Stand by for the rescue...
3 Nov 08
The jobs of audit and accountancy firms are changing, as economic and financial markets are rocked – more business recovery and advice work, less in mergers and acquisitions. But they are adapting well and already preparing themselves for the next phase
by Robert Outram, Andrew Beach and Richard Goslan
This has not been “a normal year”. That’s the verdict of Craig Anderson, KPMG’s senior partner, Scotland, and there are few who would disagree. But how has it impacted on the accountancy sector?
So far – and that “so far” comes with a strong health warning – Scotland’s accountancy practices are reasonably upbeat despite the crisis engulfing the world’s biggest financial institutions and the impending threat of recession in the “real economy”.
The downturn has meant work drying up in certain areas – M&A has been very quiet, for example – but it has also meant increased activity in others, such as corporate recovery, and business advisory work generally. It is a game of swings and roundabouts, and so far (that caveat again) firms have been redeploying their people, not shedding them.
It all looked more benign at the start of the year, though, as Anderson recalls: “Northern Rock had just gone down, but at that time most of the concern centred on mortgages. The abolition of taper relief kept us all busy up to 5 April. At the time it looked as if the capital gains tax (CGT) reforms [5 April was the deadline for asset sales before the end of taper relief and the imposition of a higher rate of CGT] would keep us going to the end of the credit crunch!”
That, of course, was before global panic in August and September sent banks, governments and regulators into a spin and took a heavy toll of the already depleted money markets.
In Scotland, the rush to beat the CGT deadline brought forward a number of business disposals, but since then deal flow has been very restricted, according to figures from Anderson’s firm. In Scotland, the number of deals completed in the first half of the year, 148, was 51 per cent down on the same period in 2007. The average deal value was £10.2m, compared with £29.4m in 2007.
Anderson says: “There have been some large transactions – such as the sale of Scottish & Southern and Scottish & Newcastle, but the number of deals is a better guide to what’s going on than the total amount. With HBOS, S&N, Abbot Group, Thus, Scotland is losing listed companies.”
James Baird, managing partner, Scotland, with Deloitte says: “We have all been hit by the uncertainty of this market. We just don’t know what is going to happen. That is leading a lot of people to freeze their position and not move, whereas if you look back to July, August, people were beginning
to look at how they might address the situation.
“What it means for us and for the accountancy sector as a whole is that we have to do different things, because clients need different things from us.”
The conventional wisdom is that accountancy firms have a cushion against recession in the form of insolvency work. For the year coming to a close, this is only partly true. According to insolvency specialist Begbies Traynor, in the UK as a whole the number of “distressed” companies – that is, businesses subject to a county court judgement or facing being wound up – more than doubled, to 4,566.
In Scotland, personal bankruptcies are up 70 per cent, though this has a lot to do with new legislation that makes it easier for individuals with low income and low assets to declare themselves bankrupt without waiting for their creditors to take action. The number of Scottish companies in liquidation or receivership is also up, by 43 per cent for the second quarter, but compared with the recession of the early 1990s, we are not seeing an explosion of large companies becoming formally insolvent.
Baird explains: “We are not seeing a large number of insolvencies, but we are doing a lot of work with companies that are looking at their debt structure, their capital structure, or having to work their way through financial covenants.
“Some who didn’t get fundraisings away earlier are now looking at how they can, for example, monetise what’s on their balance sheet. We are looking at cost reduction, restructuring, simplifying corporate structures to take costs out.”
He adds: “You have to think about things in different ways. There may well be value in the balance sheet and previously the easy answer would have been to go to a bank and borrow against that value. Now, companies have to adopt another approach.
“A classic example is the housebuilders and property companies who may have been looking to realise assets. Now they are looking at rental models where at least you can get some cash flow coming through.”
Neil Craig, managing partner with BDO Stoy Hayward in Scotland agrees: “Business restructuring, corporate recovery are very busy, while corporate finance is quiet. The edges of the two departments become blurred, and they are able to help each other out. It’s not all insolvency – they are helping our clients talk through issues with the banks, or dealing with acquisitions.
“At a time like this we keep very close to our clients. A business recovery specialist isn’t an undertaker; he’s a real friend to the client. If the clients have issues, we will help them with those issues.”
It is more than 15 years since the UK’s last serious recession and even that, the firms say, is potentially poor guide to what might happen now. Craig says: “I would challenge you to find anyone who’s working now, who has seen a recession anything like this. You would have had to have been working in 1929!
“In fact many people working in senior roles now will not even have been in a management position in the last recession.”
The current economic conditions require a different approach, Craig argues: “You have to be more creative about finance because there is less liquidity; and some things are just common sense, like managing cash, controlling costs and realising that you can’t afford to carry any fat in the business. It takes strong business discipline.”
“There is uncertainty, but we are not yet finding a downturn in our own business,” according to Baker Tilly’s regional managing partner, David Gwilliam. “For the last half-year the figures are looking fine. There has been a slowdown in corporate finance, although the deal book in the first half of 2009 has gone well, it’s hard now to make predictions.
