Oligopoly. Do you know what it means? The ‘Big 4’ global firms have captured between 70% and 80% of audit revenue worldwide and in this exclusive interview with the CEO of HLB International, Joyce Njeri delves deeper to find out how the firm continues to grow its market share amid intense competition… 

Rob Tautges, Chief Executive Officer of HLB International.

Rob Tautges, Chief Executive Officer of HLB International.

COMPETITION IN consultancy business is healthy and robust and although the audit market is dominated by the Big Four accounting firms, mid-tier entities should feel really good about their business prospects.

This is because when your largest competitors have a stranglehold on the largest clients, it’s probably nice to see how much opportunity they are passing up. One man who knows this just too well is Rob Tautges, the Chief Executive Officer of HLB International, a network of independent professional accounting firms and business advisers.

Rob took over the reins as chief executive of HLB International from Peter Frost in November, 2009 and his present role involves driving, developing and promoting the network’s global presence. Formed in 1969, HLB International network has 15,676-strong staff based in 447 offices in more than 100 countries. The firm is the 12th-largest accounting network in the world.

Earlier, Rob was a senior partner at Minnesota-based firm HLB Tautges Redpath from 1995 to 2009 before joining the international network. He was Chairman of HLBI, a volunteer-type position… but he was still managing his practice. Towards the end of his chairmanship, Frost was retiring and that’s when Rob stepped in.

The London-based CEO was recently in Dubai where he spoke exclusively to Accountant Middle East about how the network continues to spread its tentacles in the region as well as internationally; Excerpts of the interview…

Here in the Middle East, most top listed companies are audited by the ‘Big 4’ accountancy firms. As the region experiences growth particularly in the oil and gas, telecoms and financial services, do you think there’s room for other independent financial consultancies entering the market?
There’s definitely room for new players. It is true that the ‘Big 4’s dominance is maintained by institutional preference, however, mid-tier firms view the oligopoly of these large audit companies as non-threatening. Most governments, banks, stock markets and other institutions require that their major clients use only a ‘Big 4’ auditor, and when you get to other listed companies there’s no reason why a mid-tier network cannot be able to service it. Firms such as HLB, UHY, PKF, BDO, and Grant Thornton among others have demonstrated they are big enough to conduct effective audits on large organisations, and continue to do so.

We certainly have witnessed intense competition in the recent years, which has actually worked in favour of mid-tier firms. The growth of the private sector, the oil and gas, telecoms and financial services has also encouraged greater competition. This competition has fueled the natural process of consolidation and organic growth of mid-tier companies.

At HLB, we have managed to rank top after being able to invest heavily in systems, recruit the best caliber staff, effectively manage risk of failure and certainly adopting the international standards as demanded by institutions like the International Accounting Standards Board (IASB).

HLB’s audit services range from IT, HR to finance. As organisations today work towards managing risks and cutting down unnecessary expenditure, what do you regard as the critical operational areas to be watched in the everyday running of the business?
When you look back to some of the catastrophic events that businesses have encountered in the recent past, it is evident enough that all facets of a business need to be well looked after. Take for instance the oil spill in the Gulf of Mexico. The leak and its attendant damage cost BP and several other companies billions of money. Last month, hackers stole ATM card personal information from millions of people and used the information to rob money. We have also witnessed how badly constructed buildings have collapsed, putting people’s lives at risk and causing businesses unprecedented losses.

With supply chains, global trade and financial markets all intricately linked, risks become apparent and with significant impacts on company operations. So, what do you need to counter this? We cannot over emphasise the importance that auditors/accountants play in risk management.

Businesses need to be nimble, they need to be flexible, and they need to be able to respond to matters as they occur and to anticipate them as well. This is referred to as risk management. When you have a trusted adviser who can assist you in seeing what’s around the corner, you would be able to take very specific steps to minimise the effects.

Governments have been putting measures in place in an effort to minimise bad reporting mistakes and fraudulent deals, particularly following the financial crisis. With major audit firms like HLB which market themselves as seamless global firms, I’m sure some of these legislations are putting auditors in a bind. For instance, your firm here in the UAE can do things that are forbidden in, say, in the UK, despite their common membership in the HLBI network. In your opinion, how are these country-specific legislations affecting the operations of HLB’s string of legally independent local partnerships?
The regulatory environment is becoming tight. Factors that likely have led to the current markets regulation include the existence of reputation effects (both positive and negative), liability risks and insurance costs. Countries have legislated limited liability for auditors.

