Being a network member establishes that the firm is part of a large group. Additionally, the larger the firm, the more likely it will be invited to render auditing engagements. A large organized network allows for spreading the costs to price competitively. Ultimately, size is the only real means of differentiation that is readily available on accounting firms to assure clients that they can do international work.
Networks also reflect the clients’ needs for seamless worldwide services because they are more efficient and cost-effective., From the perspective of the accounting firm, a global regulated organization with consistently applied standards significantly reduced the risk. However, increasing the size of the networks can enhance legal liability risks and quality control issues that have not been resolved.
With these factors in play, some networks continued to grow; others remained in a stasis position. Individual members of networks began to offer other services related to accounting. These services included forensic accounting, business appraisals, employee benefits planning, strategic planning, and almost anything associated with financial parts of the client’s business. The network’s structure easily accommodated these services and their geographical expansion.
As the Big 8 consolidated to become Big 6, the Big 5 and then the Big 4, new networks naturally developed to emulate them. BDO
and Grant Thornton
were the earliest followers. Networks were then developed to serve mid-market companies and private businesses. New networks also sprang up as an extension of a single accounting firm in the same way the Big 8 were formed. New structures were created to further extend the networks.
The largest accounting networks adopted trade names that each member used. The names of the original firms that became part of the networks were lost and replaced with trade names. For example, PriceWaterhouseCoopers became PWC
. The perception was created that these networks were more than networks, but single entities rather than completely independent firms. This was never the case. The result was that the Big 8 concept was established which separated the eight firms from all other accounting firms.
Another factor in the development of networks in accounting was the American Institute of Certified Public Accountants(AICPA)
’s prohibition of advertising. While the largest firms indirectly advertised their services, the small firms complied with the rules and believed advertising to be unprofessional. Additionally, midsize firms were de facto restricted from advertising simply because of limited budgets. They could not create a brand that was able to compete with the one established by the Big 8. The advertising restriction was lifted in the 1970s by the Federal Trade Commission
.
When the Big 6 began its expansion to the legal profession, it was met with fierce opposition from law firms and bar associations. Commissions, panels and committees were established by legal and accounting firms to argue their positions. Government agencies were enlisted. For more than five (5) years the debate escalated. This movement ended abruptly with the fall of Arthur Anderson
as a result of its association with Enron
. Sarbanes Oxley followed, which effectively ended this trend.
Today there are 44 accounting networks whose members’ cumulative revenues range from $25 million to $26.2 billion. The top 30 networks have cumulative revenues of $142 billion dollars. The primary sources of revenue are from audit, tax and financial consultancy services.
issues requiring the networks to distance themselves from the perception of being a single entity. The Parmalat
case is the best illustration of the issues.
While the firms have lost a number of cases, the facts and circumstance, or procedural elements have reduced their actual liability.
issues carry over into operations. Regulations in the EU have been imposed that require the “networks” to define whether they are “associations” of independent firm or are more integrated networks operationally and financially. Additional standards have been passed by IFAC, an independent associations of accountants, on distinguishing networks from associations. The objectives of each are to provide the clients a level of understanding about the degree of integration with each other.
A number accounting firms have also organized a “networks of networks” called the Forum of Firms under the auspices of IFAC to protect and advance their interests.
. If the group is perceived as a network, it may be foreclosed from representation of clients because they cannot represent a competitor. Association members would not be foreclosed from representation because the firms are perceived as independent by clients.
Professional services networks
Professional services networks are networks of independent firms who come together to cost-effectively provide services to clients through an organized framework. They are principally found in law and accounting. They may also be found in investment banking, insurance, real estate and architectural...
whose principal purpose is to provide members resources to assist the clients around the world. The networks and associations operate independently of the independent members. The largest accounting networks are known as the Big Four (audit firms). There are currently 30 recognized networks and associations.
