The 2012 big four firms performance analysis - Jan 2013 report

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The 2012 big four firms performance analysis - Jan 2013 report

  1. 1. THE 2012 BIG FOUR FIRMS PERFORMANCE ANALYSISAn Analysis Of The 2012 Financial Performance Of The World’s Largest Accounting FirmsBy Big4.comJanuary 2013The 2012 Big Four Firm Performance AnalysisJanuary 2013www.Big4.comPage 1 of 24
  2. 2. THE 2012 BIG FOUR FIRMS PERFORFMANCE ANALYSISEXECUTIVE SUMMARYDeloitte, Ernst & Young, KPMG and PwC: 2012 Revenues Increase to Historic Levels2012 was a banner year for the Big Four accounting firms: Deloitte & Touche, Ernst & Young(E&Y), KPMG and PricewaterhouseCoopers (PwC) following strong growth in 2011, and erasingthe impacts of subdued performance of 2009 and 2010. 2009 combined revenue for the four firmsof $94 billion fell 7% from 2008’s record of $101 billion, but stabilized in 2010 as revenueincreased 1.4% to $95 billion. 2011 revenue rose a further 9% to historic high levels of $103billion, setting a new record.Another new record was set in 2012, with strong growth momentum in all service lines andgeographies continuing from 2011, helped by emerging countries, improvements in globaleconomic profiles and increased business deal activity. Combined 2012 revenue for the four firmsrose to a record historic high level of $110 billion, up 6% from 2011. With all global economies,except those in Europe, showing continued growth in 2012, the Big Four firms had outstandingperformance in 2012, with revenues rising in all geographies, service lines and industries.KPMG revenues grew the slowest at 1.4%, Ernst & Young at 6.7%, PwC increased 7.8% andDeloitte posted the highest rate at 8.6%. PwC grew slower than Deloitte yet reported 2012revenues of $31.5 billion, just $200 million more than Deloitte, thus maintaining its leadershipposition as the largest accounting firm on the planet.KPMG’s modest growth is well out of line with peers. Our analysis shows three factors: Europe is50% of global revenues and was negatively impacted by US dollar appreciation versus the Euro,Advisory service line had modest growth and Audit presumably lost some relative market share.In terms of geography, Americas have 40% and falling share of global combined revenues. From2011 to 2012 however, Americas had a strong performance growth of 9.2%. Europe has 43% ofcombined firm revenues and increased 3.3% from 2011 to 2012, growing the slowest due toregional uncertainty. Asian revenues have more than doubled from $7 billion in 2004 to $18.5billion in 2012, 17% of the total, and grew a strong 8.0% from 2011 to 2012.By service line, Audit accounts for 45% of total revenues and grew 2.9% from 2011 to 2012. Taxservices are 23% of total revenues and also rose 5.6% from 2011 to 2012. Advisory serviceshave been the fastest growing service line for several years increasing share from 22% of totalrevenues in 2004 to 33% in 2012. Advisory revenues grew a strong 12.2% from 2011 to 2012.The Big Four firms cumulatively employ more than 690,000 staff globally, with a total of 37,000partners overseeing a steep pyramid of about 530,000 professionals. Net employment increasedby 39,000 from 2011 to 2012.The outlook for 2013 and beyond is quite optimistic, revenue is expected to grow at a good pace,with help from strong emerging markets, Advisory services, Dodd-Frank and other regulations,conversions to IFRS and favorable economic conditions. 2013 will also prove whether PwC cancontinue to be the leader and whether KPMG can attempt to narrow its gap with E&Y.A detailed analysis can be downloaded at http://www.Big4.com/analysis.You may reproduce or distribute parts or whole of this analysis, but prominent and full attributionshould be given at all times to “The 2012 Big Four Firms Performance Analysis bywww.Big4.com”The 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 2 of 24
  3. 3. REVENUE PERFORMANCE in fiscal 2011 in US dollar terms to historic high levels of $103 billion.Blockbuster All-Round Growth From2011 To 2012 Leads To Record Revenues This revenue was the highest ever for the Big Four firms, and even exceeded theBoth 2009 and 2010 were tough years previous high of $101 billion seen at theoverall for the Big Four accounting firms: height of the global boom in 2008. ThisDeloitte & Touche, Ernst & Young (E&Y), performance is far beyond what would beKPMG and PricewaterhouseCoopers (PwC), normally anticipated and exceeded even ouras the extended global economic crisis expectations for a 4% to 7% growth.impacted their financial performance with Revenue grew even in local currency termsdifficult external conditions, slow economic at a 7% rate from 2010 to 2011, with thegrowth, cost-conscious clients and sluggish depreciating US dollar in this period addingmerger and acquisition activity. While 2001 a 2% foreign exchange boost. The Advisoryto 2008 were an extraordinary period of service line revenue grew at 15.9%, Auditcontinuous revenue growth at a double-digit grew at 5.6%; and Tax grew at 7.2% andpercentage rate, combined revenue for the returned to solid growth after two years offour firms in fiscal 2009 fell by 7% from fiscal contractions. Growth in the Americas was2008 in US dollar terms. 9.9%, Europe increased 4.3%, while Asia zoomed up by 17.4% from 2010 to 2011.2010 turned out to be a much better year forall the Big Four accounting firms as financialperformance was positively buoyed by animproving global economic scenario, high 2012 continued the strong trend seen ingrowth in emerging markets and improving 2011 with growth in all service lines andclient confidence. For fiscal 2010, the all geographies. The appreciating UScombined revenue for the four firms dollar posed some currency headwinds.increased 1.4% from $94 billion in fiscal2009 in US dollar terms to $95 billion. 2010marked a year of moderate recovery and 2012 results continued the strong trend seensomewhat of a watershed turning point. The in 2011, though not at the same pace, withfirms generally welcomed these small all service lines and geographies growingpositive percentage changes in growth as from 2011, driven by strong emergingearly evidence of a sustained recovery. markets, robust equity markets, and global economic growth and heightened deal activity. The combined revenue for the four firms for fiscal 2012 increased a solid 6.4% from $103 billion in fiscal 2011 in US dollar terms to historic high levels of $110.3 billion, yet another record. This performance was at the robust levels that we had anticipated of 4% to 7% annual growth. Revenue grew in local currency terms at a 7.2% rate from 2011 to 2012, with the appreciating US dollar in this period, particularly against European currencies,2011 results were extremely strong, with creating a 0.8% headwind for a growth ofgrowth seen in all service lines and 6.4% in US dollar terms. The Advisorygeographies from 2010, lifted by emerging service line revenue grew at 12.2%markets, improvements in equity markets, continuing its growth from last year. Evenand a general return to global economic Audit grew at 2.9%, and Tax grew at 5.6%growth and executive optimism. The and returned to solid growth. Growth in thecombined revenue for the four firms for fiscal Americas was 9.2%, Europe increased2011 increased a solid 9% from $95 billionThe 2012 Big Four Firm Performance AnalysisJanuary 2013www.Big4.comPage 3 of 24