“My role covers the north of England and Northern Ireland as well as Scotland, and there is definitely a north-south divide. The north of England is less affected – so far – by the downturn, probably because traditionally, businesses in the north and Scotland have been less leveraged. Clearly, though, any clients in property or housebuilding are having a very hard time throughout the UK.”
Gwilliam adds that, this time round, the banks are sensitive to early warning signs and are more inclined to call in a corporate recovery specialist before it is too late, rather than pulling the plug on their customers. Gwilliam says: “Our corporate recovery guys are way busy, but not with work on insolvent businesses. Our patients are in intensive care, not deceased!”
He says: “There are banks that have not been so seriously affected by the credit crunch and for them it’s ‘business as usual’, but they are able to be very choosy about where they put their money. If you have a good quality deal, it can get done.”
Tom MacLennan is an insolvency specialist as well as regional director, Scotland and north-east England, with Tenon. He says: “It’s a different kind of recession. Previously there has been a willingness on the part of financial institutions to hold on to assets such as property for a longer time; now there’s more of a focus on early realisation, so there are great opportunities for any business that does have access to capital.”
It’s bad news, however, for housebulding, MacLennan says. “We still haven’t seen the full impact in terms of job losses in that sector,” he says. “Also, any business dependent on discretionary spend is vulnerable.
“You need to have a Plan B for everything!”
Robert Hannah, who took up the post of managing partner, Scotland with Grant Thornton earlier this year, says the picture so far for his firm has not been the bleak one that “credit crunch” headlines might suggest.
He says: “At the moment, the crisis has been a financial and banking one, with many other sectors and many of our corporate clients still predicting – and planning for – some growth.
“However, there is no doubt that the credit crunch will cause a fall-out in terms of merger and transactional activity and that there will be a knock-on effect. How much is very difficult to predict, but we will continue to help our clients prepare for turbulent times and raise their awareness of opportunities both in the UK and abroad.”
Difficult times for the banks mean a greater emphasis than ever on the timely and accurate reporting of business performance. Robert Kerr, managing partner with Glasgow-based French Duncan, says: “The most immediate effect [of the credit crunch] has been the sudden concentration by banks on up-to-date financial information from the clients they are lending money to. The rigour of their scrutiny is quite a departure from recent years and, more than anything else, it illustrates the change in the commercial climate.”
He goes on: “There has been no adverse effect whatsoever on French Duncan’s business – quite the reverse, in fact. But we are not blind to the reality that audit work will diminish over the coming years if conditions continue to deteriorate and more and more companies succumb to the pressures.”
There is a general consensus that 2009 will present sterner challenges than this year, even if predicting economic developments just now is next to impossible.
Hywel Ball, managing partner, Scotland with Ernst & Young, says: “Looking ahead, the impact is going to be huge, and no-one can see where it is going to go. To a certain extent it is about timing because people who have cash are going to sit on it until they feel the bottom of the market is there. Then they will start investing, and that will be a great opportunity for them. There will be a lot of winners and losers over the next year.”
He adds: “Restructuring is a very busy area for us at the moment, with people refinancing – and if they don’t do that, we are dealing with the insolvency that follows on the back of it.”
It’s not all gloom, though. Deloitte’s James Baird says: “I see a lot of strengths in the entrepreneurial sector at the moment. The businesses that do not need to go to their bank for funds, or to private equity, are doing fine and the old spirit of Scottish innovation is alive and well.
“There is a lot of money in private equity but it is difficult to secure the appropriate debt funding for gearing, and that is slowing activity, but the level of interest is high.”
The corporate finance game is quite different now. According to Tenon’s Tom MacLennan: “It’s no surprise that there has been a significant uplift in corporate recovery and a slowdown in corporate activity. Timescales are longer, and terms are having to be altered because debt finance is not available. Also, some sellers have not adjusted to the fact that prices are lower.”
Corporate recovery departments are not the only accountants to be busy right now. Baker Tilly’s Gwilliam says: “Tax continues to perform well. Risk management is moving forward. People want to be seen to be doing the right things, which creates opportunities to provide services such as internal audit, business process improvement and IT advisory services.”
West of Scotland firm Campbell Dallas has seen “significant growth in tax consultancy and general practice”, according to managing partner Chris Horne, who goes on: “During the last 12 months, we have not seen any significant falling off of business in any particular area, although changes in the recent Finance Act have had a significant effect on higher-level tax consultancy work. Very recently, we are seeing a drop-off of activity in business areas dependent on debt funding. The industry sectors showing most activity include construction and development, manufacturing industry and professional services.”
For Robert Hannah, from Grant Thornton, it is the international side of things that has been driving much of his firm’s business. He says: “We’ve experienced a growing demand for international tax advice, cross-border trading and transaction services which are being inspired by foreign investors looking at Scottish companies and by Scots businesses proactively seeking new markets.
