Big Four accounting and consulting firms booming in Australia

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, market leader PwC followed in second spot at 22% growth, with revenues up to $2.4 billion. EY and KPMG both grew their turnover by 20%.

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.

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 BDO, Grant 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.