  4. 4. 3.3%, while Asia zoomed up by 8.0% from Revenue increases in US dollar percentage2011 to 2012. terms varied across firms, ranging from 6.7% for Ernst & Young, 8.6% for Deloitte,(For our prior analysis of 2009, 2010 and 7.8% for PricewaterhouseCoopers and 1.4%2011 Big Four Performance Analysis, please for KPMG. KPMG was the surprisingsee http://www.big4.com/analysis) laggard in annual growth, while the giant PricewaterhouseCoopers reported solid growth, enabling it to stay ahead of Deloitte.After increasing 1% in 2010 and then by9% in 2011, combined revenue increased In local currency terms, revenue increasesa solid 6% in 2012, to yet another historic were 7.6% for Ernst & Young, a weak 4.4%record of $110 billion. for KPMG, an ultra-strong 8.3% for Deloitte, and a very creditable 8.0% for PwC. ThisIn 2009, an appreciating US dollar created variation in growth led to two critical impacts.much steeper drops in US dollar terms First, PwC maintained its revenue(ranging from negative 5% to negative 11%) leadership position among the Big Four,than in local currency terms (negative 3% to leaving Deloitte to enjoy only one year aspositive 1%). In 2010, the situation reversed, the leader of the pack (in 2010). PwC’sas the US dollar depreciated somewhat strong local currency growth enabled it toagainst foreign currencies, thus smaller stay ahead of Deloitte by a slim $200 million.improvements in local currency terms Second, KPMG’s slower relative growth(negative 3.5% to positive 0.3%) translated increased its gap with Ernst & Young to $1.4into better upswings in US dollar terms billion from only $170 million in 2011, the(negative 0.9% to positive 2.6%). In 2011, difference being $0.5 billion in 2010 andfurther weakening of the US dollar aided $1.3 billion in 2009.growth in US dollar terms (7.6% to 10.1%)by a good 2%, as local currency growthcame in lower (5.3% to 8.2%).In 2012, the US dollar appreciated stronglyagainst foreign currencies, reversing thetrend seen in 2011, thus improvements inlocal currency terms (4.4% to 8.3%)translated into less buoyant growth in US The growth differential across firms wasdollar terms (1.4% to 8.6%). driven by the intrinsic nature of the firm itself and varying compositions of service linesEven in 2010, these large accounting firms and geographies and a small effect due toposted some big numbers with combined fiscal years which spanned differentrevenues at an eye-popping $95 billion, calendar months. Deloitte’s fiscal 2012dropping from an all-time record level of ended on May 31, 2012, E&Y and PwC’sover $101 billion in 2008. 2011 turned out to fiscal 2012 ended on June 30, 2012 andbe a blockbuster year with revenues of $103 KPMG was the last to close out the fiscalbillion, setting all-time records and easily year 2012 on September 30, 2012. In 2011,surpassing the previous peak set in 2008. this small difference in fiscal year-ends2012 was another banner year, with a new resulted in relatively higher impact forrecord of $110 billion. KPMG, which enjoyed three to five additional months of better economicThese large accounting firms had a conditions. KPMG was the only firm to postblockbuster year in 2012, their combined positive growth from 2009 to 2010 for all itsrevenues reaching an all-time high of three regions. In 2012, this timing gap$110 billion seemed to detract from positive growth. Fluctuations in the US dollar also contributed to the higher level of percentageThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 4 of 24
  5. 5. drops. In 2012, the US dollar continued its Interestingly PwC had lower growth in USappreciation against a basket of foreign dollar and local currency terms than Deloitte,currencies. This had a unfavorable effect, as but its larger size in 2011 offset this lowerdepreciating local currencies, where the growth differential, and while reducing thefirms earned revenue, were converted into gap to $200 million, still enabled the firm tofewer US dollars, in which the firms reported hold first place. Nevertheless, Deloitte hastheir annual results. In general, increases proven in the last few years that it is a strongexpressed in US dollar terms were the same contender for the leadership position.or lower than increases expressed in localcurrency terms. Ernst & Young took the third spot at $24.4 billion, and KPMG maintained its position as the smallest of the Big Four firms at $23.0The Big Story Of 2012: PwC maintained billion, a good $1.4 billion behind, as the gapits lead over Deloitte to first place as the increased against E&Y. Interestingly KPMGlargest accounting firm on the planet. posted relatively lower growth against E&YThe margin – a slim $200 million. in every service line and each geography.KPMG was the surprising laggard in thegroup, with modest contributions from Combined firm revenues grew 14%its Audit and Advisory service lines CAGR from 2004 to 2008 and 8% CAGR from 2004 to 2012The big story of 2010 was that Deloitte withits 1.8% growth was able to beat The Big Four firms have had an astonishingPricewaterhouseCoopers with its 1.5% run up in total revenues over the last ninegrowth to gain the first place and become years. In 2004, combined firm revenuesthe largest accounting firm on the planet. In were only $60 billion, but by 2008, this had2009, PwC was narrowly ahead of Deloitte, moved up at a compounded annual growthbut Deloitte’s 2010 revenues of $26.578 rate of 14% to exceed $100 billion; and thenbillion was ahead of PwC’s 2010 revenues subsided to 2009. Some of this gain wasof $26.569 billion by an ultra-slim but very from the collapse of Andersen, assignificant $9 million. In 2011, the situation Andersen’s $10 billion or so of revenues inof the previous year reversed. PwC posted 2002 was generally redistributed over the10.0% growth in US dollar terms and 8.2% remaining four firms. Beyond this, the globalin local currency terms. Both were ahead of financial boom in the middle of the decade,Deloitte, which recorded 8.4% in US dollar combined with assertive penetration intoterms and 7.7% in local currency terms. The emerging economies provided the engine forresult – PwC’s 2011 revenues zoomed to revenue increases. 2012 has seen the result$29.223 million, a good $423 million more of this penetration into clients and emergingthan Deloitte’s 2011 revenues of $28.800 economies, with record high results for allmillion. firms being realized.In 2012, the situation of the previous yearcontinued. PwC posted 7.8% growth in USdollar terms and 8.0% in local currencyterms. Both were behind Deloitte, whichrecorded 8.6% in US dollar terms and 8.3%in local currency terms. Yet, the result –PwC’s 2012 revenues zoomed to $31.5billion, a slim but significant $200 millionmore than Deloitte’s 2012 revenues of $31.3billion.The 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 5 of 24
  6. 6. This positive trend rapidly reversed in 2009, drastic declines of earlier years. Revenuesthe first time in six years, as economies all rose across all geographies and serviceover the world came to an abrupt halt in mid- lines with very strong double-digit growth in2008, with many countries going into emerging markets for all firms. Firms’ resultsrecessions, and ultimately affecting the were in line with our expectations for solidseemingly unstoppable growth in Big Four 4% to 7% growth. However, KPMG’sfirm revenues. Even with this drop in 2009, slowest increase was out of line with ourthe six year compounded annual growth rate prediction.from 2004 to 2011 was 8%, a remarkableachievement, given that these multi-billion KPMG’s overall growth of 4.4% in localdollar enterprises had to grow their size by currency terms was a good 4% below itsnearly 60% from a high starting point by three key peers and its growth of only 1.4%either finding new revenue opportunities or in US dollar terms was a good 7% below itspenetrating current clients. With the key peers. Our analysis indicates KPMG’sadditional growth boost in 2012, the eight- performance was impacted by three factors:year CAGR has returned back to 8% from a strong appreciation of the US dollar versus2004 to 2012. the Euro in KPMG’s largest geography, modest growth in its Advisory businessOne aspect to take note - despite being (excluding Management Consulting) and itsauditors for the world’s public companies, loss of relative market position against itswho are themselves required to report three key peers in the global Audit market.extensive details on their financials, the Big While the first factor is structural and out ofFour firms provide only very high level KPMG’s control, the poor showings on thefinancial information with minimum other two factors points to potential issuescommentary, with consequent impact on the with its business model and execution.depth of possible analysis in our study. In general, the firms’ results were in line2012 FIRM PERFORMANCE with our expectations of 4% to 7% growth. KPMG had the slowest growthDeloitte was the first firm to report this year rate, while Deloitte grew the fasteston September 19, 2012, followed by Ernst &Young on October 2, 2012, PwC reported onOctober 4, 2012 and KPMG was the last to There was some drama this year owing toreport on December 13, 2012. the somewhat close race between Deloitte and PwC. After Deloitte reported on September 19, 2012, PwC’s revenue threshold became quite clear, and as it reported on October 4, 2012, it became evident that PwC’s revenues had exceeded Deloitte to maintain the crown as the largest accounting firm.With Deloitte reporting excellentperformance and some additional resultsfrom UK firms, it became evident that theyear was shaping up to produce a terrificoutcome, continuing the strong growth seenin 2011 and a large improvement from theThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 6 of 24
