Kpmg International

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KPMG INTERNATIONAL: THE ACCOUNTING SERVICES SEGMENT OF THE

PROFESSIONAL BUSINESS SERVICES INDUSTRY

by

George N. ItchevResearch Associate

Tobin College of Business, St. Johns UniversityJamaica, NY 11439

Marc E. GartenfeldMarketing Department

Tobin College of Business, St. Johns University8000 Utopia Pkwy, Jamaica, NY 11439

Tel: (718) 990 7419Email: [email protected]

and

Robert J. MocklerJoseph F. Adams Professor of Management

Director, Strategic Management Research GroupTobin College of Business, St. Johns University114 East 90th. Street (1B), New York, NY 10128

Tel.: 212-876-5856; Fax: 212-996-6967E-mail: [email protected]


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KPMG INTERNATIONAL: THE ACCOUNTING SERVICES SEGMENT OF THE

PROFESSIONAL BUSINESS SERVICES INDUSTRY

INTRODUCTION

In the first quarter of 2002, the collapse of Enron Corp., the largest U.S. energy trader, and the possible demise ofAndersen, the accounting firm that audited and did consulting work for Enron Corp, brought an increased scrutiny to thecommon practice of companies using the same accounting firm both to audit the financial statements and to provideconsulting services. In the midst of these developments, Mr. Paul C. Reilly, the Chief Executive Officer of KPMGInternational, the third largest accounting firm in the world, announced that it would no longer accept internal-audit andconsulting work from publicly traded clients to which it provided external audit services [News Roundup, 2002].

All of the well-known companies in the accounting services industry pledged to separate their external auditservices and consulting services that were provided for the same clients, as well. The lucrative consulting business,however, was the fastest growing source of revenue for KPMG International. It represented 22% of the companysrevenues, amounting to $2.6 billion in 2001. In addition, the company tried to globalize its accounting and consultingservices, which were provided from more than 830 offices in almost 160 nations. That had led to a reorganization of

companys operations into three regional units: the Americas, Europe/Middle East/Africa, and Asia/Pacific [HooversOnline, 2002]. The main question to be resolved was how to position the company in the rapidly changing economic andpolitical environment.

In early-2002, the U.S. Justice Department brought criminal charges for obstruction of justice against Andersen,the fifth largest accounting firm in the world. In mid-2002, Andersen lost the case and was found guilty. The lawsuitagainst the accounting firm had badly affected Andersen and the accounting profession. For one thing, it was almost certainthat the U.S. Congress would enact new stringent regulations that would govern the accounting profession. Several bills hadbeen prepared and it appeared that the prevailing condition of those bills was to separate the accounting and consultingfunctions. In the short-term, however, the remaining accounting firms would pick most of Andersens clients. Thus, thiscould provide future growth opportunities for the remaining Big Four accounting firms.

KPMG International was an accounting company that operated and competed in the accounting services industry.

The accounting services industry included global accounting firms, regional accounting firms, local accounting firms, andinformation technology (IT) companies. The global accounting firms also known as the Big Five, Andersen LLP,PricewaterhouseCoopers LLP, KPMG International LLP, Ernst & Young LLP, and Deloitte & Touche Tohmatsu LLP,were the larger providers of accounting and IT consulting services. Among the Big Five, KPMG International held 18% ofthe total market in 2001, as shown in Figure 1. Newcomers in the IT field were large consulting firms such as ComputerScience Corporation (CSC), Electronic Data Systems (EDS), and IBM.

Figure 1

MARKET SHARE AMONG THE BIG FIVE ACCOUNTING FIRMS

(In Terms of Revenue 2001)

KPMG

International

18%

Deloitte &

Touche

19%

Andersen

14%

Earnst &Young

15%

Pricewaterhous

eCoopers34%

Source: Adapted from Glater, Jonathan D (2002). Audit Firms Await Fallout and Windfall, The New York Times, March 14, pp. C1, C4.


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The regional accounting firms operated primarily in the United States. The IT companies competed primarily in theconsulting services segment and operated in global, national, and local markets.

With changing political and economic trends in the accounting services industry, Mr. Paul C. Reilly was facedwith many decisions about the future strategic focus of the company. The important issues were: How to win clients in therapidly changing accounting services industry? Should the company divest its IT consulting business for publicly heldcompanies? What industry should the company focus on? Should the company expand its accounting services to newclients and industries? How should the company develop its IT solutions? The main question to be resolved was how to

differentiate KPMG International from its competition and achieve a winning edge over competitors within the intenselycompetitive, rapidly changing immediate, intermediate, and long-term time frames.

