Safe havens from the credit storm
Saturday, 22 September 2007
Jennifer Hughes
The current credit squeeze may mean lean times ahead in the City, but it will not mean work drying up for big accountancy firms, according to Mark Otty, UK chairman of Ernst & Young, one of the Big Four firms.
It will certainly mean more work for banks' auditors, though perhaps no higher fees, but the crisis has not dimmed the emerging markets' growing thirst for professional services.
E&Y plans to increase its investment in China almost four-fold during the next decade and will prioritise investment in other rapidly growing economies that the firm expects to grow at a similarly blistering pace. China alone will see "hundreds of millions" in investment from the firm, Mr Otty told the Financial Times in a rare interview.
"The leaders of our Middle East and India practices have seen nothing of what we talk about with the credit crunch - it's just not a feature in their market places," said Mr Otty who, as one of seven managing partners of E&Y's global operations, has responsibility for northern Europe, the Middle East, India and Africa in addition to running the UK.
"It's business as usual for them - they just cannot cope with the demand and they don't see any shortage of capital," he added.
Investing in E&Y's UK business remains a priority for the firm, but Mr Otty ranked putting resources into India, China and Russia of equal importance, with interest in South Korea, Japan and the Middle East just below that.
"Places like China, India and the Middle East are sitting on so much money. We've got those burgeoning populations of spenders and that's not going to go to sleep or run away scared by a credit crunch," he said.
"A lot of that money is going to end up in western economies by way of investment. We want to have the activity both in the emerging market, the source of the capital, and we want to have a focus on the mature markets where very often the investments will be made."
Mr Otty said E&Y was particularly interested in winning business from sovereign wealth funds, the investment pools set up by cash-rich governments largely in the Middle East and Asia.
A number of banks have set up teams to service the funds and there is intense competition in the sector.
"But who's going to do the work when the transaction is done? You need to have a local relationship," he said. "For us, it's everything from assurance services once an investment has been made - which the banks don't provide - through to advisory services once an investment's been made - which, generally speaking, the banks don't provide."
In the UK, the Big Four firms have yet to see any drop in demand for their corporate finance advisory services, in spite of the current credit squeeze.
"The mega deals have slowed down but there are still lots of other deals going on, and those mega deals were not what fuels a business like ours," Mr Otty said.
While corporate and tax advisory businesses have grown briskly, helped by the merger boom, the Big Four have seen a slowdown in core audit practices.
Long hampered by regulatory scrutiny and rules over which non-audit services they can provide to their audit clients, the businesses saw a boost from the extra work created by the implementation of Sarbanes-Oxley in the US and by the switch to international financial reporting standards in Europe.
Last week, PwC, the biggest of the firms, said revenues from non-audit services fell 4 per cent in the last year.
Its overall growth rate slipped to a still-healthy 11 per cent from 23 per cent the previous year. E&Y has yet to release its figures.
"I think all of us, I would imagine, would acknowledge that [the regulatory work] was going to be a spike," Mr Otty said. "The businesses have continued to grow but they haven't grown as fast."
In spite of the slower growth rate, auditing is going to come under intense scrutiny from another angle in coming months as regulators and investors look carefully at the accounting and valuation of financial assets in the wake of the current market turmoil.
There have been suggestions that accountants may have been complacent in the way they classified and valued some more complex structures.
"It is something we're going to spend a lot of time thinking about - how do you reflect your current position? How do you reflect losses that you've incurred? What sort of exposure have you got now?" said Mr Otty, who does not, however, believe that accounting is the root of the problem.
"I think the big issue that we've got there is not the structuring, it's not the somewhat complex financial arrangements, it's the decisions made around the finance. Banks were providing finance to people who shouldn't have got finance. It's as simple as that."
The current credit squeeze may mean lean times ahead in the City, but it will not mean work drying up for big accountancy firms, according to Mark Otty, UK chairman of Ernst & Young, one of the Big Four firms.
It will certainly mean more work for banks' auditors, though perhaps no higher fees, but the crisis has not dimmed the emerging markets' growing thirst for professional services.
E&Y plans to increase its investment in China almost four-fold during the next decade and will prioritise investment in other rapidly growing economies that the firm expects to grow at a similarly blistering pace. China alone will see "hundreds of millions" in investment from the firm, Mr Otty told the Financial Times in a rare interview.
"The leaders of our Middle East and India practices have seen nothing of what we talk about with the credit crunch - it's just not a feature in their market places," said Mr Otty who, as one of seven managing partners of E&Y's global operations, has responsibility for northern Europe, the Middle East, India and Africa in addition to running the UK.
"It's business as usual for them - they just cannot cope with the demand and they don't see any shortage of capital," he added.
Investing in E&Y's UK business remains a priority for the firm, but Mr Otty ranked putting resources into India, China and Russia of equal importance, with interest in South Korea, Japan and the Middle East just below that.
"Places like China, India and the Middle East are sitting on so much money. We've got those burgeoning populations of spenders and that's not going to go to sleep or run away scared by a credit crunch," he said.
"A lot of that money is going to end up in western economies by way of investment. We want to have the activity both in the emerging market, the source of the capital, and we want to have a focus on the mature markets where very often the investments will be made."
Mr Otty said E&Y was particularly interested in winning business from sovereign wealth funds, the investment pools set up by cash-rich governments largely in the Middle East and Asia.
A number of banks have set up teams to service the funds and there is intense competition in the sector.
"But who's going to do the work when the transaction is done? You need to have a local relationship," he said. "For us, it's everything from assurance services once an investment has been made - which the banks don't provide - through to advisory services once an investment's been made - which, generally speaking, the banks don't provide."
In the UK, the Big Four firms have yet to see any drop in demand for their corporate finance advisory services, in spite of the current credit squeeze.
"The mega deals have slowed down but there are still lots of other deals going on, and those mega deals were not what fuels a business like ours," Mr Otty said.
While corporate and tax advisory businesses have grown briskly, helped by the merger boom, the Big Four have seen a slowdown in core audit practices.
Long hampered by regulatory scrutiny and rules over which non-audit services they can provide to their audit clients, the businesses saw a boost from the extra work created by the implementation of Sarbanes-Oxley in the US and by the switch to international financial reporting standards in Europe.
Last week, PwC, the biggest of the firms, said revenues from non-audit services fell 4 per cent in the last year.
Its overall growth rate slipped to a still-healthy 11 per cent from 23 per cent the previous year. E&Y has yet to release its figures.
"I think all of us, I would imagine, would acknowledge that [the regulatory work] was going to be a spike," Mr Otty said. "The businesses have continued to grow but they haven't grown as fast."
In spite of the slower growth rate, auditing is going to come under intense scrutiny from another angle in coming months as regulators and investors look carefully at the accounting and valuation of financial assets in the wake of the current market turmoil.
There have been suggestions that accountants may have been complacent in the way they classified and valued some more complex structures.
"It is something we're going to spend a lot of time thinking about - how do you reflect your current position? How do you reflect losses that you've incurred? What sort of exposure have you got now?" said Mr Otty, who does not, however, believe that accounting is the root of the problem.
"I think the big issue that we've got there is not the structuring, it's not the somewhat complex financial arrangements, it's the decisions made around the finance. Banks were providing finance to people who shouldn't have got finance. It's as simple as that."