  7. 7. This year, we highlight the firms who haveachieved the highest growth rate in PwC revenues rose 7.8% in 2012, enoughrevenues from 2011 to 2012 in local to maintain its leadership as the largestcurrency terms as the growth stars in 2012. accounting firm on the planet2012 GROWTH STARS PwC firms had strong revenue increases of 13% in both North America and SouthAudit America, which followed a similarly strongDeloitte Audit – 6.0% performance in 2011 and consolidated the firm’s market position in the region. RevenueTax growth in developing markets of the MiddlePwC Tax – 7.9% East and Africa was also strong - up 15%. Overall, Asian growth was 6%. PwC firmsAdvisory had revenue growth of 4% in WesternPwC Advisory – 16.9% Europe and 8% in Central and Eastern Europe, both higher growth rates than inAmericas 2011. Revenues from developing marketsPwC Americas – 13.3% accounted for 20% of PwCs aggregate global revenues, and expected to reach 40%Europe by 2017.E&Y Europe – 6.5% In the US, revenues were up by 15%; in theAsia Pacific UK by 6%; in China by 14%; in India byDeloitte Asia – 16.3% 16%, in Russia by 13% and in Brazil by 14%. In terms of service lines, 2012 Assurance revenues was up 3.4% in local currency terms to $14.864 billion, but in terms of USA brief overview of 2012 results for each firm dollars, revenues increased slower at 3.3%follows. from $14.393 billion in 2011. PwC noted excellent performance in its signaturePricewaterhouseCoopers PwC Assurance practice, the largest in the world, despite the maturity of the business and thePricewaterhouseCoopers’s FY 2012 global globally competitive market for auditrevenues for the year ending June 30, 2012 services and downward pressure on pricing.was US$31.510 billion, a 7.8% increasefrom the US$29.223 billion in FY 2011 in US Tax services increased 7.9% in localdollar terms. However, on local currency currency terms to $7.944 billion, and 7.8% interms FY 2012 revenues were actually US dollar terms from $7.372 billion in 2011.higher than FY 2011 by 8.0%. This highly PwC noted that this growth was driven bycommendable performance helped the firm increasing demand from clients for advice toregain its top ranking as the largest deal with the risks and challenges of taxaccounting firm on the planet. PwC compliance, tax revenue examinations andmaintained this top honor by beating tax accounting. Further, PwC Tax advisedDeloitte, who reported FY 2012 revenues of clients of tax consequences and risks as$31.3 billion, thus falling short of PwC by a companies actively transform their businessslim $200 million, after being ahead in 2010 operations to deal with globalization andby an extraordinarily slim margin of just $9 changing supply chains.million. Advisory services for PwC was the top service line as revenues increased by 16.9% in local currency terms to $8.702 billion, andThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 7 of 24
  8. 8. 16.7% in US dollar terms from $7.458 billion number of graduates in the year ahead.in 2011. PwC indicated outstanding PwC expanded its workforce by 7% in FYperformance from the consulting 2012, taking the total number of people tobusinesses, due to higher sales in over 180,000 for the first time.consulting services as clients recognizedPwC’s ability to deliver transformationalchange across the spectrum of consulting Deloittefrom strategy to execution. Deloitte Touche Tohmatsu, the global firm,PwC noted strong growth in the reported fiscal 2012 revenues for the yearAmericas and increasing revenue share ending May 31, 2012 of US$31.3 billion, afrom developing countries 8.3% growth in local currency terms, but an increase of 8.6% in US dollar terms from 2011 of $28.8 billion. Deloitte revenues grewIn terms of geographies, Asia and the strongest since 2008.Australasia 2012 combined revenues rose to$5.4 billion from $5.1 billion in 2011. This Deloitte member firms experienced growthwas a growth for Asia in local currency of across all three major geographic regions,7.9% and 8.8% in US dollar terms; and led by exceptional results generated in Asiacorrespondingly for Australasia a decrease Pacific, the Americas, and a number ofof 5.0% in local currency, and a small developing markets, as well as across allincrease of 0.2% in US dollar terms. PwC business lines and industry sectors. Infirms revenues in Australia and the Pacific FY2012, Deloitte saw growth across allwere down by 5% due to an exceptional business lines and industries, with financialitem in FY2011 which significantly boosted advisory and consulting experiencing 15 %revenue growth last year. Without this and 13.5 % revenue growth, respectively.exceptional item, revenues from Australia Deloitte successfully completed 30 strategicand the Pacific continued to grow steadily, acquisitions in 2012 in key markets andup 3%. growth areas, including Digital, Analytics, Financial Advisory, and Consulting.Americas turned in an excellentperformance, with 2012 revenues at$12.224 billion, up 13.4% in local currencyterms and 12.8% in US dollar terms from Deloitte noted growth in all three regions,$10.836 billion in 2011. all functions and all industry sectors. Asia Pacific and developing countries,Europe, Middle East and Africa combined and Americas were exceptionalrevenues in 2012 of $13.877 billion, rose asolid 5.4% in local currency terms and 4.4%in US dollar terms from $13.283 billion in By service line, Consulting (and Financial2011. Western Europe revenues increased Advisory) was the fastest grower at 15%4.4% in local currency terms and 4.0% in US from $10.9 billion in 2011 to $12.5 billion indollar terms from $11.518 billion in 2011 to 2012. Financial Advisory grew at 15% due to$11.984 billion in 2012. Central and Eastern several significant cross-border, cross-European revenue increased 8.3% in local functional client engagements, and throughcurrency terms and 4.8% in US dollar terms acquisitions. Consulting revenue grew byfrom $0.778 billion in 2011 to $0.816 billion 13.5% by helping clients with their mostin 2012. complex challenges, including responding to changes in the market, industry, andIn 2012 the firm recruited a record 20,500 regulatory landscape, as well as supportinggraduates, making PwC one of the largest expansion into new and emerging markets.graduate recruiters around the world; and Demand for services in Businesswith plans to recruit and train an even larger Intelligence, Enterprise Applications,The 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 8 of 24
  9. 9. Finance Transformation, M&A, and HR consecutive year. Deloitte India grew by 19Transformation were dominant growth % in local currency. Half of the memberdrivers. firms in the region, including Deloitte China, experienced double-digit growth.Audit and Enterprise Risk Services (ERS)revenue increased 6.0% against 2011 from$12.3 billion to $13.0 billion. Audit grew mostrapidly in the priority markets, especially in The Asia Pacific region grew a solidthe Asia Pacific region. ERS drove growth— 16.3% and was the fastest-growingdouble-digit growth in every region and region for the eighth consecutive yearindustry—due to heightened regulatorypressure, positive analyst ratings, andincreased awareness of the importance of And while this was a remarkableoptimized risk management practices. performance, it was unable to help maintain Deloitte’s lead over PwC to continue to beTax and Legal revenues rose 4.0% against the largest Big Four firm in the world. Its2011 from $5.6 billion to $5.8 billion. Growth 2012 revenues of $31.3 billion were behindwas driven by the continued implementation PwC’s 2012 revenues of $31.5 billion by aof enhanced service delivery models in both slim $200 million, after being ahead in 2010Compliance & Reporting and Advisory by a miniscule but significant margin of $9services, as well as by the introduction of million or 0.03%.new service offerings, especially in prioritymarkets, to help clients manage thecomplex, fast-changing economic and tax A remarkable performance in 2010 hadenvironment. An uptick in cross-border helped Deloitte to beat PwC and becomeconsultative services and strong growth in the largest Big Four firm in the world.the Asia Pacific region also propelledgrowth. We had indicated in our 2009 analysis that ifThe fastest growing industry was Energy & Deloitte’s growth rate were to exceed PwC’sResources, with revenue growth of 24%. growth