Keeping Watch

This was my first blog post.  It was originally published on October 12 of 2006.

Financial Times, “Merger moves see firms boost their global credentials,” October 11, 2006

The big four firms such as KPMG and Deloitte never miss an opportunity to plug their global business credentials and their commitment to serving clients across borders – each firm has more than 100,000 staff in more than 140 countries.
But their marketing messages often seem to be on a different plane from reality.
They are not global businesses – and nor are any of their rivals.
Instead, for legal reasons, they are networks of national partnerships and each partnership is “independent”, as KPMG makes clear in its latest annual report: “Each member firm takes responsibility for its own management and the effectiveness of its work.”

The article by Barney Jopson regarding the KPMG UK/Germany firm merger hits all the key points. When professional service firms, in particular audit firms, serve large, multinational clients, these clients expect integrated, seamless service delivery that must also be efficient and cost effective for the firms. Providing these services at a high quality under differing legal and regulatory structures is very challenging. Choosing the approach for the client that works best is not always achieved by merging firms, opening more offices and building local infrastructure. The audit firms continue to want to “have their cake and eat it too.” They market themselves as global firms but have splashed the protective legalese on all public documents and sites and adopted the Swiss Verein structure that is intended to insulate each from each other in case of a meltdown.

As was mentioned in the article, Grant Thornton’s reaction to its problems with its Milan office due to Parmalat was swift – cut off the offending appendage from the network. But what of the clients of Grant Thornton worldwide who counted on a Milan office? What of the Milan office clients who thought they had engaged a firm with a global network? They were both sacrificed to risk mitigation by the US firm.

KPMG’s merger of its UK and German firms is interesting given the historical rivalry between these two practices. When the former US based KPMG Consulting (now BearingPoint) sought to purchase the consulting practice from KPMG Germany in preparation for the IPO of the new consulting firm, there was much resistance. Of all the international KPMG Consulting locations that joined BearingPoint, they were one of the last to sell. As a former BearingPoint Managing Director in Latin America, I heard that the German firm did not want to disclose as much as was needed to perform full due diligence and set a good price, and they seemed perpetually concerned about eventual dominance by the US and the UK in the new corporate structure. They expressed distrust, as we all probably should have, of the financial rewards promised for leaving their successful audit practice for the unknown consulting firm and were not enticed by promises of huge gains from stock options. In the end, there should have been fuller due diligence by BearingPoint. Issues with valuation and goodwill from this transaction were part of the accounting issues BearingPoint has suffered greatly from since.

Let’s hope that the combined KPMG UK/Germany firm will make a good marriage for the sake of quality and seamless service delivery to European and other multinationals in this region.