A stormy romance across the North Sea
“At the end of a week in which Barclays and ABN Amro embarked on Europe’s largest ever cross-border financial services deal came a reminder that it has not always been plain sailing between the English and the Dutch.”
In a previous post, I’ve discussed the choices the Big 4 are making about who they’ll work for, both as an auditor and, now again, as a consultant. I’ve argued that for the Big 4 and, in my opinion, in particular for PwC, it’s often a conscious choice and not a surprise when auditors switch clients. But sometimes the choice is not the Big 4’s. Take the case of mergers and acquisitions…
What happens to the auditors when two large organizations merge? If they have the same auditor, it may be a simple choice. When two firms “merge” but one of them is really the dominant party, the acquirer, I think it’s more often the acquirer’s auditor that remains.
PwC UK has been Barclays’ external auditor for a very long time. The external auditor for ABN Amro is Ernst and Young. In a Barclays/ABN combination, it’s my prediction that PwC would maintain the external audit relationship with the combined organization.
Would this be PwC’s preference? I don’t mean to say they wouldn’t miss whatever consulting dollars they may be currently receiving from their ABN Amro Advisory relationship. A consulting client like ABN Amro would be hard to replace. And there will be a power struggle that has to be resolved between PwC UK and PwC Netherlands. It’s said that the banks have agreed that the new headquarters would be in Amsterdam.
You know, of course, that it’s not as easy as it looks for PwC to switch the focal point for the audit relationship from one country to another. After all, “PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.” When they support each other, share staff and work on global clients across borders, they invoice each other and pay each other in cash, like any other “separate and independent legal entity“. To change the control and authority over the global revenue allocation to the Dutch from the British is a negotiation they are probably already in the midst of.
Well, the combined organization would be one of the Top 5 financial services organizations in the world. PwC is keen on having a larger presence in this industry. They won’t relish giving up an Advisory relationship with ABN Amro, since as a new Barclays/ABN external auditor delivering both types of services would be prohibited under SOx independence rules. But such a large audit contract for such a large, prestigious organization is an ongoing, very lucrative and fairly stable annuity that the firm’s partners know how to grow and manage better than a consulting relationship. They also still find audit more financially attractive and less risky than consulting. After all, they’re still accountants by nature…
Since their attempts at re-starting their consulting organizations are still in the early stages, I doubt they would bet on growing a consulting relationship with the new entity over having a blue-chip audit client such as Barclays/ABN. Neither organization is considered a problem child from a risk standpoint in comparison to, say, KPMG’s client Citi. This relationship would give PwC the audits for two of the largest and most well regarded banks in the world – Barclays/ABN and JPMChase.
When the firms first started being consultants in a big way in the late 90’s, the external audit business had bottomed out. It was a commodity business and everyone in the firms was anxious, against their better judgement and generally risk adverse natures, to exploit consulting engagements to supplement the low prestige, low influence and low fees of the external audit. Such was the case and the cause of the poster child for the “consulting cart coming before the auditing horse” – Enron and Arthur Andersen.
Now, with Sarbanes-Oxley, the auditing business is very busy and very lucrative and the firms plan to keep it that way. They’re growing and making money by the bucketfuls and are lobbying hard to keep more of it even when they screw up. Although they say they want to re-grow their consulting arms, I don’t believe their hearts are really in it nor do I believe they know what they’re getting into. The competitive landscape on the technology side has changed dramatically and the difficulty of making money easily or without risk in consulting is formidable, as PwC knows very well based on its experience with its former client, BearingPoint.
Unfortunately for Ernst and Young, they will lose an audit client, ABN Amro. But don’t feel too bad. They just stole the New York Times from Deloitte by promising to get the Times out of the “adverse opinion” doghouse.
And where is KPMG in all this? Well, if a bid by Citibank goes through for some portion of ABN assets, say the retail operations of their LaSalle Bank subsidiary based in Chicago, KPMG will add to their fees as auditor for Citi.