rate only by a minimum of 0.3%,Life Sciences & Health Care grew by 13%, Deloitte’s 2010 revenues in US dollar termsConsumer Business and Transportation by would make it the largest among the Big11%, and Financial Services by 10%. Four firms. And as it happened, PwCFinancial Services generated more than revenues grew by 1.5% and Deloitte25% of the total industry revenue. revenues grew by 1.8% from 2009 to 2010, and that put Deloitte ahead by a very smallIn terms of geography, Americas increased but critical delta, which Deloitte celebrated8.0% from $14.3 billion in 2011 to $15.4 by indicating that “Deloitte ascends tobillion in 2012. Deloitte LATCO member firm become the largest private professionalgrew by 16.3 %. Deloitte United States grew services organization worldwide” while notby 9.1 %. naming PwC in its press release.Europe, Middle East and Africa revenues In 2009, Deloitte revenues shrank less thanincreased 6.4% from $10.3 billion in 2011 to PwC, thus narrowing, but not completely$11.0 billion in 2012. Member firms in Africa, closing the gap against PwC. By showingNorway, Greece, and Luxembourg all remarkable performance in 2009, arguablyexperienced double-digit growth in local one of the toughest environments in recentcurrency. Deloitte UK grew by 11 % in local memory, Deloitte demonstrated that it was acurrency. strong contender for the leadership position.Asia Pacific grew 16.3% from $4.2 billion in Deloitte continued to focus on hiring,2011 to $4.9 billion in 2012, making it the developing, and retaining top talent as a keyfastest-growing region for the eighth driver of the expansion of business activity.The 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 9 of 24
  10. 10. In FY2012, Deloitte hired 51,400 Jim Turley, Global Chairman and CEO,professionals; its total workforce now Ernst & Young will retire in June 2013 to beexceeds 193,000 professionals worldwide replaced by Mark Weinberger. Jim Turley,and the organization is well on its way to who has led Ernst & Young since 2001, hasachieving its growth goal of 250,000 led E&Y to grow from $10 billion in annualprofessionals by FY2015. global revenues to $24.4 billion, has doubled its headcount and has established itself as the most globally integrated organization in the profession in mindset, actions andErnst & Young structure.Ernst & Young’s combined worldwide 2012 The firm’s strongest performing sectors, allrevenues for the year ending 30 June 2012 with double digit growth, were: Automotive,were US$24.420 billion, increasing 7.6% in Life Sciences, Mining & Metals and Oil &local currency terms from the comparable Gas. Brazil saw organic revenue growth ofperiod in FY 2011 of US$22.880 billion in 17.5%, while India, Africa, China and theglobal revenues. In US dollar terms, the CIS increased revenues 19.8%, 10.2%,revenue jumped 6.7% from 2011 to 2012. 11.8% and 15.6%, respectively.Ernst & Young noted that its business Assurance Services had FY 2012 revenuesmodel and strategy continue to weather the of $10.923 billion, which was up 4.1% ineconomic turmoil and withstand the test of local currency terms, and 3.4% in US dollartime as all service lines showed strong terms from FY 2011 revenues of $10.561growth in emerging markets. Assurance billion.revenues were up 4.1%, Tax 7.0%,Transactions 9.4% and Advisory 16.2%, a Global Tax Services with FY 2012 revenuesgood performance given the current of $6.370 billion was up 7.0% in localbusiness climate. Growth in all of service currency terms and also up 6.0% in USlines was almost entirely organic, with dollar terms from FY 2011 of $6.011 billion.acquisitions accounting for less than onehalf of one percentage point. Advisory Services with FY 2012 revenues of $4.956 billion was up an astounding 16.2%Jim Turley, Global Chairman and CEO of in local currency terms, and 15.1% increaseErnst & Young noted, “FY12 remained a from $4.304 billion in FY 2011 in US dollardynamic and volatile period in the world terms. Transaction Advisory Services witheconomy. The ongoing sovereign-debt crisis FY 2012 revenues of $2.171 billion, had ain Europe, the impending ‘fiscal cliff’ in the 9.4% increase in local currency terms andUS, and signs that the emerging-market revenues grew 8.3% in US dollar terms fromeconomies are slowing all point toward a $2.004 billion in 2011.challenging business climate in the monthsahead. We will also continue to faceregulatory uncertainty in many jurisdictions Ernst & Young has a solid 2012around the globe. That said, we are pleased performance despite tough externalthat our business showed good results, the pressures. All service lines andbest since 2008, in the midst of what has geographies grew. Advisory growth wasbeen several years of uncertainty.” exceptionalAfter revenues increased 7.6% from 2010 In terms of geographies, Americas had FYto 2011, Ernst & Young followed up with 2012 revenues of $9.820 billion, whichanother great year with 6.7% revenue increased 10.1% in local currency terms,growth from 2011 to 2012 and 9.3% in US dollar terms from FY 2011 revenues of $8.981 billion. EMEIA with FY 2012 revenues of $10.459 billion was upThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 10 of 24
  11. 11. 6.5% in local currency terms and also up KPMG noted that at a time of ongoing global3.8% in US dollar terms from FY 2011 of economic challenges, the growth reflected$10.075 billion. Asia-Pacific with FY 2012 the firm’s continued strategic focus onrevenues of $2.813 billion was up 8.1% in investments in emerging markets and keylocal currency terms, but increased 11.1% in service areas, as well as aggressiveUS dollar terms from $2.532 billion in FY recruitment of top talent.2011. Japan had FY 2012 revenues of$1.328 billion, which was down 2.3% in local KPMG in China consolidated its leadingcurrency terms but up 2.8% in US dollar position in M&A consulting by advising onterms from FY 2011 of $1.292 billion. three of the four largest Chinese businessThe firm noted that emerging markets saw outbound merger and acquisitions during thecombined revenue growth of 15.5%. E&Y’s course of the year.headcount at an all-time high of 167,000,with 15,000+ new hires in 2012. KPMGs Management Consulting practice, part of the Advisory business, achieved growth of 15% from 2011 to 2012 and hasErnst & Young made a key change to grown to a business with revenues of $2.2their reporting of revenues in 2009, billion in just seven years.showing combined, not consolidatedrevenues KPMGs firms now serve more than 82% of the Global Fortune 500 list of companies.Ernst & Young made a key change to their Further, to better explain KPMG’s modestreporting of revenues in 2009, electing to results, Michael J. Andrew, Chairman ofshow combined, not consolidated revenues KPMG International, commented:by eliminating intra-firm billings. E&Yrestated its 2008 revenues down from $24.5 "2012 was a year of two distinct halves; withbillion as originally reported to $23.0 billion growth strongest at 6.4% in the first sixreported as restated in 2009. The reason months of the year (October 2011 to Marchprovided for this change was, “In line with 2012) and relatively weaker growth of 2.1%our globalization efforts to harmonize in the six months to September (April 2012policies across member firms, revenues for to September 2012). Growing our business2009 and 2008 related to member firm against such a challenging economicbillings to other member firms have been backdrop is testament to the quality of oureliminated from the financial information people and the strength of their relationshipspresented here. This financial information with clients."represents combined not consolidatedrevenues, and includes expenses billed to KPMG recorded increased revenues acrossclients.” all functions with particularly strong growth generated in Financial Services, Industrial Markets and Infrastructure, Government and Healthcare. Advisory revenues grew byKPMG 8.3%, to $7.86 billion; Tax revenues grew by 6.3%, to $4.86 billion; and Audit revenuesKPMG reported 2012 combined revenues grew by 0.9%, to $10.31 billion.for the fiscal year ending 30 September2012 of US$23.030 billion versus At a regional level, the Americas deliveredUS$22.710 billion for the prior 2011 fiscal strong growth for the year, with revenuesyear. This was a 4.4% increase in local rising by 7%. The Europe, Middle East andcurrency terms and a 1.4% increase in US Africa region reported increased revenues ofdollars terms. KPMG noted the strong 5.3% across the region, despite the ongoingappreciation of the US dollar which impacted economic uncertainty caused by theits reported results. Eurozone crisis. The Asia Pacific regionThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 11 of 24