Foundations
Accounting networks were created to meet a specific need. “The accounting profession in the U.S. was built upon a state-established monopoly for audits of financial statements.” Accounting networks arose out of the necessity for public American companies to have audited financial statements for the Securities Exchange Commission (SEC). For over 70 years, the SEC has continually sought for greater coordination and consistent quality in audits everywhere in the world. Networks were the logical model to address these requirements. They expanded outside of the United States since financial results had to be audited wherever a company conducted business. In the US, the Public Company Accounting Oversight BoardPublic Company Accounting Oversight Board
The Public Company Accounting Oversight Board is a private-sector, non-profit corporation created by the Sarbanes–Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies. Its stated purpose is to 'protect the interests of investors and further the public interest...
's (PCAOB) regulations provide for inspection of non-United States firms. Without a network with common standards and internal means of communications, conducting the required audits would not be possible.
There were other profession-based factors which favored the growth of accounting networks. As a result of competition for the audit work, consolidation was inevitable. These include the fact that a network can establish a brand
Brand
The American Marketing Association defines a brand as a "Name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers."...
. A brand establishes the credibility of the network and allows the individual members to charge more. Creating a brand is very difficult when all of the members of a network are providing essentially the same services.
Being a network member establishes that the firm is part of a large group. Additionally, the larger the firm, the more likely it will be invited to render auditing engagements. A large organized network allows for spreading the costs to price competitively. Ultimately, size is the only real means of differentiation that is readily available on accounting firms to assure clients that they can do international work.
Networks also reflect the clients’ needs for seamless worldwide services because they are more efficient and cost-effective., From the perspective of the accounting firm, a global regulated organization with consistently applied standards significantly reduced the risk. However, increasing the size of the networks can enhance legal liability risks and quality control issues that have not been resolved.
With these factors in play, some networks continued to grow; others remained in a stasis position. Individual members of networks began to offer other services related to accounting. These services included forensic accounting, business appraisals, employee benefits planning, strategic planning, and almost anything associated with financial parts of the client’s business. The network’s structure easily accommodated these services and their geographical expansion.
As the Big 8 consolidated to become Big 6, the Big 5 and then the Big 4, new networks naturally developed to emulate them. BDO
BDO International
BDO International is a worldwide professional services network of public accountancy firms, serving national and international clients. Each BDO Member Firm is an independent legal entity in its own country. The network, originally formed in 1963 as Binder Seidman International Group, is...
and Grant Thornton
Grant Thornton
Grant Thornton LLP encompasses the U.S. operations of Grant Thornton International, the largest accounting organizations outside of the Big Four . The member firms of Grant Thornton International comprise a global network of 27,000 employees and 2,207 partners in more than 110 countries...
were the earliest followers. Networks were then developed to serve mid-market companies and private businesses. New networks also sprang up as an extension of a single accounting firm in the same way the Big 8 were formed. New structures were created to further extend the networks.
The largest accounting networks adopted trade names that each member used. The names of the original firms that became part of the networks were lost and replaced with trade names. For example, PriceWaterhouseCoopers became PWC
PwC
PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....
. The perception was created that these networks were more than networks, but single entities rather than completely independent firms. This was never the case. The result was that the Big 8 concept was established which separated the eight firms from all other accounting firms.
Another factor in the development of networks in accounting was the American Institute of Certified Public Accountants(AICPA)
American Institute of Certified Public Accountants
Founded in 1887, the American Institute of Certified Public Accountants is the national professional organization of Certified Public Accountants in the United States, with more than 370,000 CPA members in 128 countries in business and industry, public practice, government, education, student...
’s prohibition of advertising. While the largest firms indirectly advertised their services, the small firms complied with the rules and believed advertising to be unprofessional. Additionally, midsize firms were de facto restricted from advertising simply because of limited budgets. They could not create a brand that was able to compete with the one established by the Big 8. The advertising restriction was lifted in the 1970s by the Federal Trade Commission
Federal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
.
Multidisciplinary Expansion
In the 1990s, the large accounting firms reached another ceiling in the services they made available to their clients. Having reached their natural limit on growth with more than 90% of auditing for public companies, the Big 6 branched out to become multidisciplinary in legal, technology, and employment services. Since the essential infrastructure was in place, it was thought to be relatively simple to incorporate other services into the existing network. As a network, it was natural to create independent entities in these other professions which themselves could be part of the network. The method and structures varied from firm to firm.When the Big 6 began its expansion to the legal profession, it was met with fierce opposition from law firms and bar associations. Commissions, panels and committees were established by legal and accounting firms to argue their positions. Government agencies were enlisted. For more than five (5) years the debate escalated. This movement ended abruptly with the fall of Arthur Anderson
Arthur Anderson
Arthur Anderson may refer to:*Arthur Anderson , Scottish businessman and co-founder of the Peninsular and Oriental Steam Navigation Company *Arthur E. Andersen , founder of Chicago-based accounting firm...
as a result of its association with Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...
