Big Four accounting and consulting firms booming in Australia

12 February 2019

The Big Four professional services firms – EY, Deloitte, KPMG and PwC – are enjoying a sustained boom in Australia. Services in consulting and financial advisory, which are more lucrative than accounting and assurance work, are driving local growth for the world’s largest advisory and accounting firms.

Looking at the development of Australia’s economy combined with client demand, 2019 looks set to be another good year for the country’s burgeoning professional services economy. While firms of all shapes and sizes are booming, though, Australia's professional services growth is in no small part due to the exceptional growth posted by the Big Four firms, leading Stuart Kells, co-author of a new book titled ‘The Big Four’ to describe their dominance as “proportionally larger to anywhere else” in the world.

The aggregated revenue of PwC, Deloitte, EY and KPMG topped $7 billion in the last financial year. Together the Big Four employ more than 25,000 staff across Australia, led by a total pool of almost 2,500 partners. Of these consulting behemoths, Deloitte has undoubtedly been the fastest grower in the last three years, seeing a 32% jump in revenue to $2 billion. In terms of growth, KPMG followed in second spot, with 27% growth, but it remains in fourth spot in terms of its revenues of $1.7 billion, behind EY, which grew by 20% to $1.8 billion. The market leader in Australia, PwC, saw its revenues rise to nearly $2.4 billion.

Revenue of the Big Four accounting and consulting firms in Australia

While the Big Four do have a reputation for buying up smaller competitors to inflate their performance, the booming revenues of the firms are partially built on organic growth, especially in areas experiencing high demand, such as cybersecurity, digital consulting and automation. At the same time, a drive to move into new areas of services, such as legal, design thinking, digital and creative services has boosted growth – but inescapably, the largest part of the Big Four’s success is due to their relentlessly aggressive campaigns of M&A.

Deloitte, which is biggest of the group at global stage, has taken over a staggering 28 companies in the nation in the past four years – featuring purchases of everything from an identity security company to a virtual reality illustration firm – including data science consultancy Connected Analytics, and Microsoft cloud partner Mexia. As for KPMG, it made 16 acquisitions in the past four years, including the recent move for innovation consultancy UDKU.

Elsewhere, PwC purchased companies which drive infrastructure projects, a stake in an advertising agency, as well as buying up corporate restructuring and deals business PPB Advisory in 2018. EY meanwhile snapped up a tax law firm, two data analytics units and a market research firm, among others, and continued this spree early in 2019 with the acquisition of Plaut IT

Consultants the money makers

While the bulk of the traditional media remain steadfast in their descriptions of the Big Four firms as ‘auditors’ or ‘accountancies’, this has long since ceased to capture the diverse and wide-ranging nature of these multifaceted companies. Audit is now just a side-business for the world’s largest professional services players, with the percentage of revenue derived from their core service of auditing financial statements falling to an all-time low in Australia of between 14% and 21% in 2019. The decline in importance of auditing work to the Big Four can be attributed to three major factors.

Global revenue of the Big Four firms (US$ / billion)

First, the companies that buy auditing services from the Big Four have typically become unwilling to pay a premium which the firms require to properly carry out the statutory work. They are instead looking to smaller rivals including BDOGrant Thornton and RSM, which charge lower fees. This is particularly the case in the mid-market auditing scene, where top 20 firms beyond the leaders are enjoying growing demand.

Second, the Big Four have come under mounting scrutiny regarding their audit portfolios. In 2016, Greg Medcraft, the then-outgoing chairman of ASIC, told The Australian Financial Review that the quality of auditing in Australia was "appalling", and went as far as to warn that it could lead to an Enron-style corporate collapse in the near future (Enron's collapse in the US led to the downfall of Arthur Andersen).

As a result, the Big Four have come to see auditing work as an increased risk, with little room for manoeuvre, and a low potential for positive press, as if they do audits well, it gains no attention. At the same time, if things go wrong, the negative press can sting them for months. Reputation damage has hit the Big Four hard in several countries globally, including Germany, the Netherlands, South Africa, the UK and the US.

Finally, the Big Four are shifting their attentions to consulting for the simple reason that it earns more. The margins for consulting work are usually higher than their traditional areas of business. An analysis of EY’s revenues for instance shows that last year assurance margins were 35%, compared to almost 50% for consulting and cyber-security work. At the end of the day, then, the departure from the Big Four’s origins is driven by the fact that consulting is now where the big money is made, so focus on consulting is growing at a much faster rate than the audit divisions of the quartet, both in in Australia, and as part of a global trend.

Related: Australia’s management consulting market set to expand in 2019.


Federal government excessively spent $580 million on consultants

05 February 2019

The Australian federal government excessively spent more than $580 million on hiring management consultants, according to an analysis from the Institute of Public Affairs. 

The analysis explored the direct cost of the federal government in excess of what is conceived as “regular and required operations” to society and business, also known as the cost of the political class, or swamp as America’s Donald Trump labelled it during his presidential election campaign. The report found that such spending stood at a total of $8.1 billion for the year 2017. The bulk was spent on public sector wage premiums, accounting for $5.5 billion, with the authors further finding that on average, public servants enjoyed average weekly earnings that were “significantly higher” than their peers in the private sector. In 2017, average weekly public sector earnings amounted to $,1410, compared to $1,117 for private sector workers.

Despite the difficulties of comparing pay elements including job roles and seniority across the public and private sectors, the authors highlight that public sector wage growth has been much higher in the two preceding years. “The government would have saved $1.24 billion a year if public servants received 9.5% superannuation instead of the standard 15.4%,” the report states.

Federal government spending: Direct cost of the political class ($ billion)A total of $439 million was spent on international organisations such as the International Monetary Fund and the World Bank, major political parties received $63 million in funding for their political campaigns, while advocacy organsiations such as health, diversity and social welfare groups received $191 million. Among the largest beneficiaries of the latter group are the Cancer Council, which received $39 million, Oxfam ($19.1 million), Australian and State Councils of Social Services ($14 million), AIDS Council of NSW ($13.4 million), the Ethnic Communities Council of Queensland ($11.1 million), Reconciliation Australia ($10.1 million) and Birdlife ($2.9 million).

Public broadcaster received $1.3 billion, while $584 million was paid to consulting firms, of which $254 million was spent by the Department of Defence. Among the firms tapped by ministry heading Australia’s army, navy and special forces include ACIL Allen Consulting, Bechtel, Partners in Performance, Ernst & Young, Deloitte, Rand Corporation, KPMG and PwC. Other firms that are taped by government officials include McKinsey, BCG and Bain – they are typically brought on board to oversee strategic initiatives. According to a previous Institute of Public Affairs (IPA) report, the federal government works with nearly 1,200 different consulting firms, for services such as strategy, organisation, project management, technology, engineering consultancy, financial planning and interim. 

According to a 2018 analysis, the federal government spent a total of $4.6 billion on consultants in 2017 (the IPA reports looked into “excess spending”). However, that amount was questioned by many, with some analysts pointing at systematic failures in defining and recording the fees accrued by consultants, leading to a figure that underestimated the actual situation. The news led to a riot in the government echelons, with the Federal Labor stressing that it would clamp down on consulting spend.

“The nature of the Canberra Swamp perverts liberal democracy, entrenches established special interest and represents a gross misuse of taxpayer money,” the IPA report concluded, calling for “deep-seated, structural reform” to Australia’s administrative state.