  12. 12. reported revenue growth of 1.1%, reflecting $11.51 billion versus $11.66 billion in 2011,subdued growth in North Asia. up 4.0% in local currency terms but down 1.3% in US dollars terms.KPMG noted exceptional annual growth of20% or more at KPMG firms in Argentina, In Asia Pacific, combined 2012 revenues ofBrazil, Chile, India and Turkey. Revenue $4.07 billion increased 1.1% in localgrowth was also strong in Africa and currency terms and 1.8% in US dollar termsIndonesia, rising by more than 10% in each against $4.00 billion in FY 2011. KPMGarea over the last fiscal year. KPMG also noted tough conditions in North Asia.decided to convert the Chinese member firmfrom a joint venture to a special general DETAILED ANALYSIS OF KPMGpartnership as a bold step. RESULTS KPMG’s modest performance, far belowKPMG’s revenue grew at 1.4% in US peers and our expectations calls for furtherDollar terms and 4.4% in local currency analysis of their results.terms from 2011 to 2012, the slowestamong Big Four firms and increasing thegap with Ernst and Young KPMG’s modest performance, far below peers and our expectations calls for further analysis of their resultsBy service line, Audit FY 2012 revenueswere $10.31 billion versus $10.48 billion inFY 2011, up 0.9% in local currency butdown 1.6% in US dollar terms. KPMG noted KPMG’s relatively poor performance wasthat on the Audit side, the market has never impacted by three key factors:been more competitive. 1. KPMG’s Europe service line 2012Tax services revenues in 2012 were $4.86 growth of 4.0% on local currency basisbillion versus $4.69 billion in 2011, a strong was generally at par with peers. From6.3% increase in local currency terms and 2011 to 2012 on a local currency basis,3.6% increase in US dollar terms. Deloitte grew 6.4%, E&Y grew 6.5% and PwC grew 5.4%. However, KPMGAdvisory services revenues of $7.86 billion Europe is 50% of KPMG Globalin 2012 were up versus $7.54 billion in 2011, revenues, thus a much largerby 8.3% in local currency terms and 4.2% in percentage share compared to its peers.US dollars terms. Also, the US Dollar strongly appreciated against the Euro in KPMG’s Fiscal 2012 (October 2011 to September 2012)KPMG’s fiscal year end is September, versus KPMG’s Fiscal 2011 (Octoberthis was a distinct advantage in 2011, but 2010 to September 2011), which led tonot much of a help in 2012. Growth in a 5.3% differential between Europe’sAdvisory was the highest local currency growth (at positive 4%) and US dollar growth (negative 1.3%), and also contributed largely to the 3%By geography, Americas Region had 2012 differential between KPMG Global’srevenue of US$7.45 billion versus US$7.05 local currency growth (at positive 4.4%)billion in 2011, up 7.0% in local currency and US Dollar growth (at positive 1.4%).terms and up 5.7% in US dollar terms. Brightspots included Brazil, Chile and Argentina 2. KPMG’s Advisory service line 2012with 20+% revenue growth, growth of 8.3% on local currency basis, even though creditable, was clearly farIn Europe, Middle East and Africa, combined below peers and below KPMG’s ownKPMG member firm 2012 revenues were performance in 2011. From 2011 toThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 12 of 24
  13. 13. 2012 on a local currency basis, Deloitte grew 14.0%, E&Y grew 14.0% and PwC KPMG reported moderate growth in Asia grew 16.9%. Further, KPMG noted that and Europe. Tax revenues increased at its Management Consulting service line solid rates grew 15% from 2011 to 2012 to $2.2 billion in 2012. Calculating further, it appears that the Advisory service line excluding the Management Consulting KPMG increased its global workforce by service line grew only modestly from over 5%, to more than 152,000 partners and 2011 to 2012. staff, the highest number of individuals ever employed across the network. More than 3. KPMG’s Audit service line 2012 growth 450 new partners were appointed over the of just 0.9% on local currency basis was year, bringing the number of partners across clearly far below peers. From 2011 to the network to more than 8,600, another 2012 on a local currency basis, Deloitte record. KPMG recruited more than 18,000 grew 6.0%, E&Y grew 4.1% and PwC graduates last year and plans to recruit a grew 3.4%. KPMG noted a fiercely further 60,000 graduates over the next three competitive audit market, and seemed years, marking the highest planned to have been severely impacted and recruitment levels in KPMGs history. perhaps lost relative market share to all its three rivals in 2012. REVENUE BY GEOGRAPHYKPMG’s relatively poor performance wasimpacted by three key factors: The distribution of revenues by geography shows some very interesting insights.Europe’s growth was comparable to Contrary perhaps to common belief, Europepeers but its larger share of overall (including generally Europe, Middle EastKPMG revenues and the appreciation of and Africa), rather than the Americas regionthe US dollar versus the Euro contributed (including Canada, the US and Southto KPMG Global’s slower growth in US America), has the highest percentage ofDollar terms. total revenues for the Big Four firms, averaging 43% of total worldwide revenues.KPMG’ Advisory service line excluding Americas average about 40% and the AsiaManagement Consulting had modest Pacific countries (including India, Southgrowth from 2011 to 2012 Asia, China, North Asia and Australia) have the remaining 17% of the revenue share.KPMG Audit’s growth at rates far belowits key peers, appears to indicate thatKPMG presumably lost relative audit Europe has the highest proportion ofmarket share to other Big Four firms total revenues for the Big Four firms at 43%, Americas at 40% and Asia’s share has climbed rapidly to 17%KPMG China has now 9,000 partners andstaff and will convert from a joint venture toa special general partnership. KPMG alsoannounced that its member firms expect tohire 60,000 campus graduates over the nextthree years.The 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 13 of 24
  14. 14. region. For example, KPMG noted that 2012 revenues in Brazil grew 20+%, Deloitte reported that Latin American countries grew 16%. E&Y Brazil grew at 17.5%. South and Central America for PwC grew 13% while North America and Caribbean revenues grew 13%. The 3% revenue share loss of the Americas has generally gone to Asia Pacific, where emerging markets such as China, India, Korea and Vietnam have grown at disproportionately higher rates.The AmericasThe Americas represent about 40% of globalrevenues of the Big Four firms combinedrevenues, but its share has been falling overthe years. From 2005 to 2012, there hasbeen a noticeable drop of about 3% in theAmericas region’s share of the total revenuefor all the firms. In 2005, 42% of combinedfirm revenues were reported from theAmericas region, whereas in 2012, it haddropped to only 43% of total firm revenues.From 2011 to 2012 however, there was From 2005 to 2012, there has been astrong performance for the Americas region noticeable drop of about 3% in thefrom all the firms, with the region growing Americas region’s share of the totaloverall at 9.2% in US Dollar terms – PwC revenue for all the firmsgrew the fastest at 12.8%, followed by E&Yat 9.3%, Deloitte at 8.0% and KPMG at5.7%. EuropeThere also appears to be large variationacross firms in the proportion of total globalrevenue from the Americas. For example, Europe, surprisingly, is the largest region byDeloitte at the high end, sources 50% of its revenue for all Big Four firms. The Big Fourrevenues from the Americas driven by its firms typically combine Europe, comprisingDeloitte Consulting unit, and KPMG at the the developed countries of Western Europe,low end has only 32% of its revenues from the up and coming markets of Easternthe Americas. Ernst & Young has 40% and Europe with Middle Eastern and AfricanPwC has 39% of their total revenues from nations for a giant EMEA region. Europethe Americas, in line with the total firm represents about 43% of global revenues,average. and as we see across the years, this total percentage has remained remarkably flatWhile Latin America, and particularly South from 2004 to 2011, though a drop from 48%America and Mexico have provided good in 2008 to 43% in 2012 is becoming verygrowth opportunities for growth in recent noticeable. In 2004, 46% of combined firmyears, the predominance of the mature revenues were reported from the Europemarkets of USA and Canada with their region, and in 2012, there has been a slightslower growth has generally limited the drop to 43% of total firm revenues cameexpansion of Big Four firms in the Americas from Europe.The 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 14 of 24