INDUSTRY AND COMPETITIVE MARKET ANALYSIS

THE PROFESSIONAL BUSINESS SERVICES INDUSTRY

The professional business services industry, as shown in Figure 2, consisted of six industries; accounting services,financial services, marketing services, management services, legal services, and information technology services.

Figure 2

THE PROFESSIONAL BUSINES SERVICES INDUSTRY

THE ACCOUNTING

SERVICES INDUSTRY

THE FINANCIAL

SERVICES INDUSTRY

THE MARKETING

SERVICES INDUSTRY

THE MANAGEMENT

SERVICES INDUSTRY

THE LEGAL

SERVICES INDUSTRY

THE INFORMATION

TECHNOLOGY

SERVICES INDUSTRY

THE PROFESSIONAL BUSINESS

SERVICES INDUSTRY

The financial services industry included investment bankers and brokerage firms, asset management firms,investment and venture capital firms, mortgage bankers, consumer lenders, commercial lenders, and leasing companies.Since 1980, the business of financial institutions had grown at about one-and-a-half times the rate of growth of the U.S.gross domestic product, and since 1990, its growth had outpaced GDP growth by about two to one [Department ofCommerce, 2002].

Companies in the marketing services industry provided wide range of services. Some of the services providedincluded advertising, media services, and sales promotions. The primary providers of marketing services were advertisingand media companies. According to Veronis Suhler Stevenson, a media merchant bank, advertising and media serviceswere expected to increase at a compound rate of 7.4% from 1999 to 2004 and spending would reach $313.6 billion in 2004[Veronis Suhler Stevenson, 2002].

The management services industry could be divided into two service categories: business relationship managementand customer relationship management. The primary providers of management services were business and customersrelationship management companies. The worldwide market for customer-relationship management services totaled $22billion in 2001, a 10.6% increase from 2000 revenue of $19.9 billion, according to San Jose-based Dataquest Inc., a unit ofGartner Inc. [Sacramento Business Journal, 2002]. In the future, the focus of business and customer relationshipmanagement was expected to turn from operational and tactical to analytical and business intelligence.

The legal services industry included law firms and individual lawyers. The primary providers of legal services were

law firms and individual lawyers. The law firms and the individual lawyers provided a wide range of services.

The primary providers of information technology services were computer hardware, software, and servicescompanies. IT referred to the collection of products and services that turned data into useful, meaningful accessibleinformation. The IT industry had several major sub industries: computer hardware, software, and services. Often,telecommunications hardware, software, and services were also included in the definition. According to the Department ofCommerce, the United States was the world leader in information and communications technology products and services,representing almost 35% of global spending [Department of Commerce, 2002]. In addition, the IT industry accounted for afull third of all real economic growth and half of all productivity growth between 1995 and 1999.


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According to the same report, the financial services industry was the single biggest consumer of IT products andservices, spending over $70 billion in 1999. This industry was followed by the communications services ($61.7 billion),manufacturing ($56.9 billion), wholesale ($50.1 billion), business services ($16.8 billion), retail ($18.7 billion), real estate($17.1 billion), and transportation ($16.8 billion). At 24%, transportation and business services had experienced the highestaverage annual rate of IT spending growth between the years 1994 and 1995. This was followed by real estate, retail, andmanufacturing at 17%, financial services at 14%, and communications services and wholesale, both at 12%.

The rapid change of the economic environment, the increased competition and the development of new

technologies had forced companies to realize that the professional services offered by the companies in the professionalservices business industry were integral part of their business environment. To succeed companies had to focus on theircore competencies and utilize their capital assets in the most efficient ways. To achieve that, companies often turned toprofessional service companies.

THE ACCOUNTING SERVICES SEGMENT OF THE PROFESSIONAL BUSINESS SERVICES INDUSTRY

The accounting services segment did not exist as an official industry classification and, therefore, was created, asshown in Figure 3, to fit the companies who competed in the accounting, IT consulting, and financial advisory industries.

