Building A Top Global Indian Accounting Firm

Introduction

During his address on the occasion of the CA Day on 1st July
2017 hosted by the Institute of Chartered Accountants of India (ICAI), Hon’ble
Prime Minister Shri Narendra Modi exhorted the Chartered Accountants and said,

“There are so many accounting firms in India, but none had
managed to find a place among the top global players…By 2022, let us have a
Big Eight, where Four firms are Indian”. 

The ICAI, in its Vision 2030, states that it will develop
skilled professionals with competencies to service clients not only within
India but across the globe that requires technical skills as also
cross-cultural appreciation and understanding of global needs.

The above goals are audacious! While there are many Indian
Chartered Accountants who have become successful global professionals, our
profession will need to overcome many challenges and shortcomings to pursue
realisation of this goal of building top global Indian Accounting Firms (IAFs).

This article attempts
to present a current snapshot of the accounting profession in India with an
international benchmarking and discuss some of the measures required in
building a global accounting firm.

Indian Accounting Profession and International Benchmarking

Let’s look at the current
landscape of the accounting profession in India and how it fares in
international comparison to understand the enormity of the challenge presented
by the Hon’ble PM. Given our historical linkage and comparable size of our
economies based on the GDP in nominal US Dollar terms, the UK has been selected
for the international comparison.

Sources and notes:

1.  www.imf.org. India is catching up fast and
expected to surpass by 2019 as per the recent estimates by the IMF.

2.  www.icai.org and www.frc.org.uk. The total
number of members for the seven accountancy bodies in the UK and Republic of
Ireland (ROI) within these two countries.

3.  www.icai.org and www.ons.gov.uk.

4.  www.icai.org and www.frc.org.uk. The UK data
represents the registered audit firms.

5.  www.icai.org and www.accountancyage.com – UK’s
Top 50+50 Accountancy Firms 2017 by Accountancy Age.

6.  www.icai.org and www.frc.org.uk.

The Select Committee on Economic Affairs of the
House of Lords of the UK(the Select Committee) in its report “Auditors:
Market concentration and their role” published in March 2011 notes that the
Big Four audited 99 of the FTSE 100 leading firms and around 240 of the
next-biggest FTSE 250 in 2010. They also had about 80% audits of the FTSE small
capitalisation firms. The Select Committee commented that it took 150 years
from the beginnings of modern audit in Britain around 1850 to the emergence of
the Big Four. The Committee added that internationalisation of business,
economies of scale and the reputational assurance to be the significant factors
that helped the dominance of the Big Four.

In contrast, the Big Four in India audited merely
26% of the total 1,519 companies listed on the National Stock Exchange (NSE) as
per a study report published by Prime Database in September 2016. The report
also stated the percentage of the companies audited by the Big Four was higher
at 47% in the Nifty-500 subset. Despite a much lower proportion (2.63%) of the
IAFs being subject to peer review, the percentage of the Big Four amongst the
NSE listed companies is much smaller.

The history of the Big Four in India is of recent
vintage, and the evolution of large IAFs is in early stages. There have been
several successful IAFs with a long history. However, very few of them have
been able to evolve beyond a set of individuals into an institution and expand
their footprint significantly. A good number of such IAFs have become part
of the Big Four in order mainly in the wake of globalisation post-1991.

The statistics in the above table show that the
IAFs are much more fragmented with a higher ratio of the proprietary firms even
though the Small and Medium Practitioners (SMPs) form a large part of the
Accounting Profession even in a matured market. The economics of the SMP
practice is such that the intensity of competition exerts further pressure on
margins which results in inadequate investment required in turn hampering their
evolution into a large organisation. India has witnessed very few successful
examples of AFs coming together to build a bigger firm that could encourage the
consolidation in the accounting profession. A major impediment is the ability
of the founders/partners to grow beyond the personal capacity of serving the
clients and building the business.

The statistics in the above table also show a much
lower number of IAFs with 50/100 or more partners as well as the aggregate
number of the partners in such large firms in India when compared to the UK.
The advent of the Limited Liability Partnership (LLP) removing the restrictions
on the number of partners in India and possibility of forming
multi-disciplinary partnerships should give an impetus to open tremendous
growth opportunities for the IAFs.

Building a Top Global Accounting Firm

David H. Maister, in his well acclaimed book “Managing
Professional Services Firm” writes that every professional service firm in
the world, regardless of size, specific profession, or country of operation,
has the same mission statement: “Outstanding service to clients, satisfying
careers for its people and financial success for its owners.”

