Medium-sized accountancy firms began to act in defence of their market shares in the 1970s; they tried to create their own international networks, but their affiliations tend to be looser than those of the big international accounting firms.28 The shares of these firms in the market for audit services is greater in developing countries in comparison with industrialized countries, where the big firms dominate (CIFAR, 1995, p. 379). In certain other countries as well, such as Austria, France and Japan, a number of fairly large companies are audited by firms other than those affiliated to the big international accounting firms, although the latter have established a commercial presence there too.
Beyond the large and medium-sized firms (either with or without international linkages) there is a third category of firms, the small local ones. These are numerous in some countries (e.g. United Kingdom and Ireland), where they provide bookkeeping and attestation services to small companies. Some small firms are “niche market” firms, specializing in a particular service, e.g. tax consultancy or corporate finance.
Auditing has been (and still to a large extent is) at the core of the services offered by the professional accountant. The nature of auditing has shaped the methods of expansion and internationalization that the international accounting firms have undergone. Trade in this basic service is still subject to substantial legal and technical barriers. These limitations, and the fact that audit services are very difficult for clients to monitor - customers tend to rely on suppliers to specify what they should be demanding as well as to supply the service - would seem to indicate that internationalization will not occur and that domestic supply of the services will dominate (Davis et al., 1993, p. 113).
However, the large international accounting firms seem to represent a striking example of the internationalization of service firms in practice, and they are far more internationalized than, for example, lawyers (Flood, 1995, pp. 139-169). Cross-border sales of services are characteristically fraught with danger and few customers wish to venture into new markets without some kind of external support. When, for example, a TNC based in the United Kingdom is interested in opening a business in Spain it will usually be too unfamiliar with the local market for services to risk purchasing auditing services from small, unknown firms. It will therefore buy such services from one of the big firms, whose services are of a standard, known, quantity and quality. They are also likely to choose to use the same firm as they use in their home country.29
In addition to the legal and technical barriers, the main reason for the small volume of cross-border trade (for example, in the European Union) in accounting services is that the international networks of firms discussed above have been able to develop their own solutions. They mainly rely on licensed accountants in the host countries to supply their services locally, and refer their work to the corresponding members of the network in the relevant countries when international services are needed (European Commission, 1995, pp. 24-25). At the same time, however, these multi-domestic networks of partner firms are gradually becoming more tightly knit and information technology is playing a key role in this process. A number of intermediate service products such as accounting and auditing software are highly tradable. These products may only constitute a limited fraction of the overall economic activity of firms, but they are important for the development of a standardized set of products and s tandardized quality control that can be enforced throughout the entire organization. This is likely to further promote international harmonization of accounting practices and services. Although there may be national variations in regulations, the working routines involved in the production of accounting services will converge. Convergence of capital markets will also cause a convergence towards international accounting standards, further accelerating the demand for highly qualified accountants. Thus, the tradability of accounting services will be greatly influenced by the existence of accountants who can meet international professional qualification requirements. Advances in information technology applied to working routines and advances in professional training will facilitate further trade in accounting services.
Notes
1. 'Regulated services” refer to those services which the accountancy profession carries out which are
regulated through law. “Reserved function” refers to those activities which only qualified professional accountants can carry out. Auditing is the largest and most important of these. (Based on definitions used in IFAC, 1995.)
2. An example are the attempts by the Securities and Exchange Commission (SEC) in the United
States to ban accountancy firms from offering other services such as consulting to audit clients. Although the SEC backed down in the face of an aggressive battle by accountants resisting such restrictions, some SEC -mandated rules remain - such as restrictions on the sort of work that accountants’ affiliate firms can undertake for audit clients (see The Economist, 3 March 2001.) The final rule of the SEC on auditor independence can be found at http://www.sec.gov/rules/final/33- 7919.htm. Non-audit services that have been placed under more restrictions as a result of the final rule include bookkeeping and other services related to the audit of clients’ accounting records, financial information systems design and implementation, appraisal or valuation services and fairness opinions, actuarial services, internal audit services, management functions, human resources, broker-dealer services and legal services.
3. United States estimated revenues for employer and non-employer firms in accounting, tax
preparation, bookkeeping and payroll services (North American Industry Classification System) were $76.3 billion in 1999 (up from $70.4 billion in 1998). See http://www.census.gov/svsd/www/sas54.html. (It should be noted that payroll services, included in those figures, are not commonly provided by accounting firms.)
4. The industry was dominated by the “Big Eight” in the 1980s and the “Big Six” until the later 1990s.
Today, it is reduced to the “Big Five” as a result of mergers driven by globalization and increased competition.
5. See The Economist, 3 March 2001, p. 61.
6. See International Accounting Bulletin, “World Survey”, December 1995.
7. See Clolery, 1994, pp. 16-56. This survey shows clearly the regional differences in specialization
and business strategy for the same accounting firms.
8. See Journal of Accountancy, January 1996, pp. 20 and 25.
9. International Accounting Bulletin, “World Survey” Supplement, December 1993.
10. See, for instance, UNCTAD (1994c): An overview of current developments at the global level in
the field of accounting and reporting by TNCs is also provided in chapter I of UNCTAD (1995, pp. 2-17).