  15. 15. Overall, the region’s revenues increased The Big Four firms have had spectacular3.3% from 2011 to 2012, with Deloitte up growth in Eastern Europe as these high6.4%, PwC Up 4.5%, E&Y up 3.8% and growth economies have matured intoKPMG down 1.3%. Europe was roiled by capitalistic markets, requiring sophisticatedvolatility and uncertainty regarding Greece, audit, tax and transaction services. MoreItaly, Portugal and Spain in 2012 and thus recently, Middle East and Africa have beenrecorded the slowest growth among all three much stronger sub-regions, albeit from aregion. Europe’s loss of share is also due to smaller base. For example from 2011 torapid growth in Asian revenues. 2012, PwC reported that Central Europe grew 8% from 2011 to 2012. KPMG Africa was up 10%+, E&Y Africa was up 10.2%.Europe represents about 43% of global Asia Pacificrevenues, staying flat 2004 to 2011,though a dip from 2008 to 2012 is Asia Pacific, while being the smallest region,becoming very noticeable. Europe grew has posted the highest growth rates of allslowest among regions – up 3.3% in 2012 regions. This diverse region comprises a few mature markets such as Japan and Australia, but mainly covers fast growth emerging markets such as China, India,As in Americas, each firm has a different Vietnam, Korea and Singapore. The Asiapercentage of European revenues as a Pacific region has been in an economicshare of the total revenues. KPMG at the boom for most of this decade, and theirhigh end sources 50% of its revenues from demand for Big Four firm professionalEurope (KPMG Europe LLP being a key services have multiplied. All the firms havecontributor) while Deloitte at the low end has grown at exceedingly high rates each yearonly 35% of its revenues from Europe, this since 2004, with the result that combinedsituation being a total opposite of the revenues have more than doubled from $7Americas. Ernst & Young and PwC each billion in 2004 to $18.5 billion in 2012.have 43% of their total revenues fromEurope, in line with the total firm average. Overall, the region’s revenues increased 8.0% from 2011 to 2012, with Ernst & Young up 8.3%, KPMG up 1.8%, Deloitte rising 16.3% and PwC up 6.0% rise in revenue from 2011 to 2012. Asia’s differentially higher growth has led to a gain of share from America and Europe. Asia represents about 17% of global revenues for all the firms, and across the years, this percentage has increased steadily from 2004 to 2012This diverse European region comprisesboth of mature markets such as the UnitedKingdom, France, Italy and Germany, aswell as fast growing Eastern Europeannations - Poland, Russia, Czech Republic,Hungary and Romania; Middle Easternnations of UAE, Kuwait, Israel and Qatar;and African countries – South Africa, Egypt,Kenya and Nigeria being prominent.The 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 15 of 24
  16. 16. some commentary on the annual report on the spectacular increases in these countries. The BRIC countries – Brazil, Russia, India and China – have been the shining stars in the growth story in recent years For example from 2011 to 2012, PwC Brazil grew 14%, Russia was up 13%, India grew 16%, and PwC China grew 14%. ForAsia represents about 17% of global Deloitte, Brazil and other Latin countriesrevenues for all the firms, and as we see grew 16.3%, India grew 19% and Chinaacross the years, this total percentage has experienced double digit growth. E&Y Brazilincreased steadily from 2004 to 2012. In grew 17.5%, Russia grew 15.6%, India was2004, less than 12% of combined firm up 19.8%, and China grew 11.8%. Forrevenues were reported from Asia, and in KPMG, Brazil and India both had 20%+2012, it had sharply increased to 16.5% of growth.total firm revenues. This share gain came atthe expense of the Americas region, andnow more recently, Europe, whichcorrespondingly lost its share of the pie. Allfirms reported strong growth from this region REVENUE BY SERVICE LINE– Deloitte’s Asia Pacific revenues grew16.3%, making it the fastest-growing region The Big Four firms offer a wide variety offor the eighth consecutive year. professional and financial services, with newer Advisory services adding to their more traditional and deep-rooted Audit (Assurance) and Tax Services. Firms vary in their structure and definition of these broad service lines, typically though about half the revenues are sourced from Audit, and theAsian revenues zoomed 8.0% from 2011 balance is shared between Tax andto 2012 to reach record revenues of $18.5 Advisory Services.billionDeloitte India grew 19%, and Deloitte Chinahad double digit growth. Ernst & Young Indiagrew 19.8% and E&Y China grew 11.8%.Surprisingly Asia Pacific was a weak regionfor KPMG. For PwC, revenues rose 6% inAsia.BRICThe BRIC countries – Brazil, Russia, Indiaand China – have been unquestionably the Auditshining stars in the growth story in recentyears. Though the firms do not report The audit service line, the largest in all firms,individual country revenues, there is typically accounts for almost 45% of total revenuesThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 16 of 24
  17. 17. but this proportion has been steadily gains to mitigate any losses in revenue. Anddropping across the years. In 2004, Audit Audit revenues generally held flat from 2009revenues were 52% of total revenues, but by into 2010, though Deloitte and E&Y2012, this had dropped a full 7% to 45% of experienced declines which were somewhatrevenues. The drop in Audit and also in Tax offset by increases in KPMG and PwC.revenue was offset by an increase in the From 2010 to 2011, the Audit service lineAdvisory business. Typically Audit is a grew at all four firms, with PwC growingsteady business, as publicly traded clients fastest at 6.5% and Deloitte growing slowestrenew auditor services each year with some at 5.1%.increase in annual fees. Most companiesprefer to maintain their auditors for a long From 2011 to 2012, combined Audittime, providing stability to the auditors’ top revenues grew 2.9% from $47.7 billion inline. The Audit service line did experience 2011 to $49.1 billion in 2012. The Auditsharp growth in total revenues in 2005 to service line grew at PwC at 3.3%, Deloitte2007, but this has slowed down sharply in Audit growing fastest at 6.0%, E&Y up bythe 2008-2010 years. Audit rebounded from 3.4%. But KPMG Audit shrank in US dollar2010 to 2012, but this was overshadowed by terms by 1.6%, dragging the overall serviceeven faster growth in Advisory. line downwards.The audit service line, the largest in allfirms, accounts for almost 45% of total Taxrevenues, but this proportion is steadilydropping across the years. Audit The tax service line, forms about a quarterrevenues rebounded in 2012 of the Big Four firm revenue and generally holding this percentage level across the years. Tax revenue are reasonably steady, as they derive revenue from add-on services provided to audit clients, in addition to tax services provided for transactions, complicated tax restructurings and other projects. The tax service line, forms about a quarter of the Big Four firm revenue and generally holding this percentage level across the years. Tax grew 4.4% from 2011 to 2012From 2008 to 2009, revenue for the Auditservice line for the combined firms shrank by6% in US dollar terms, and from 2009 to2010, Audit revenues dropped a further0.2%. But from 2010 to 2011, combinedAudit revenues grew a strong 5.7% from$44.9 billion in 2010 to $47.5 billion in 2011.Audit revenues performance was somewhatbetter than the Tax service line which fell 7%from 2008 to 2009 and 1.2% for 2009 to2010, demonstrating Audit’s somewhat anti-recessionary nature. Audit fees came underpressure in 2009, but firms maintained theirfocus on client service and market shareThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 17 of 24
