Accountants: flush with cash, looking to buy

There is one industry which should be happy with increasing regulation in Australia: accounting. Most of the industry’s revenue growth over the past few years has come at the hands of audit compliance and financial reporting.

"A recovering Australian economy has also helped accounting firms, with high levels of investment in natural resources."
Nicole Franklin, Contributing Editor, BlueNotes

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More fundamentally, however, increasing per capita income in Australia, more and more individuals and businesses are turning to the experts for advice on how best to manage their wealth and taxation. A recovering Australian economy has also helped accounting firms, with high levels of investment in natural resources followed by an uptick in merger and acquisition activity between the 2010 and 2012 financial years requiring due diligence, advisory and audit services.

And now there is the just-signed Free Trade Agreement with China which delivered more on facilitating trade in services like accounting than most expected. Indeed services is one of the 'four pillars' of the agreement.

This improved position for accounting has not been without headwinds however, as recent research to emerge from the ANZ Client Insights and Solutions team reveals.

Revenue growth for the top quartile of firms grew from rates of 10 per cent in fiscal 2010 to a high of over 25 per cent in fiscal 2011; returning to just below 10 per cent in fiscal 2014. For the lowest quartile of firms, a negative rate of growth in 2010 was turned around to rates of around 1 per cent in fiscal 2014.

Increased uncertainty about the economic environment has also meant large accounting firms have faced deteriorating working capital. Clients have held on to their cash for as long as they can, using it for their own operating purposes while extending payment terms.

Despite these complexities, accounting firms have increased operating margins from around 10 per cent to 15 per cent between fiscal 2010-14. This includes a slight dip in profit from 2013 to 2014 as mid-tier firms have started to place an increased amount of pressure price-wise on the ‘Big 4’ – PwC, KPMG, Deloitte and EY.

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Given revenue growth and margin improvement, many firms are now in a position with large cash reserves on their balance sheet. Debt levels have dropped from a ratio of around 2.5 times EBITDA (earnings before interest, tax, depreciation and amortisation) to under 1 times EBITDA.

This leaves firms in a flexible financial position and able to look for opportunities to grow through acquisitions or potentially invest in large-scale projects to match their strategic objectives, such as investing in technology to improve their service offering.

This type of activity takes many forms, including expanding and diversify revenue streams in order to reduce volatility. For example, KMPG are focusing on providing legal services that align with their tax practice. EY has engaged in many strategic alliances, expanding their business to include market research and specialist energy modelling with Sweeney Research and ROAM Consulting respectively.

Firms are increasingly looking to automate the lower value services that they provide via cloud-based accounting software and automation. These will be major disruptors in the industry in coming years.

Source: Accountants Benchmark Report – Proactive Accountants Network (2014), BRW (2013), Publicaccountant – The official Journal of The Institute of Public Accountants (2014 & ANZ Analysis.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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