Network Firms

By Finance Advisory, 3rd Eye Advisory®
Network Firms

A network firm is an entity that belongs to a network. A firm can be a sole practitioner, partnership or corporation of professional accountants or an entity that controls or is controlled by such parties. A network firm can be an entity which is a part of a larger structure that is aimed at co operation and which is

  • controlled by the firm
  • under common control, ownership or management
  • part of a larger structure clearly aimed at profit or cost sharing
  • otherwise affiliated or associated with the audit firm through common quality control policies and procedures, common business strategy, the use of a common name or through the sharing of significant common professional resources.

For an example, consider a multinational corporation, which is an association of 96 firms, operating in 96 different countries, established to provide global services to clients. Each firm is a member of this corporation, but is a separate and distinct legal entity. As a member, each firm agrees to common quality control policies and procedures designed by the corporation and which are implemented and monitored throughout the association. Each firm uses the standard name in marketing and promotional material as well as when signing assurance reports. There are many common clients within the association. In such a case, this corporation is a network comprised of all the 96 firms.

If there is an international association of firms, formed to provide global services to its clients, with each firm being a separate and distinct legal entity and under the profit sharing arrangement, 25% of the profit of each firm is pooled and redistributed to individual firms based on a predefined formula. In this case, the larger structure is clearly aimed at co-operation and profit sharing. Hence, it is a network.

Accounting networks and associations are professional services networks whose primary purpose is to provide its members with resources to aide and help the clients, globally and hence diminish the risk and unpredictability by bringing together a greater number of resources to work on a conflict. The networks and associations operate unaccompanied by its individual members. The largest accounting networks are known as the Big Four.

Deloitte is one of the "Big Four" accounting firms and the largest professional services network in the world by revenue and number of professionals. Deloitte provides audit, tax, consulting, enterprise risk and financial advisory services.

The Big Four are the four largest international professional services networks, offering various services such as audit, assurance, tax, consulting, advisory, actuarial, corporate finance, and legal services. They handle a lion's share of audits for publicly traded companies as well as a number of private companies, creating a cartel of sorts, in auditing large companies.

KPMG, a professional service company, is one of the Big Four as well. With its head office situated in Amsterdam, the Netherlands, KPMG has three major lines of services: financial audit, tax, and advisory. Its tax and advisory services are further divided into various service groups.

EY (formerly known as Ernst & Young) is also a multinational professional services firm headquartered in London, United Kingdom. EY is termed as one of the largest professional services firm in the world and is one of the "Big Four" accounting firms. The organisation operates as a network of member firms which are separate legal entities in individual countries. It provides assurance (including financial audit), tax, consulting and advisory services to companies.

None of the Big Four firms is a single firm. On the contrary, they are professional services networks. Each of them is a network of firms, owned and managed solitarily. These firms have entered into accords with other member firms in the network to share a unified name, brand and quality standards. Each network has established an entity to collaborate the activities of the network.

Price Waterhouse Coopers (commonly known as PwC) is a multinational professional services network headquartered in London, United Kingdom. It is the second largest professional services firm in the world and is the fourth of the Big Four auditors.

In one case (KPMG), the co-ordinating entity is Swiss, and in three cases (Deloitte Touche Tohmatsu, PricewaterhouseCoopers and Ernst & Young) the co-ordinating entity is a UK limited company. Those entities do not themselves perform external professional services, and do not own or control the member firms. They are similar to law firm networks found in the legal profession. In many cases each member firm practises in a single country, and is structured to comply with the regulatory environment in that country.

These firms combine services performed by local firms, confined within their respective borders, but do not perform services or hold ownership in the local entities. This group was once known as the "Big Eight". It was later reduced to the "Big Six" and then eventually to "Big Five" by a series of mergers and amalgamations. The Big Five became the Big Four after the demise of Arthur Andersen in 2002, following its involvement in the Enron scandal.

Technically, the Big 4 firms are not in facts "firms" at all. They are each a network of firms that agree to operate under the same name and general business terms. EY France is actually a completely separate entity to EY Singapore, which is completely separate again to EY South Africa. Each local firm is referred to as a member firm. In some cases the bigger local firms, such as those in the U.S., will strategically purchase other smaller firms. However, it is generally within their interest to stay as separate firms as far as possible. The primary reason for the collapse of Arthur Andersen was due to the fact that, unlike the other Big Five, it was one global firm.

Accounting networks, today, are facing a new obstacle that fundamentally tarnishes the image that the firms wish to project to its clients. The common notion has been that the Big 4, Grant Thornton and BDO are single entities that perform services globally, for clients of this single entity. As a result of court cases, this has introduced consequential secondary liability issues, compelling the networks to detach themselves from the impression of being a single entity. The Parmalat case is the best illustration of the issues

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Article by: Finance Advisory, 3rd Eye Advisory®