  18. 18. Tax had a very strong growth in 2006 to In 2004, they had 22% of total revenues and2008, in line with large scale global merger this had sharply increased to 33% in 2012,and acquisition transactions activity, but at the expense of declines in Audit and Tax.posted a sharp decline in 2009 of 7%. Taxrevenues further declined by 1.2% from2009 to 2010, with Deloitte falling by morethan 5% and E&Y also declining, offsetsomewhat by revenue increases in thisservice line at KPMG and PwC. 2011 was adifferent story altogether – combined Taxrevenues of $22.3 billion in 2010 jumped astrong 7.1% to $23.9 billion in 2011. KPMGTax grew a remarkable 13%, while DeloitteTax grew the slowest at 5.2%.Combined Tax revenues of $23.9 billion in2011 jumped another solid 5.6% to $25.0 Despite this sharp growth, Advisory servicesbillion in 2012. In general, the service line had the sharpest decline of 9% from 2008 toperformed solidly for all firms in 2012, 2009, as clients slowed down transactioncontinuing on the good pace set in 2011. and restructuring activities all over the world.The growth rates for all firms was generally But Advisory had the sharpest bounce backbetween 3.6% to 8.0%. among service lines, with revenues up 6% from 2009 to 2010, as equity markets roared back, M&A increased and client demand for consulting grew proportionately.Advisory From 2010 to 2011, combined AdvisoryThe Advisory service line, forms the last revenues grew a remarkable 15.9% fromquarter of the Big Four firm revenue and $27.8 billion in 2010 to $32.2 billion in 2011.includes the broader non-Audit and non-Tax The service line grew at PwC at 20.2%,services such as Transaction Advisory, Risk Deloitte growing at 14.7%, E&Y up byManagement, and Business Consulting 14.2%. KPMG Advisory at 14.8% growth.services; and demarcations generally varyacross the firms. Owing to this catch-all From 2011 to 2012, combined Advisorynature of this category, there are many revenues grew 12.2% from $32.2 billion indrivers of top line results, merger and 2011 to $36.1 billion in 2012. The serviceacquisition activity and general business line grew at PwC at 16.7%, Deloitte growinggrowth being principal factors. at 14.1%, E&Y up by 12.9%. KPMG Advisory was the surprising laggard at 4.2% growth.Advisory services have increased theirshare of revenues. In 2004, they had 22%of total revenues and this had sharply Advisory zoomed 12.2% from 2011 toincreased to 33% in 2012 2012. All firms except KPMG recorded tremendous growthAdvisory services have been one of thefastest growers in the Big Four firms as the In 2012, the growth story became evenfirms extend their services beyond stronger. Combined Advisory revenues ofassurance and taxation through penetration $32.2 billion in 2011 jumped 12.2% to $36.1into current clients or through referrals from billion in 2012, the first time ever to cross theother firms who may be conflicted out at $35 billion threshold. Advisory is surely thetheir clients. Advisory services have star service line for all the firms.generally increased their share of revenues.The 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 18 of 24
  19. 19. Even in 2009, assuming attrition rates had dropped to 10%, new hires in 2009 would beFIRM EMPLOYMENT ANALYSIS about 85,000 equating to about 350 hires each day. And in 2010, assuming thatThe Big Four firms cumulatively employ attrition rates held steady at 10%, new hiresclose to 690,000 staff all over the world, would be 55,000 or 200 per business day inincluding partners, audit, tax and advisory one of the toughest job markets in recentprofessionals and administrative staff. This history. In 2011, assuming that attrition ratesstaggering number has been consistently on again held steady at 10%, new hires wouldthe rise from 2004, when cumulative be 98,000 or 390 per business day in aemployment was around 435,000 staff. In difficult job market. In 2012, assuming that2009, employment peaked at around attrition rates again held steady at 10%, new617,000. However, in 2011, as firms slowed hires would be 100,000+ or 500 perhiring and outbound attrition reduced, total business day in a difficult job market. Truly,employment fell by nearly 7,000 to 610,000. Big Four firms are huge seekers of talentIn 2011, the situation reversed with hiring in with correspondingly very busy recruitersline with revenue growth, boosting total even in a period of deep recession.employment by 37,000 net new hires to647,000. 2012 continues the growth trendwith total employment up 45,000 to a newrecord of 692,000. In 2012, we estimate there were only about 37,000 partners in all the Big Four firms, overseeing a steep pyramid of about 530,000 professionals Elevation to partner at a Big Four firm is a tough and long process as every professional who has ever worked at a firm knows. Partners form an elite class within these large partnerships, and only one in about 20 people belongs to this exclusive club. In 2010, we estimate there were onlyFrom 2004 to 2012, the number of people about 34,000 partners in all the Big Fourworking at just these four firms has firms, overseeing a steep pyramid of aboutincreased by around 250,000+, an increase 460,000 professionals, thus the typicalof 60% over just eight years. And while partner being responsible for about 14revenues did increase 6.4% from 2011 to professionals in 2010. In 2011, we estimated2012, net employment increased 7.1% over a small increase of about 1,000 newthis period. partners to a total of about 35,000 partners in all the Big Four firms, overseeing a steep pyramid of about 493,000 professionals,The Big Four firms cumulatively employ thus the typical partner being responsible forclose to 690,000 staff all over the world about 14.2 professionals in 2011. In 2012,with 37,000 partners and 530,000Typical annual attrition rate at Big Four firms professionals, this ratio has climbed again towas running about 15% prior to 2008. For 14.3.example in 2008, the Big Four firmscumulatively would have made about140,000 new hires to account for the loss ofprofessionals and the additional revenuegrowth. This works out to about 550 hires foreach business day of the year.The 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 19 of 24
  20. 20. Under the prior consolidation method in 2008, Ernst & Young’s global revenues were $24.5 billion which were revised down to $23.0 billion under the new combined method of reportingIn 2004, the professional to partner ratio was CONCLUSIONonly 11, thus partners are taking on moreresponsibilities in terms of professional The 2007 to 2009 recession has been themanagement and development over the world’s worst financial crisis for over 70years. years, and despite such turbulence, the Big Four firms turned in quite a creditableAnother metric that is closely watched is performance, with revenues falling by singlerevenue per partner, in 2004, each partner digits in local currency terms from 2008 towas holding up $2.1 million in revenue, and 2009. Since March 2009, global financialthis had crept up to $2.9 million by 2011 and markets had a marked improvement infurther to $3.0+ million in 2012, matching the equity values, and general businessprior peak of $3.0 million in 2008. In other conditions are in much better shape inwords, each partner was expected to bring December 2012.in and manage client revenues of nearly $3million in recent years to justify his or herposition in the highest levels of the firms. 2011 marked a return to moderate growthClearly, making partner is only the beginning and positive global macroeconomicof a series of demanding client development momentum, very favorable for all Bigand professional responsibilities down the Four firmsroad. Leading economic indicators in developed nations were on the uptrend in 2011 andERNST & YOUNG RESTATES REVENUE both OECD and emerging market countries posted multiple quarters of positive GDPErnst & Young changed their revenue growth. 2012 saw the continuation ofreporting methodology in 2009, by reporting positive trends, as stability returned to the“…combined not consolidated revenues, United States, Latin America countriesand including expenses billed to clients in continued their fast growth, Asianline with globalization efforts to harmonize economies remained strong while onlypolicies across member firms”. Under the Europe was subject to a series of sovereignprior consolidation method in 2008, Ernst & debt crises and high levels ofYoung’s global revenues were $24.5 billion unemployment. A reduced threat of USwhich were revised down to $23.0 billion double-dip recession and deflation, anunder the new combined method of optimistic outlook among global executives,reporting. Ernst & Young restated only 2008 rebounding M&A activity, continuedunder this methodology but did not restate globalization strongly favored Big Four firmprior years, thus our analysis is affected by revenue growth, as the firms participated inthis reporting constraint. an increasing level of financial activities pursued by their clients, whether it be tax restructuring or compliance, transfer pricing, mergers and acquisitions, IPOs, strategicThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 20 of 24
