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Partner Pay Cuts Might Not Suffice for U.K. Accounting Giants

April 17, 2020, 3:37 PM

The major accounting firms shifted into survival mode this week in the U.K., slashing partner pay in the hopes of protecting jobs once they emerge from the coronavirus crisis.

Yet as the pandemic continues to wreak economic havoc, the question is whether more systemic change will be needed. The big accounting firms may have to consider changes to their core business models, refocusing on audit as their more lucrative advisory business withers.

“We might anticipate seeing a re-shaping of those models in favor of the statutorily-based work (e.g. audit, insolvency work) as was the case after the financial crisis,” Mike Suffield, director of professional insights at the Association of Chartered Certified Accountants, wrote in an email. “The firms may also look at their overall financial arrangements and resilience in the face of these kind of circumstances: As partnerships, typically the firms operate with relatively low levels of readily available capital to draw upon at any given time.”

Some markets, such as mergers and acquisitions, never recovered after the last financial crisis and will fall even further in the coming years as companies have slashed spending, said Richard Murphy, an economics professor at City University.

“Revenues could fall by double digits in percentage terms,” he said.

Pay Cuts a First Step

Deloitte, Ernst and Young LLP, and PwC all announced over the past week that their U.K. partners would face pay cuts. KPMG LLP said it had not yet taken any action, but had warned partners cuts might be coming.

The Big Four firms have avoided staff layoffs so far, although some smaller firms did announce some wider pay freezes and temporary job cuts.

Partners at BDO LLP and Mazars will also face pay cuts, the firms said.

The end goal is clear: Make cuts now in the hopes that things will eventually improve. All of the Big Four deny having any plans to shed staff because of the crisis, and emphasized that hiring and promotion plans won’t be canceled. The smaller firms are being hit harder, however.

“There is general consensus that we are either in, or about to enter, a severe global recession,” BDO, the fifth-largest firm, said Thursday. “BDO is not unaffected by the situation and we have had to take clear—but temporary—measures to ensure we can weather the current storm and protect jobs.”

BDO has cut partners’ pay by a quarter, with a freeze on the quarterly dividend until January 2021. Pay increases, promotions, and new recruitment have all been frozen. Some 700 of its 5,500 staff will be furloughed, or temporarily laid off, with the government meeting most of their wages.

Mazars, the ninth-largest firm, said in an email Thursday that its partners had also agreed to a pay cut of around 25%, and that it had furloughed some staff members.

“This will help to ensure roles are secure during and after this crisis, and that Mazars remains a resilient employer in the long term,” the firm said.

PwC, also known as PricewaterhouseCoopers LLP, said in a statement Thursday that preserving jobs is the “right thing to do” and puts the firm in a stronger position to support clients when the pandemic is over.

Deloitte and EY both said they had cut partners’ profit share by 20%; PwC said partner pay would be cut by up to 20% during the crisis to protect jobs at the firm.

Karthik Ramanna, professor of business and public policy at Oxford University’s Blavatnik School of Government, played down the impact of partner pay cuts. Rather, he said, partners should use their skills during the downtime to help ensure public bailout money is properly spent.

“The bigger story is that there is a real opportunity for them here, to show that they can help us in a time of crisis,” he wrote in an email.

Murphy of City University predicted the fallout could be long-lasting.

“Revenues could be down for two years following coronavirus,” he said, “and that will cause fundamental change to the accountancy industry.”

To contact the reporter on this story: Michael Kapoor in London at correspondents@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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