Big Four accounting firm PwC LLP’s announcement that it will package its tax prep and audit services together under a single umbrella represents a sign of a seismic shift in how accounting firms are managed.
“It’s a breakthrough that’s about 150 years in the making,” said Allan Koltin, a consultant to accounting and law firms on how to manage their businesses. “It’s groundbreaking. I wouldn’t be surprised to see every major firm in the country, every global firm move to a structure that resembles this.”
Koltin called the move a long-overdue acknowledgment that accounting firms provide just two types of services: compliance work that companies have to get done but are loath to pay for, and advisory services that clients are willing to pay top dollar for. Computers are doing more and more of the compliance work, making it a commodity, and PwC probably would have announced its plans sooner if not for the Covid-19 pandemic, Koltin said.
“It’s a sign of the times. It’s a sign of the bot and the bot replacing the human,” Koltin said.
PwC announced Tuesday that it would divvy its tax services between its audit and advisory practices to better reflect the changing needs of its clients. The firm aims to bundle tax planning work into other core services like helping companies grapple with changing energy needs and diversifying supply chains. It comes as part of a broader shift in the firm’s global strategy to also better ensure reliable business reporting.
While the move is limited to PwC’s U.S. firm for now, Mark O’Connor, CEO of Monadnock Research, which follows the consulting industry, expects that “we’ll see it go international pretty soon.” He and Mike Shaub, an accounting professor at Texas A&M University, think it’s possible that some or all of the other Big Four firms could follow.
“They want to be out there as the first mover on this,” Shaub said of PwC.
Accounting firms have invested heavily to automate the audit to reduce human errors and allow auditors to analyze broader sets of data that feed into estimates and key figures like revenue. Firm leaders have said that those efforts are improving audit quality and resulting in better regulatory inspections.
It’s a similar story for tax work and the firms have invested there too, along with expanding their outsourced tax services in recent years.
The audit business itself remains profitable but the meaning of the audit is changing. Cybersecurity risks, sustainability reporting, and digital currencies affect the breadth of experience auditors need and the time needed to serve as an effective check on corporate financials.
Tim Ryan, PwC’s U.S. chairman, has said previously he wants the firm to be able to provide a wide range of assurance services to meet those demands in the marketplace.
The U.S. firm declined to provide revenue figures. But revenues from the global firm’s Americas region topped $18 billion last year, out of the firm’s $43 billion global total.
How the restructured service lines impacts audit quality remains to be seen, though Ryan said that the merger of audit and tax prep would allow more collaboration among accountants, and should improve quality.
But investors want audits that are priced to ensure skilled, seasoned auditors have the time and resources to provide a thorough check on management and all the myriad of judgments and estimates that feed into the financial statements. They don’t want talk of reduced pricing or treatment of the audit as less valued work.
“Companies need really good audits. Investors really need good audits,” said Tony Sondhi, who runs the investment advisory firm A.C. Sondhi & Associates. “Anything that moves us in that direction is a welcome thing. Whether this gets us there or not I don’t know yet.”
A Clear Line
PwC’s restructuring will draw a clearer line between its businesses and ensure an audit that’s free of any potential conflicts of interest that might arise if an auditor were also providing a client with advice on how to run its business.
“You’ve got to draw that line or the regulators are going to draw it at some point,” Shaub said.
Meanwhile, consulting work is in high demand as companies try to make up from a lost year of projects deferred by the pandemic. Sustainability reporting is also driving a surge in advisory work, an estimated $1 billion niche of the consulting market, according to Source Global Research.
PwC’s reorganization came along side a change in strategy for its global network to help its clients face change demands for energy and to build resilient business models.
“Organizations will want to build back better, and while PwC’s announcement is striking, many consulting firms are gearing themselves up for heavy demand in this area,” Edward Haigh, joint managing director at Source Global, said in an email to Bloomberg Tax.
—With assistance from Michael Rapoport.