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KEY NOTE Report : ACCOUNTANCY : September 2004

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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 LLP, Deloitte & Touche, Ernst & Young, Grant Thornton, KPMG, PFK, PricewaterhouseCoopers, Smith & Williamson, Tenon, Group,

EXECUTIVE SUMMARY

This report examines the market for accountancy services in the UK. These can be split into four sectors: management consultancy; audit and accounting (often called assurance or business assurance); taxation and legal services; and corporate finance and business recovery.

Accountancy in the UK is an industry that is in the middle of much change. Profits are lower than they have been for many years and competition is fierce, especially among the top 30 or so firms. More is being asked of accountants, and their image has taken a battering following the demise of some important clients in the US, the UK, Italy and Australia. Meanwhile, new accounting standards are being introduced by international accounting bodies, which will demand more expertise from UK accountancy firms.

The accountancy market in the UK is still growing, but at a much slower rate than in the late 1990s. Key Note estimates that the total fee income from accountancy and related services in 2003 was around £14.44bn, with corporate finance and business recovery the strongest performing sector.

The accountancy industry is dominated by the so-called `Big Four' firms. PricewaterhouseCoopers, Deloitte & Touche, KPMG and Ernst & Young audit more than 90% of the top 100 UK public companies, as well as most of the top 350. Although the `Big Four' hold a dominant position, their revenues have not grown as fast as those of many of their competitors. However, even these competitors are finding life difficult, as margins on audit and taxation services are slim. Although consultancy is seen as the most profitable sector, most accountancy firms have seen their revenues rise by only a modest amount in this area. The Management Consultancies Association says that, on a like-for-like basis, overall fee income generated by its members rose by 13% in 2003. Few accountancy firms can say that they have done as well in the consultancy sector.

The industry is growing increasingly concerned about auditor liability. The fact that Ernst & Young is to face a court case in 2005, in which substantial damages are being sought by Equitable Life, is worrying the profession. Another concern is the Inland Revenue's strict attitude towards tax avoidance. The Inland Revenue has made plain that specific tax avoidance schemes that it has not vetted will result in the accountancy firms that sold the schemes being fined. This has caused confusion and uproar, as it appears that the Inland Revenue has not made its demands clear.

Another concern is the raising of the audit threshold. Until the end of 2003, any business with a turnover of £1m or more had to be audited. However, HM Treasury has now raised this threshold to £5.6m. This means that thousands of small businesses no longer need to be audited by an accountant. Small firms are overjoyed, and the Federation of Small Businesses has applauded the Chancellor of the Exchequer for saving these small firms both time and money. In contrast, the accountancy industry is vexed by this decision. For the top ten accounting firms this will make little practical difference, as they mainly deal with businesses with turnovers greater than £5.6m. However, for small accountancy firms, the loss of these small clients could have a significant impact on their business.

TABLE OF CONTENTS

. Market Definition

REPORT COVERAGE

MARKET SECTORS

Management Consultancy

Audit and Accounting

Taxation and Legal Services

Corporate Finance and Business Recovery

MARKET TRENDS

Strong Price Competition in Audit and Accounting

Low Profitability

Growing Confidence of the Major Mid-Tier Firms

ECONOMIC TRENDS

Population

Table 1: UK Resident Population Estimates by Sex (000), Mid-Years 1999-2003

Gross Domestic Product (GDP)

Table 2: UK Gross Domestic Product at Current and Annual Prices (£m), 1999-2003

Inflation

Table 3: UK Rate of Inflation (%), 1999-2003

Unemployment

Table 4: Actual Number of Unemployed Persons in the UK (million), 1999-2003

Household Disposable Income

Table 5: Average Annual Household Disposable Income in the UK (£), 1998-2002

MARKET POSITION

The UK

2. Market Size

the total market

Table 6: The Total UK Accountancy and Related Services Market by Value by Sector (£m), 1999-2003

Table 7: The Major Market Shares in the UK Accountancy and Related Services Market by Size of Firm (%), 2003

BY market SECTOR

Management Consultancy

Table 8: The UK Management Consultancy Sector† by Value (£m), 1999-2003

Audit and Accounting

Table 9: The UK Audit and Accounting Sector by Value (£m), 1999-2003

Taxation and Legal Services

Table 10: The UK Taxation and Legal Services Sector by Value (£m), 1999-2003

Corporate Finance and Business Recovery

Table 11: The UK Corporate Finance and Business Recovery Sector by Value (£m), 1999-2003

3. Industry Background

recent history

Number of Companies

Table 12: Number of UK VAT-Based Enterprises Engaged in Accountancy† by Turnover Sizeband (number and %), 2003

Employment

Table 13: Number of UK VAT-Based Local Units Engaged in Accountancy† by Employment Sizeband (number of employees and %), 2003

Table 14: Members of the Institute of Chartered Accountants in England and Wales by Occupation, April 2002, 2003 and 2004

REGIONAL variations in the marketplace

DISTRIBUTION

HOW ROBUST IS THE MARKET?

LEGISLATION

key TRADE ASSOCIATIONS

The Association of Chartered Certified Accountants

The Chartered Institute of Management Accountants

Chartered Institute of Public Finance and Accountancy

The Institute of Chartered Accountants in England and Wales

4. Competitor Analysis

the marketplace

Table 15: The `Big Four' Leading Accountancy Practices by UK Fee Income (£m), 2003/2004

THE MID-TIER FIRMS

Table 16: The Leading 46 Second-Tier UK Accountancy Practices by Fee Income (£m), 2003/2004

MARKET LEADERS

Baker Tilly

Company Structure