. Sarbanes Oxley followed, which effectively ended this trend.
Today there are 44 accounting networks whose members’ cumulative revenues range from $25 million to $26.2 billion. The top 30 networks have cumulative revenues of $142 billion dollars. The primary sources of revenue are from audit, tax and financial consultancy services.
Vicarious Liability
Accounting networks are now facing a new challenge that go to the heart of the image that the firms wish to project to clients. The perception has been that the Big 4, Grant Thornton and BDO are single entities that perform services around the world for clients of this single entity. As a result of court cases this has introduced significant vicarious liabilityVicarious liability
Vicarious liability is a form of strict, secondary liability that arises under the common law doctrine of agency – respondeat superior – the responsibility of the superior for the acts of their subordinate, or, in a broader sense, the responsibility of any third party that had the "right, ability...
issues requiring the networks to distance themselves from the perception of being a single entity. The Parmalat
Parmalat
Parmalat SpA is a multinational Italian dairy and food corporation. Having become the leading global company in the production of ultra high temperature milk, the company collapsed in 2003 with a €14 billion hole in its accounts in what remains Europe's biggest bankruptcy...
case is the best illustration of the issues.
While the firms have lost a number of cases, the facts and circumstance, or procedural elements have reduced their actual liability.
Networks versus Associations
The vicarious liabilityVicarious liability
Vicarious liability is a form of strict, secondary liability that arises under the common law doctrine of agency – respondeat superior – the responsibility of the superior for the acts of their subordinate, or, in a broader sense, the responsibility of any third party that had the "right, ability...
issues carry over into operations. Regulations in the EU have been imposed that require the “networks” to define whether they are “associations” of independent firm or are more integrated networks operationally and financially. Additional standards have been passed by IFAC, an independent associations of accountants, on distinguishing networks from associations. The objectives of each are to provide the clients a level of understanding about the degree of integration with each other.
A number accounting firms have also organized a “networks of networks” called the Forum of Firms under the auspices of IFAC to protect and advance their interests.
Conflicts of Interest
Self-definition as a network or associations may determine if there is a conflict of interestConflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
. If the group is perceived as a network, it may be foreclosed from representation of clients because they cannot represent a competitor. Association members would not be foreclosed from representation because the firms are perceived as independent by clients.
Big 4 Dominance of Public Company Audits
Accounting scandals have again focused on the fact that the Big 4 has a near monopoly on audits of public companies. Networks are demanding regulations on auditing to require that auditors rotate and include the smaller networks in this rotation. The demands also request that mid-market firms be able to participate to break up the monopoly of the Big 4.See also
- Umbrella organizationUmbrella organizationAn umbrella organization is an association of institutions, who work together formally to coordinate activities or pool resources. In business, political, or other environments, one group, the umbrella organization, provides resources and often an identity to the smaller organizations...
- Business networkingBusiness networkingBusiness networking is a socioeconomic activity by which groups of like-minded businesspeople recognize, create, or act upon business opportunities. A business network is a type of social network whose reason for existing is business activity...
- Organizational StudiesOrganizational studiesOrganizational studies, sometimes known as organizational science, encompass the systematic study and careful application of knowledge about how people act within organizations...
- Professional services networksProfessional services networksProfessional services networks are networks of independent firms who come together to cost-effectively provide services to clients through an organized framework. They are principally found in law and accounting. They may also be found in investment banking, insurance, real estate and architectural...
- Multidisciplinary professional services networksMultidisciplinary professional services networksMultidisciplinary professional services networks are organizations formed by law, accounting and other professional services firms to offer clients new multidisciplinary approaches solving increasingly complex issues. They are a type of professional services network which operates to provide...
- Law Firm Networks