  21. 21. growth, risk management, IFRS conversionsor audit compliance. • The dollar has improving against the Euro and the Yen in 2011.Despite these favorable trends, in 2012, thefirms painted a backdrop of a tougheconomic climate, difficult global challenges,intense audit competition, economic For 2013, we expect 2012’s momentum torebalancing, increasing regulation, market continue for all the four firms, likely inuncertainty, a war for talent, the European the 5% to 8% range.sovereign debt crisis, the impending USfiscal cliff, and slowing growth in developingcountries as perhaps a way of providing We expected KPMG to have the strongestcontext to solid firm performance managing fiscal 2012, but actual results werethrough rough external conditions. shockingly below our expectations. KPMG Europe, its largest region, was impacted by the sharp appreciation of the US dollar against the Euro in its FY 2012 year versusThe second half of fiscal 2011 started to its FY2011 year. Also, the months from Juneproduce better growth. And this positive 2012 to September 2012 were truly difficulttrend continued strong through all of FY times for all firms; and while this was2012 reflected in KPMG’s second half results, they are likely to manifest in the 2013 performance for the other three firms. KPMGHaving likely captured the worst of 2009’s Audit and KPMG Advisory also turned inimpact in fiscal year 2009, fiscal year 2010, performance far below its peers.which ranges from mid-2009 to mid-2010,did produce small but highly welcome Overall though, actual 2012 performancepositive revenue growth. For 2012, we turned out to be above our expectations,foresaw much better revenue growth for all Audit and Tax continued their strong growth,the four firms, likely in the 4% to 7% range while Advisory continued its streak offor a variety of key factors: remarkable revenue increases. Americas grew much faster than anticipated, and• Companies have improved their bottom Asian revenue marched along their historical lines, and are moving rapidly from a trend. Even, Europe, which was fraught with mentality of cost control to a more difficult regional issues, turned in moderate optimistic attitude of aggressively growth. And of course, KPMG surprisingly seeking top line growth. This translates did post the lowest growth in US dollar terms into more need for consulting and tax among all the Big Four firms. services from the Big Four firms The Big Four firms dominate their space and• Global equity markets have been are unlikely to face any emerging positive in 2011, and 2012 points to competitors for a long time, and while further gains. Credit markets are very regulation and audit litigation do pose fluid and private equity firm activity is operating and financial risks, it is unlikely sharply up. that any of these single items will be of sufficient magnitude to generally upset the• Both Merger and Acquisition activity and status quo. Initial Public Offerings are on the rise in 2012 versus 2009, and expected to further increase in 2012. For 2013 and beyond, we foresee several• 2011 revenue has been moving up years of solid revenue growth based on prior years momentum, and likely to continue into 2012.The 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 21 of 24
  22. 22. • 2012 has shown that Big Four firms areOUTLOOK rapidly making selective acquisitions to enhance their consulting expertise.2011 and 2012 have been solid turning These value-adding services will providepoints, building upon the foundation set in additional boosts to overall revenue2010, as the world’s worst economic crisisfades into the rear view mirror. • Growth in developing markets such as Brazil, Chile, East and South Africa,For 2013 and beyond, we will see good Middle East will be strong and deep asrevenue growth for all firms, driven by increasing financial sophistication willfavorable economic circumstances. In create demand for Big Four audit, taxparticular, for fiscal year 2013, we see a 5% and advisory servicesto 8% overall growth for all the firms, withparticularly good performance in Advisory, • Global macro factors such as lowAsia and even North America. interest rates, improving equity markets, weaker Japanese Yen and Euro willThe Big Four firms have participated provide impetus to cross-border M&Aextensively in the explosive growth in theemerging markets, and while it will be harder • Adoption of IFRS standards all over theto grow at high levels from an already huge world will accelerate in 2012 andrevenue baseline, now exceeding $20 billion beyond, necessitating externalfor each firm, the firms have demonstrated assistance from Big Four auditors totremendous global breadth and depth to effect implementation and compliancebenefit from any growth or even changes intheir client base. Particularly, we see some • Big Four firms are ideally situated tosolid factors to drive growth in the near to gain business in helping clients dealmedium term, for 2013 and beyond: with increasing regulations all over the world, particularly in the financial sector,• Advisory will strongly benefit from but also in environmental reporting, continuing momentum and the Big Four energy and enhanced investor analytics. firms’ increasing scope and penetration in this sector. • Continued absence of credible and scaled competition will perpetuate the• Tax will directly benefit from domination of Big Four firms in the Audit globalization, compliance, M&A and and Tax markets, notwithstanding any complex supply chains efforts in European zone to diminish Big4’s near monopolies• Audit will be challenged by intra-firm competitiveness and client pressures on 2013 will also be an interesting year to rates and pricing. watch for any changes in Big Four rankings: whether PwC will be able to maintain its lead• There is already higher penetration into over Deloitte, and whether KPMG will post emerging markets which have better better revenue results. We will also watch growth profiles. More importantly, Asia whether KPMG can return to peer-level has become a more significant and growth in 2013 and can reverse the modest highest-growth region for all firms - both performance seen in 2012. factors will help drive higher revenue growth. 2013 will also be an interesting year to• Advisory has become a larger watch for any changes in Big Four component of revenues and continues rankings: whether PwC will be able to its strong year-on-year revenue growth. maintain its lead over Deloitte, and Both factors will be propel total growth. whether KPMG can further shrink its gap with E&YThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 22 of 24
  23. 23. Notes Use Of This AnalysisAll figures are in United States dollars You may reproduce or distribute parts or whole of this analysis, but prominent andDisclaimer full attribution should be given at all times to:Source of figures for this analysis arepublicly available financial statements and / “The 2012 Big Four Firms Performanceor press releases issued by Deloitte & Analysis by www.Big4.com”Touche LLP, Ernst & Young LLP, KPMGLLP and PricewaterhouseCoopers PwC LLP You can also provide a link to thison their website or on the internet. internet address URL: http://www.big4.com/analysisBig4.com believes in these numbers andanalysis, but does not guarantee their The full study can be downloaded inaccuracy. Adobe pdf format from this URLSome numbers and ratios have beenestimated due to non-availability ofinformation. Numbers may not add due to Contactrounding. For further information, please contactAttribution Big4.com:Full attribution for cover page photograph is Phone: (866) 690-5050due to Mark Chandler Photography (all Email: Marketing@Big4.comrights reserved by Mark ChandlerPhotography) at Yahoo Flickr Creative The Big Four Job BoardCommons. The Big Four BlogAll logos and trademarks are copyrights of Big4 on Youtubetheir respective owners. Big4 on Twitter Big4 on Facebook Big4 on LinkedIn Big4 on XingThe 2012 Big Four Firm Performance AnalysisJanuary 2012www.Big4.comPage 23 of 24
  24. 24. THE 2012 BIG FOUR FIRMS PERFORMANCE ANALYSISThe 2012 Big Four Firm Performance AnalysisJanuary 2013www.Big4.comPage 24 of 24

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