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KEY NOTE ACCOUNTANCY : September 2003

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This report covers: accountancy, accountancy services, management consultancy, audit, accounting, assurance, tax, legal services, corporate finance, business recovery, forensic accounting, actuarial services, transaction services, outsourcing, share issues, stock market flotations, project finance, structural finance, disposals, mergers and acquisitions, management buyouts, MBO, factoring, leasing, debt management, private finance initiatives, PFI, privatisation,

Companies covered include: Baker Tilly, BDO Stoy Hayward, Deloitte & Touche, Ernst & Young LLP, Grant Thornton, KPMG, PKF, Pricewaterhouse Coopers, Smith & Williamson, Tenon Group,

EXECUTIVE SUMMARY

This report looks at the market for accountancy services in the UK. Accountancy services are broken down into four areas: management consultancy; audit and accounting (often called assurance or business assurance); taxation and legal services; and corporate finance and business recovery.

The accountancy market continues to grow, although this growth slowed in 2002. In 2002, the total fee income from accountancy and related services was £14.36bn according to Key Note estimates, which represents an increase of 7.5 percent on 2001. This figure includes £6.94bn from management consultancy. The smallest sector has been corporate finance and business recovery with business recovery being the driver of this sector.

The accountancy industry is dominated by what is known as the `Big Four' firms, which indicates how concentrated the industry has become — around 12 years ago the industry was dominated by what were then known as the `Big Eight'. The `Big Five' became the `Big Four' accountancy firms in September 2002, when the UK practice of the worldwide accountancy firm, Andersen was bought by Deloitte & Touche.

The 'Big Four' audit all the top 100 UK public companies and they have a large share of the accountancy market. Now that three of the `Big Four' have sold off their consultancy businesses, the 'Big Four' as a group have only a small presence in the consultancy market. However, they have the lion's share of the market in auditing, tax, corporate finance and business recovery.

Nevertheless, the small- to medium-sized accountancy firms appear to be maintaining their ground and may indeed be increasing their share, albeit marginally.

For the rest of 2003 and into 2004, the main concerns in the accountancy industry are not related to their market but to Government and other external factors. Greater regulation is on the agenda in Europe and in the US. This is not palatable to the accountancy profession and indeed some of it may be unnecessary. The profession not unnaturally is arguing against excessive regulation. Auditor liability is also a major concern. A recent court case in Scotland has broadened auditors' responsibilities. More litigation is another concern as well as the cost of insurance, which had to increase to take into account the rising number of court actions involving accountancy firms. There is the likelihood that the Government will raise the threshold for compulsory audits for companies from a turnover of £1m to £4.8m. This will remove the necessity for thousands of firms to have an audit, although many choose to continue to have one. However, the issue is how many firms will retain their annual audit.

Key Note forecasts that the accountancy market will grow by 33.8 percent between 2003 and 2007 to stand at £20.27bn. Management consultancy will represent 47.9 percent of this market.

TABLE OF CONTENTS

Executive Summary

1. Market Definition

REPORT COVERAGE

MARKET SECTORS

Management Consultancy

Audit and Accounting

Taxation and Legal Services

Corporate Finance and Business Recovery

MARKET TRENDS

Strongly Growing Market

Continuing High Demand for Audits

Increase in External Influences

Regulatory Influence

Smaller Accountancy Firms Appear to be Growing the Fastest

ECONOMIC TRENDS

Population

Table 1: UK Resident Population Estimates by Sex (000 and percent), Mid-Years 1998-2002

Gross Domestic Product

Table 2: UK Gross Domestic Product at Current and Constant 1995 Prices (£m), 1998-2002

Unemployment

Table 3: Actual Number of Unemployed Persons (million and percent), 1998-2002

Household Disposable Income

Table 4: Household Disposable Income (£ and percent), 1998-2002

MARKET POSITION

2. Market Size

the total market

Table 5: The Total UK Accountancy Market by Value by Sector (£m), 1998-2002

Table 6: The Major Market Shares in the UK Accountancy and Related Services Market by Size of Firm ( percent), 2002

BY market SECTOR

Management Consultancy

Table 7: The Total UK Management Consultancy Sector† by Value (£m), 1998-2002

Audit and Accounting

Table 8: The Total UK Auditing and Accounting Sector by Value (£m), 1998-2002

Tax and Legal Services

Table 9: The Total UK Taxation and Legal Services Sector by Value (£m), 1998-2002

Corporate Finance and Business Recovery

Table 10: The Total UK Corporate Finance and Business Recovery Sector by Value (£m), 1998-2002

3. Industry Background

RECENT HISTORY

Changes in the Industry

Number of Companies

Table 11: Number of UK VAT-Based Enterprises Engaged in Accountancy by Turnover Sizeband (£000 and percent), 2003

Employment

Table 12: Number of Members of the Institute of Chartered Accountants in England and Wales by Occupation, April 2002 and 2003

REGIONAL variations in the marketplace

DISTRIBUTION

HOW ROBUST IS THE MARKET?

LEGISLATION

key TRADE ASSOCIATIONS

The Association of Chartered Certified Accountants (ACCA)

The Chartered Institute of Management Accountants (CIMA)

The Institute of Chartered Accountants in England and Wales (ICAEW)

4. Competitor Analysis

the marketplace

Table 13: The `Big Four' Leading Accountancy Practices by UK Fee Income (£m), 2002/2003

THE MID-TIER FIRMS

Table 14: The Leading 46 Second Tier UK Accountancy Practices by Fee Income (£m), 2002/2003

MARKET LEADERS

Baker Tilly

Company Structure