Networks of professional services firms date to the 19th century with correspondent banks. In order to secure assets, banks established networks and internal regulations for the transfer of funds. These networks were the first organizations that operated independently of the members. The network established a set of common standards with an organization that applied these standards for the benefit of members and clients.[1] The correspondent banking system also represented the first form of a global structure that prevails today.
In the last 25 years, the trend toward networks has been accelerated by a number of factors including (1) globalization,[2] (2) competition, (3) client regulations, and (4) the need for access to information. It is simply impossible for a single professional services firm to be in every market where their clients require services.[3] Network membership addresses each of these environmental factors. As an alternative structure, members can have access to offices in every city in the world. They can compete against the much larger entities and address the myriad of new regulations affecting their clients. Access to information is essentially unlimited.
The networks themselves are a reflection of the professions in which they are found. In professional services, the principal of client-driven networks was first applied to accounting firms and later was extended to the legal profession. The accounting networks reflect the clients’ needs for audit services in many different states and countries. The legal networks reflect the fact that large law firms with offices in other states or countries sought to seduce the clients of local firms by offering their more extensive services. The members need a network to be able to offer the same level of services. An organized and well-managed network is the best option for independent firms.
Networks are, however, more than organized structures in which members can service clients. They are entities separate and distinct from the members. In this sense networks can establish a recognizable internal and external brand for their members.[4] Internal branding of a network instills confidence in it and its members. Externally branding a network can increase the actual price of its services by distinguishing its brand from those of its competitors.[5]
Today there are more than 170 legal networks[6] and more than 40 accounting networks.[7] Their sizes range from multibillion-dollar global networks, such as the Big 4, to small specialist associations.[8] Both face similar issues. Each must translate a model into concrete results for members and their clients. To see how this is done, it is necessary to look at the different levels of development of individual networks.
Accounting Networks – Setting the Standard for Networks
“The accounting profession in the U.S. was built upon a state-established monopoly for audits of financial statements.”[9]
Accounting networks arose out of the necessity for public American companies to have audited financial statements for the Securities Exchange Commission (SEC).[10] For more than 70 years, the SEC has continually sought for greater coordination and consistent quality in audits everywhere in the world. Networks were the logical model to address these requirements. They expanded outside of the United States, since financial results had to be audited wherever a company conducted business. In the U.S., the Public Company Accounting Oversight Board (PCAOB) regulations provide for inspection of non-United States firms. Without a network with common standards and internal means of communications, conducting the required audits would not be possible.[11]
There were other profession-based factors that favored the growth of accounting networks. As a result of competition for the audit work, consolidation was inevitable. These include the fact that a network can establish a brand. A brand establishes the credibility of the network and allows the individual members to charge more.[12] Creating a brand is very difficult when all of the members of a network are providing essentially the same services.
Being a network member establishes that the firm is part of a large group. Additionally, the larger the firm, the more likely it will be invited to render auditing engagements. A large organized network allows for spreading the costs in order to price competitively. Ultimately, size is the only real means of differentiation that is readily available on accounting firms to assure clients that they can do international work.[13]
Networks also reflect the clients’ needs for seamless worldwide services because they are more efficient and cost-effective. This was clearly illustrated by Freidheim.[14] From the perspective of the accounting firm, a global regulated organization with consistently applied standards significantly reduced the risk. However, increasing the size of the networks can enhance legal liability risks[15] and quality control issues that have not been resolved.[16]
With these factors in play, some networks continued to grow; others remained in a stasis position. Individual members of networks began to offer other services related to accounting. These services included forensic accounting, business appraisals, employee benefits planning, strategic planning, and almost anything associated with financial parts of the client’s business.[17] The network’s structure easily accommodated these services and their geographical expansion.[18]
As the Big 8 consolidated to the Big 6 and then the Big 4, new networks naturally developed to emulate them. BDO and Grant Thornton were the earliest followers. Networks were then developed to serve mid-market companies and private businesses. New networks also sprang up as an extension of a single accounting firm in the same way the Big 8 were formed. New structures were created to further extend the networks.
The largest accounting networks adopted trade names that each member used. The names of the original firms that became part of the networks were lost and replaced with trade names. For example, Price Waterhouse joined with Coopers & Lybrand to become PricewaterhouseCoopers, which became PWC. The perception was created that these networks were more than networks, but single entities rather than completely independent firms. This was never the case. The result was that the Big 8 concept was established, which separated the eight firms from all other accounting firms, which have consolidated to the Big 4.