“From an industry sector perspective, whisky and technology, especially renewables, are still performing strongly.”
Outsourcing is a continuing trend that the economic downturn has done little to halt. At French Duncan, Robert Kerr says that in more and more cases, his firm provides an outsourced accounting and finance function for clients, in many cases driven by the banks’ demand for up-to-date information. Kerr says: “The need for clients to timeously provide information to their bankers has never been greater but, in times like this, it is also of great benefit to their company.”
Tom MacLennan at Tenon says that this is also proving to be a growth area for Tenon, providing a partial or total finance service including areas such as payroll processing, or sales and purchase ledger work. He says: “There are considerable cost and quality advantages for clients, and in difficult times you need quality financial information more than ever.”
For Henderson Loggie, forensic accounting has been one of the success stories of 2008, according to chief executive Steve Cartwright. He speaks of the firm’s expertise in public sector audits, especially working with Audit Scotland and the further education colleges.
He says: “We are helping our clients find ways to weather the storm. Cash is king, so credit control is very important. We are helping clients on the management of cash flow and working capital. You need to identify your top customers and look after them, and similarly look after your key staff.
“If businesses bury their heads in the sand there’s a chance they may go under, but I’d like to think that our clients are not in that position.”
What about the accountancy firms themselves? One indicator of their confidence is that they are still recruiting and still see competition for talent as one of their key challenges.
Tenon’s Tom MacLennan says: “We are recruiting a similar number of graduates to last year. We are not reducing staff, but we are redeploying from quiet areas to active areas such as corporate recovery.”
James Baird also says his firm recruited a full complement of graduates and has overall grown its workforce. He argues: “Our biggest strategic issue remains getting enough of the right people. The job market is changing, but partly because people are sitting tight and deciding that now is not the time to change.
“There’s an adage that you need different managers in difficult times than when things are booming. We are managing our business tightly – that doesn’t mean reducing our ambitions, and it doesn’t mean reducing the scale of what we do, but it means making sure that we do it in the right way and keep a close control over our business.”
BDO’s Neil Craig says: “People know that times are tough and that we all have to work harder. You don’t need to tell them that, and it means that people are more flexible. For example people will move between corporate finance or audit and business recovery as and when the work requires it. They help each other out.”
French Duncan has had an acquisitive year, which Robert Kerr describes as “exceptional”. The firm’s merger with McCabes of Edinburgh brought in fresh tax expertise. French Duncan also acquired the insolvency division of William Duncan in January and the tax consultancy practice of Tom O’Connell in May.
Kerr says: “We are perfectly positioned to win work from the Big Four because clients in this severity of economic storm are less and less willing to pay huge fees for professional services, where the only difference is the name. Clients are saying that they can obtain services every bit as good from mid-tier firms and firms like us.”
Meanwhile, after the recent merger with Glasgow practice Sinclair Wood, Henderson Loggie describes itself as the only top four independent firm with a presence in all the four major cities in Scotland: Glasgow, Edinburgh, Aberdeen and Dundee.
Where do we go from here? “It will take at least a full year for sub-prime to wash through the corporate cycle,” predicts David Gwilliam. “The credit crunch itself is a limited phenomenon, but the downturn resulting from it looks to last longer. Our biggest challenge, however, remains recruiting quality staff. You don’t cut your way to growth, and Baker Tilly has ambitions to grow further.”
Hywel Ball says: “The way to respond to these market conditions is to stick to what you know best, and he or she who is fastest to react to opportunities will be the winner. Too much proactive planning is probably going to be a waste of time. We are still keen to invest, and we are still looking to invest heavily in the oil and gas business and we see that as a growth area.
“The other dominant industry sector in Scotland is financial services and the long-term prognosis there is uncertain. I think different regions in Scotland will have different market conditions next year. It’s not just job losses but a feeling of wealth in individuals and how that affects morale, and how confident people feel to do things.
“A lot of people in financial services will have had share options and will have been hit, so maintaining the motivation and confidence and courage to keep doing things will be harder.”
Chris Horne at Campbell Dallas believes the accountancy sector may have some hard choices to make: “I feel that we are at a crossroads, as we are unable to establish if the down-turn will require a review of our resources. But, in my view, this decision would not be taken lightly, bearing in mind the difficulties that we faced over recent years in putting together the high quality teams that we have.”
Martin Gill, Scottish managing partner with PKF, also takes a sombre view of the immediate future: “Initial thoughts that Scotland might escape the worst of the downturn due to its high levels of public sector employment are now appearing too optimistic. The housing market seems to be holding up better in Edinburgh but the downturn is obviously global rather than Scottish or UK wide, therefore the impact on the Scottish marketplace is likely to be wide reaching.
“The impact of the [proposed] HBOS takeover has yet to be fully understood. Retaining headquarters in Edinburgh, at least for the corporate banking side, is obviously an important issue and one that remains to be resolved.
“We would predict actually a pretty good year for the firm but a downturn for the economy as a whole.”