Building a top global AF requires striving well
beyond these necessary ingredients of outstanding client service, nurturing a
winning team and ensuring the financial success. Research on what makes a
long-lasting global organisation shows that the following elements are critical
in building a top global IAF:

Core Ideology

In his book “Built to Last”, the author Jim Collins
narrates how their research revealed that the visionary company was guided more
by a core ideology—core values and a sense of purpose beyond just making
money—than the comparison company was. Jim says that a deeply held core
ideology gives a company both a strong sense of identity and a thread of
continuity that holds the organisation together in the face of change.
Another important learning from their research is that the architects of
visionary companies don’t just trust in good intentions or “values statements;”
they build cult-like cultures around their core ideologies. These learnings
apply equally to the AFs wanting to transform into a long-lasting organisation
that will transcend beyond individuals and to be regarded as institutions.

Marketplace Strategy

A successful AF will require evolving winning
strategy not only regarding whether to specialise or to generalise but also the
marketplace positioning. As an example, one may adopt “Cost leadership” as a
strategy given the India advantage or pursue a “Differentiation” strategy or a
research-driven “Focus/Expertise” as a strategy. Many IAFs cruise along and do
not exercise a conscious choice when it comes to this critical element. Several
firms take up every assignment that comes their way and not focus on a specific
segment/area where they wish to be. Research shows the business that are
focussed on specific market segments are able to build a stronger brand and
also are more profitable.

Eminence and Thought Leadership

Closely linked with the marketplace strategy are
the eminence and thought leadership strategy and plans. The AFs need to build
their reputation in a way that helps create new relationships and drive the
growth. In an increasingly competitive and complex world, an AF that can
showcase early-stage thinking and the unique expertise of an emerging thought
Leader to win the battle for ideas will stand to gain.

Partnership governance

The partnership governance is the most critical
factor. However, being a highly sensitive subject and perhaps due to conflict
of interest, there is minimal discussion around this. A strong Partnership
governance where the individual partners regard the organisational benefits
above self-interests is crucial to building a large, long-lasting organisation.
The norm today is for the firm to be democratic whereby every member of the
Partnership, howsoever senior, should be required to abide by the majority vote
regardless of how they feel about a matter. The partners elect a governing
board and to strive for consensus on major issues, such as strategy,
compensation, hiring, training, organisation, and choice of service lines.

As part of the governance process, the AF should
evolve a structured approach to deal with partners’ compensation and promotion
that can be based on measurable performance usually adapting the principles of
the balanced scorecard. The measures could include quantitative as
well as qualitative criteria such as earnings, billable hours, collection,
cross-referrals, contribution to firm’s initiative such as building eminence,
etc. Such a performance appraisal process can raise contentious, confusing and
conflicting issues in many firms, but data-driven, objective and structured
appraisal process covering even the managing partner or the CEO can contribute
to long-term growth and success of an AF.

Collaboration

Building a global AF will require fostering a
culture of collaboration and ensuring the people do not work in silos. A higher
degree of cooperation is needed in the areas of staffing (cross-staffing, staff
rotation), client relationship, knowledge-sharing and training &
development to break through the silos and pursue growth. David Maister
describes the preferred model as “The One-Firm Firm”. Maister suggests that a
firm that cultivates an environment focused on the outcomes for the firm as a
whole rather than for the individuals only, will operate as an effective team.
Such a firm also needs to foster the culture of coaching and mentoring at all
levels starting from the top with the Partners actively helping to solve
problems, develop opportunities and provide inspiration.

Talent management

The importance of attracting the right talent and
nurturing them can never be over-emphasised. A typical SMP falls into the trap
of lower fees resulting in lesser ability to attract and retain quality staff.
A regular challenge faced by an AF is the inability of a senior member to
delegate appropriately. There is a core tendency of ‘professionals’, to assume
higher levels of expertise, find it necessary to do the work and that there is
less standardisation possible – a problem caused by insecurity or unresolved
ego issues. Building a right mix of the staff pyramid and ensuring appropriate
delegation with rewards and recognition at each level are crucial to the
success of an AF.

Technology

In today’s age, the technology has become an
essential enabler for an AF to success. Many firms are embracing cloud and
digital technologies for real-time collaboration with the clients and manage
the paperless workflow. The AFs need to groom and encourage younger leaders to
adapt to the changes and overcome the challenges thrown by continuously
evolving technology.

Conclusion

The successful global accounting firms, such as the
Big Four, present several lessons that can help IAFs embrace the opportunity
and pursue growth. There are several top global Indian information technology
(IT) companies, and India has emerged as the Worlds’ largest sourcing
destination for the IT industry. A large number of Indians occupy the
leadership positions in large global businesses.

These successes have led not only the economic
transformation of the country but also altered the perception of India in the
global economy. The rise of Indian multinational companies has been well
acclaimed and can provide a strong backbone to the IAFs in pursuing global
growth opportunities.