[1] Correspondent Banks, www.svpco.com/payment_services/check_image_exchange/connect/001591.php (last visited Jan. 30, 2016).
[2] Harvard Law School Center on the Legal Profession reported in the Am Law Global 100 that U.S. law firms had 10 percent of their lawyers based outside of the U.S., as compared to 26 percent of the non-U.S. firms. The U.S. firms averaged five offices. Harvard Law School, www.law.harvard.edu/programs/plp/pages/statistics.php#sotflf (last visited Jan. 30, 2016).
[3] C. Silver, Globalization and the U.S. Legal Market in Legal Services – Shifting Identities, 31 L & Poly in Int’l Bus. 1127-29 (2000); Rachel Baskerville & David Hat, Globalization of Professional Accounting: The Big 8 Entering New Zealand, (University of Exeter, Dept. of Accounting, Working Paper, 2006), available at http://hdl.handle.net/10036/29637; see also H. A. Perera et. al, Globalization and the Major Accounting Firms, 13 Australian Account. Rev., 27, 27-37 (2003).
[4] See infra Chapter 6, Marketing the Network – Creating the Brand.
[5] M. Firth, Price Setting and the Value of a Strong Brand Name, 10 Int’l J. of Res. in Marketing 381, 381-386 (1993).
[6] See infra Appendix 2.
[7] Philip Smith, Top 40 Networks 2015: The Survey, Accountancy Age, July 9, 2012, www.accountancyage.com/aa/analysis/1776670/top-35-networks-2013-the-survey.
[8] Networks and associations of accounting firms are unusually ranked by the cumulative revenues of all of their members. They can be ranked by total staff, professionals, and partners.
[9] W. E. Olson, The Accounting Profession in the 20th Century, The CPA J. (July 1999).
[10] For the history of accounting networks, see Mark Stevens, The Big Six (1991); see also Stephen A. Zeff, How the U.S. Accounting Profession Got Where It Is Today, 17 Accounting Horizons 189-205 (Sept. 2003); see also. H. Lenz & M. Schmidt, Das Strategische Netzwerk als Organisationsform internationaler Prüfungs- und Beratungsunternehmens – die Entwicklung zur „Global Professional Service Firm“, in J. Engelhard & E.J. Sinz, Kooperation im Wettbewerb. Wiesbaden 113-150 (1999); see also J. Klaassen & J. Buisman, International Auditing, in Comparative Int’l Acct. (Chris Nobes & Robert Parker Eds., 6th ed. 2000); Michael Barrett, et. al., Globalization and the Coordinating of Work in Multinational Audits, 30 Acct., Orgs. and Soc’y 1, 1-24 (2005).
[11] Id.
[12] Van Alstyne, supra note 8.
[13] Rachel Baskerville & David Hat, Globalization of Professional Accounting: The Big 8 Entering New Zealand, (University of Exeter, Dept. of Accounting, Working Paper, 2006), available at http://hdl.handle.net/10036/29637, citing Greenwood et. al., Biggest is Best? Strategic Assumptions and Actions in the Canadian Audit Industry, 10 Revue Canadienne des Sciences de l’Administration 308-322 (1993).
[14] Freidheim, supra note 14, for a discussion on the history of networks.
[15] See infra Chapter 7, Regulations and Other Legal Considerations for Networks.
[16] “In some respects, the nature and structure of the industry today is more likely to hamper than help in that process (quality control). Specifically, we noted the geographic dispersion of the Big Four’s accountants, the many different cultures in which they practice, and the many legal systems to which they are subject. All of these factors make it extremely difficult to maintain uniform audit and performance standards. Participants also voiced concern about the characteristic organizational structure of a Big Four firm, an amalgam of partnerships with separate legal identities operating under the same brand name. While it may be unrealistic to demand that each such confederation of partners become a single partnership, we believe each firm can do far more to raise standards and levels of expertise at each of these related partnerships globally.” The Future of the Accounting Profession, The 103rd American Assembly, 10 (Nov. 13-15, 2003) www.iasplus.com/resource/americanassembly.pdf.
[17] See Deloitte, www.deloitte.com/view/en_US/us/siteMap/index.htm, for a list of services that Deloitte LLP offers.
[18] Aharoni, Internationalization of Professional Services: Implications for the Accounting Profession, in Brock et al., Restructuring the Professional Organization (1999). The internationalization process continues; see also Adam Jones & Simon Rabinovitch, Accounting: Stalking the Big 4, Financial Times, April 16, 2013, at 9, discussing the development of very large indigenous accounting firms in China.