11. Often, reputation is related to the size of a firm’s operations; see Aharoni (2000, pp. 135-137).
12. The Eighth Directive was adopted as a new Company Law Directive in 1984 (84/253/EEC) and
should have entered into force in member States before 1 January 1990. For various reasons, its implementation has been severely delayed, and an assessment in 1993 indicated that several of the large EU countries had merely made minor modifications to their national legislation to accommodate the intentions of the directive. See UNCTAD (1994b), particularly chapter VIII, pp. 177-204.
13. There are about 138,000 registered auditors - “approved persons” in EU legislation terminology.
The extent of mutual recognition of registered auditors is limited. It varies between 20 and 40 per cent annually for the whole EU. (Information based on Financial Times Information Limited (2000), and inquiries with the European Commission (Internal Market Directorate General, Financial Markets - Financial Reporting and Company Law Unit), and the secretariat of the Fédération des Experts Comptables Européens.)
14. The principal sources of information were: Fédération des Experts Comptables Européens, Survey
of the Activities of Professional Accountants in Europe, 1995; National Economic Research Associates, Competition in European Accounting: A Study of the EC Audit and Consulting Sectors, 1992; and Massachusetts CPA Review: A Rainbow of Consulting Services, 1992.
15. EDIFACT (Electronic data interchange for administration, commerce and trade) is a common standard developed in 1987 under United Nations auspices and adopted by the International Organization for Standardization (ISO). It defines rules for the electronic exchange of standardized documents between different locations and thereby allows communication between users of different hardware and software. See Lanvin (1993, pp. 258-259).
16. Based on draft recommendations prepared by the Western European Edifact Board (1995); and on
Schlieper (1995).
17. ZZZZ Best claimed to be a significant Californian restoration business. However, the company
existed only on paper. Its accounting firm failed to detect the fraud, probably because it agreed to restrict its examination for reasons of confidentiality. Among others things, the accounting firm agreed not to disclose the location of the buildings under restoration to third parties and not to make any follow-up telephone call to any contractors, insurance companies or building owners. See Stevens (1991, p. 271).
18. Consolidated accounts were a common feature of financial reporting in the United States by 1910,
although not legally required until much later. Developments were much slower in the United Kingdom, but by 1939 the London Stock Exchange was requiring directors of holding companies seeking to issue shares to produce both a consolidated balance sheet and a consolidated profit and loss account for the shareholders (see Edwards, 1989, pp. 230-232). They became compulsory in the United Kingdom for annual accounts following the 1948 Companies Act. In some countries in Europe they did not become compulsory until after adoption of the Seventh Company Law Directive of 13 June 1983 into national legislation in the late 1980s.
19. It is now known as Andersen Worldwide SC following a 1996 name change.
20. See Cooper et al.(2000, p. 113).
21. See, e.g. Arthur Andersen Annual Report 1995.
22. Davis et al. (1993, p. 114). This example is not chosen accidentally. In 1989-1990 some firms did
not follow their international partners in an internationally organized merger. For example, in the United Kingdom and in the Netherlands, Deloitte did not join DRT (Deloitte Ross Tohmatsu) as it then was, but instead became part of the Coopers & Lybrand international network. In Germany a major firm (Treuarbeit AG) formerly owned by the German Government joined Coopers & Lybrand and dropped its earlier link with Price Waterhouse.
23. See http://www.fas.org/irp/congress/1992_rpt/bcci/01exec.htm.
24. See http://www.numa.com/ref/barings/bar08.htm.
25. This description assumes a degree of choice on the part of the national firm once it has joined the
international firm. However, in some cases it seems that the national firm - through compulsory and voluntary staff changes and organizational transformations - may tend to lose much of its independence (if not legally, then de facto).
26. See Accountancy , July 1996, p. 17.
27. When Arthur Young, the auditor of Pepsico, merged with Ernst & Whinney, which was the auditor
for the rival company, Coca-Cola, the latter apparently told the merged firm, Ernst & Young, that it must choose between its two clients. Ernst & Young chose to keep Coca-Cola, and thus lost Pepsico as a client. The Pepsico audit was subsequently undertaken by one of the international rivals of Ernst & Young, namely KPMG. See Cypert (1991, p. 237).
28. For more details, see NERA (1992, p. 11); and Daniels et al. (1989, p. 96).
29. It has been argued - by Davis et al. (1993, pp. 105-108) - that many multinational clients choose
not to exploit the economies created by production integrated over borders, i.e. they do not choose to use the same professional accountancy firm. However, they quote evidence from 1983, which is moreover limited in geographical scope (the United Kingdom). CIFAR (1995, vol. 2, pp. 372-374) suggests that this rather overstates the case. As noted earlier in the text, studying a sample of large subsidiaries, CIFAR found that in a high proportion of cases big international accounting firms tended to audit both the parent and the subsidiary, whether it was in the same country or not.