BDO hails landmark year due to merger and organic growth
The merger with Moore Stephens LLP and the shifting sands of the UK audit market have driven BDO to a “landmark year” with revenues of £578m.
Boasting a 25% increase on the previous year and revenues of £578m, BDO leapfrogged rivals Grant Thornton into the coveted Top Five accountancy firm position, thanks in part to its merger with Moore Stephens back in February this year.
The merger has significantly contributed to BDO’s fortunes, with profits up by 26% to £134m which includes five months of post-merger profits.
BDO’s managing partner Paul Eagland hailed this a “landmark year” for the firm, with the 15% organic growth enhanced by the merger.
Speaking to AccountingWEB, Eagland explained the firm’s ambitions to challenge its larger competitors in all areas of audit, tax and advisory work.
“Lots of firms in the big market recognises that there is much opportunity, particularly as there is a need to invest in people, IT, and robotics,” said Eagland. “At the same time, there is, of course, the audit reform. Depending on how that lands, that should provide a fair number of opportunities.”
The mid-market is ripe
Where the market opportunities have paid off for BDO is in the performance of the mid-market. The resilience of the 30,000 mid-market companies in the UK (who BDO call the “entrepreneurially-spirited client base”) against an uncertain political and economic environment has provided a significant chunk of that 15% organic growth for BDO.
“That part of the market has grown more quickly and generated more profits and employed more people post-financial crisis than the FTSE/public interest entity part of the market or the micro-market,” explained Eagland.
BDO recognised the strategic opportunity in its merger with Moore Stephens LLP in cementing its market position to these “entrepreneurially-spirited” AIMs listed clients.
Although the merger opened the firm’s reach to the mid-market clients, a key decision in rubber stamping the deal was whether the two firms’ cultures meshed. Had there not been a culture-fit, Eagland said they would not have proceeded.
“Because we both focused on the cultural fit prior to the signing the merger agreement, the people issues have worked out and panned out better than we would have anticipated, said Eagland. “Teams have come together and equally we've had a fantastic reaction from legacy BDO and legacy Moore Stephens clients.”
While the people aspect has been a smooth transition, the same can’t be said for the “painful” processes and systems aspect of the merger. “I was saying to a partner the other day that if you have your home broadband changed it can be incredibly stressful. But can you imagine what it's like when you've got 5,000 people and their systems and software coming together? It takes much longer than you would expect.”
BDO smells audit market opportunity
BDO is looking to capitalise on the Big Fours failings and double down on an audit market with all to play for. As the Big Four firefight, BDO has seen its audit business increase by 25% with revenues of £200m.
Depending on how that lands, that should provide a fair number of opportunities.”
If early numbers released by audit analytics are to be believed, BDO looks to be the biggest audit winner with a net gain of 20 LSE listed companies. BDO’s gains look to be the Big Four losses, as KPMG, for example, lost 37 LSE listed companies, yet only gained 13.
With the audit reform review underway, BDO smells opportunity. It has already committed to invest £20m in its UK audit practice over the coming year.
BDO’s Eagland told AccountingWEB that the firm has received “unprecedented” audit interest, especially from large firms in the listed arena. “Whatever the outcome from those reviews, we will commit to continuing to invest in that market both in terms of people and systems.” He added, “As the market opens up, we can play our part in it.”
Audit is not the only area of growth for BDO, with the advisory revenues up by 30% to £210m and the tax business has generated revenues of £168m driven by private tax advice. Eagland puts the high demand in the tax business to the need of growing businesses to have “strong technical tax advice to help those companies grow internationally” and the “stronger focus on compliance”.
People and culture
As the revenues have increased as has BDO’s investment in people. While competitors are tightening their belts – whether that’s through taking back mobile phones or letting go partners – BDO has promoted 13 partners and appointed 14 new partners, with a further 1,500 promotions also made across the business.
As BDO’s partners enjoy uplift in fortunes, it’s a different tale for rival Grant Thornton who is letting go of 6% of its partners.
Like the Big Four firms, Grant Thornton has also suffered its share of audit blunders, with its audit of Patisserie Valerie still under scrutiny by the accountancy watchdogs, and the release of 12 partners follows a fall in revenue by 1.8% and a drop in average profit per partner from £403,000 to £373,000.
It sends a message to the market that we are an attractive, well-run partnership.”
Therefore, BDO’s decision to increase the average distributable profit per partner (PEP) by 8.7% to £602,002 should go some way in attracting more talent to the firm and ensure their individual partners feel rewarded.
“It sends a message to the market that we are an attractive, well-run partnership and the profit per partner increase does attract future talent and additional talent to the business,” said Eagland. “There are a lot of individual variables at play in what is a very simple figure at the end of the day.”
Investing in people looks to continue being a top priority for BDO for BDO partners over the next three-to-five years. In particular, Eagland stressed that the investment would include ensuring the firm has policies that support wellbeing.
“It's amazing how in the last three-to-five years this issue around wellbeing and making sure people have a work-life balance has moved to the top of the agenda.”
Also high on Eagland’s priority list is to carry on investing in audit processing tools, automation, digitalisation and robotics. “This enables our people to spend their time advising clients on more specialised and complex matters,” he said.