One main challenge arising from this is that of liability of audit firms in the event of negligence. Damage claims arising from alleged professional negligence are increasing, and if you remember the scandal of Enron and the collapse of Andersen & Co, what this means effectively, is that auditors are compelled to accept the business risk of their clients. On the other hand, these regulations have favoured big accounting firms, with greater liabilities being imposed on auditors and directors.

The very foundation of public accounting is to win and earn trust and something that is so foundational to the profession at most fronts… looks to welcoming those rules and regulations. The side that we have to stay balanced with though, is the practicality of some of the regulations and the cost.

If the regulation is such that it would increase a typical audit cost by a certain percentage, we expect the authorities that are introducing the regulations to understand the full impact of what is really is. When we look at different countries there are basic professional principles that we expect them to adhere to even if their (firms) local country has asked for a regulation in that particular area.

All HLB member firms for instance, we expect them to comply with IASB standards. Some countries have passed regulations by requiring international standards for audit, but for HLB member firms, we set our standard at that minimum. The regulations that are more troublesome for me are those that want to somehow tip the natural forces of competition. Some are saying that perhaps others are too dominant or regulations move work away from networks. The major policy challenge is to identify and remove the restrictions which are unnecessary or disproportionate to achieve public interest goals.

Still on the same issue, with an aim to crack whip on tax, audit and investment advisors possibly indulging in unfair trade practices, some governments as well as regulatory authorities are putting in place strict operational policies and laws for them, including putting a ceiling on fees charged by them. What is your take on this?
My feeling is that putting a ceiling on fees charged is a gross mistake. If so many procedures need to be done in the business to protect public interest, to be able to give a very clear audit opinion, and then the regulators come in and say you have to do all these within a certain ceiling… it puts pressure on the accounting firm to stay profitable and to hire qualified staff. And if that plays out, at the end of the day it may lead to lower quality report that doesn’t protect the public interest.

SWIMMING WITH THE SHARKS: “It is true that the ‘Big 4’s dominance is maintained by institutional preference, however, mid-tier firms view the oligopoly of these large audit companies as non-threatening.”

“It is true that the ‘Big 4’s dominance is maintained by institutional preference, however, mid-tier firms view the oligopoly of these large audit companies as non-threatening.”

The credit crunch of 2008-2010 and debt crises have introduced the world to a new order of magnitude in financials. Businesses have been forced to establish new models to cope and stay liquid and competitive. What in your assessment are the most common challenges financial consulting businesses are facing in today’s competitive marketplace?
Accountancy firms are facing the same issues that other businesses are, that is, if many of their clients’ needs are less or are out of business… that means the revenue of the accountancy firm is down. So they need to consider the efficiency of procedures that they put in place, they also need to right-size their resources for the business, and they also need to identity greater opportunities and diversify their services.

Most of the market zones where HLB has established operations are still going through financial and economic challenges. For instance here in the Middle East we have countries that are still restive following the infamous Arab Spring. The UK and the entire Euro zone have lately been in the news as economies deploy mechanisms for recovery. Kindly share with us how HLB continues to grow its revenues internationally under these conditions.
As I talk with our firms around the world and specifically here in the Middle East, the economic downturn is certainly troublesome, but it also creates opportunities. Of course on the face of things, the downturn and sluggish jobs market should be a concern for all professionals, however, the value of a chartered accountant in an economic downturn goes up. The measures that their clients need to survive and thrive really relies on sound and solid advice.

Businesses and organisations of all sizes recognise the importance of financial experts in times of prosperity and of hardship, and this means there are always opportunities for accountants. Firms become even more conscious of their finances during an economic downturn as they look to deploy anything they can do to improve the health of the bottom line, or simply gain strategic insight from the balance sheet.

As such, businesses recognise the need to hire accountants to maintain up-to-date records. Similarly, during the economic crisis, governments impose tough corporate governance and regulatory rules. In this case, accountancy professionals play an important role in helping businesses to deal with complex rules and regulations.

HLB has greatly capitalised on this fact and the worldwide expansion of our network has largely appeared to be recession proof, as we continue to hire on all continents to operate effectively in a globalised business world and increase our presence, particularly is emerging markets.