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Five big issues in professional services

Lucy Mair looks at the hot topics making headlines in the industry
Commercial awareness

1. Big Four monopoly

The professional services industry is dominated by the Big Four firms: Deloitte, Ernst & Young, KMPG and PwC. These are multinational conglomerates which, between them, audit all but one of the FTSE 100 index of leading UK-listed companies and tower over the accounting, tax and consulting landscapes, and hire thousands of graduates every year.

The monopoly has arisen through a combination of strong, historic relationships between the Big Four firms and their clients. But slightly smaller firms, such as Grant Thornton and BDO, and industry regulators argue that the monopoly stifles competition, which has driven up the price of services while reducing their quality.

At the recommendation of a House of Lords inquiry, the Competition Commission began investigating the Big Four monopoly in 2011 and is expected to publish its initial findings in early 2013. Meanwhile, the EU has put forward proposals to introduce mandatory joint audits of large corporates, which would require Big Four firms to share work with their smaller rivals.

2. Audit and non-audit services

The main services offered by professional services firms are audit, tax, corporate advisory and management consulting, but there's debate in the industry about whether audit services should be kept separate and independent from non-audit services.

An audit is an assessment of a company's financial records and procedures, and its objective is to check whether or not the company's accounts give an accurate view of its financial position. It's therefore essential that audits are independent and unbiased. But, if the auditor is also providing the company with advisory and consulting services, there could be a serious conflict of interest leading to audits that aren't objective.

To guarantee the independence of external auditors, the Auditing Practices Board in the UK already restricts professional services firms from offering advisory services to their audit clients. The European Commission is proposing that reforms to separate audit and non-audit services be introduced across the EU, which could shake up the business model of professional services firms and require them either to break up or ring-fence their audit arms.

3. The financial crisis

The Big Four professional services firms came under fire when the financial crisis hit in 2008. It has been suggested that some auditors were not sufficiently rigorous in their analyses of the accounts of banks and other financial institutions, and they've been criticised by the House of Lords economic affairs committee for failing to spot, or give any warning about, the risks building up in the banking sector.

To maintain auditors' objectivity and prevent similar risks from falling through the cracks again, EU regulators have suggested a rotational system in which an auditor's tenure with a client would be limited to a period of between six and 25 years - shorter than the current average relationship of 48 years. The Competition Commission is expected to make similar recommendations in the UK.

4. Tax avoidance

Some of the biggest headlines over the past few months have been about tax avoidance schemes; from comedian Jimmy Carr using an off-shore company to shelter a reported £3.3 million a year from the taxman, to the likes of Starbucks exploiting loopholes to pay an effective corporation tax rate of 0.3 per cent in the UK instead of the standard rate of 24 per cent.

Tax audit and management are some of the biggest business areas for professional services firms. Tax advisers help their clients, including high net-worth individuals and multinational corporations, legally reduce the amount of tax they pay on their earnings and business transactions. As more questions are asked about the ethics of tax avoidance, and the government seeks to crack down on the practice, it could have an impact on the work of professional services firms.

5. Administrations

Professional services firms are also leaders in providing restructuring services to businesses in financial trouble. The past year has been especially busy for administrators as they've been called in to help a number of high street stores, including Peacocks, Game, JJB Sports, Comet and now Jessops.

Administration is a rescue mechanism for companies that become insolvent - when the value of their assets isn't enough to repay their debts - and involves administrators stepping into the shoes of the management, running the company in the interest of creditors and often looking for a buyer to rescue the company. Economic conditions on the high street are unlikely to pick up in the near future, meaning restructuring services will continue to be an important and high-profile line of work for professional services firms.