Figure 3

THE ACCOUNTING SERVICES INDUSTRY

AUDITS OF

FINANCIAL

STATEMENTS

REVIEWS OF

FINANCIAL

STATEMENTS

OTHER

ATTEST

REQUESTS

ASSURANCE

SERVICES

COMPLIANCE

WORK

TAX

PLANNING

TAX

SERVICES

ACCOUNTING AND

BOOKKEPPING

SERVICES

ACCOUNTING

SERVICES

ENTERPRISE

BUSINESS

SOLUTIONS

ENABLING

TECHNOLOGY

IMPLEMENTATION

IT

INFRA-

STRUCTURE

MANAGEMENT

SYSTEMS

INTEGRATIONS

INFORMATION

ASSURANCE

ENTERPRISE

MANAGEMENT/

OPERATION

SUPPORT

KNOWLEDGE

MANAGEMENT

SYSTEM

ENGINEERING/

SOFTWARE

DEVELOPMENT

DATA OPERATIONS

AND FACILITY

MANAGEMENT

MANAGEMENT

CONSULTING

IT CONSULTING

SERVICES

CORPORATE

FINANCE

CORPORATE

RECOVERY

FINANCIAL

ADVISORY

SERVICES

INDIVIDUALS

BUSINESS

COMPANIES

NON-FOR-

PROFIT

ORGANIZATIONS

GOVERNMENT

CLIENTS

INTERNET

INFORMATION

TECHNOLOGY

SOLUTIONS

TECHNOLOGY MARKETING &

PROMOTIONS

OPERATIONS

SECURITIES

AND

EXCHANGE

COMMITIONS

INTERNAL

REVENUE

SERVICE

AMERICAN

INSTITUTE OF

CERT. PUBLIC

ACCOUNTANTS

FINANCIAL

ACCOUNTING

STANDARDS

BOARD

REGULATIONS

GLOBAL

MARKET

GEOGRAPHICAL

MARKETS

MERGERS

AND

ACQUISITIONS

ALLIANCES

EXPANSION

STRATEGIES

EXTERNAL

COMPANIES

PRICE

WATER

HOUSE

COOPERS

DELOITTE &

TOUCHE

TOHMATSU

ERNST &

YOUNG LLP.

ANDERSEN

INTERNAL

COMPANIES

COMPETITION

THE ACCOUNTING SERVICES INDUSTRY

In mid-2002, the accounting industry has faced strong criticism from lawmakers on Capitol Hill and the public due

to questionable auditing practices. In addition, the stock market had plunged more than 20% in 2002, although, theeconomy, according to most economists, remained strong. All of these events had created an uncertain environment formany industries including the accounting services industry. Although the outcome remained unclear, many professionals inthe accounting and financial field agreed that the accounting firms would have to give up most of their consulting services.At the same time, many of these professionals agreed that the accounting firms would be presented with new opportunities.

Thus, staying afloat in this environment would require a well planned and executed strategy.

Although, the accounting firms would give up most of their lucrative consulting services they were still expectedplay an important role when it came to consulting. For one thing, some of these consulting services would be transformedinto new services that would be more in line with the traditional accounting services. For example, the accounting firms hadprovided clients with advice on network capability and security. In the near future, the accounting firms would provideclients with new assurance and audit services that would be beyond the scope of financial statements. Also, these newservices would be expanded to new clients such as customers and suppliers of the traditional clients. In addition to the newservices, the accounting firms would continue to provide IT services to the federal government. In the future, whenaccounting firms provide IT consulting services to corporations, if at all, they would be guided by stringent rules ofindependence. However, the same rules would not apply when IT services were provided to the federal government.


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The market for information consulting services was sluggish in 2001 due to economic slowdown in the U.S. andthe September 11 attack. However, the IT services were expected to grow as the Federal Government planed to increase itsspending on IT systems and services. According to Kennedy Information, Inc., the Federal Government would increasespending on IT systems and services at a compound annual growth rate of 11% from $37.1 billion in fiscal year 2002 to$63.3 billion in fiscal year 2007 [Kennedy Information, Inc., 2002]. According to the report, federal agencies with thegreatest spending on IT systems and services included the Department of Defense, the Department of the Treasury, theNational Aeronautics and Space Administration, the Department of Transportation, and the Department of Justice. Thereport shows that these five departments would represent nearly 70% of federal spending on information systems and

services in fiscal year 2007 [Kennedy Information, Inc., 2002]. The report also shows that the growth in federal spendingwould be most significant for professional services and outsourcing, as opposed to spending on equipment, software, andtelecommunications.

Overall, accounting services were expected to grow as advances in information technology continued to reshapethe relationships between businesses, customers, and clients.

INDUSTRY TRENDS

The accounting services industry, which remained stable for decades, had been changing for the last several years.Recent growth in the industry had come from adding new services most notably, IT consulting services to thetraditional audit and tax functions. This had created some challenges for accounting firms. For one thing, IT consultingrevenues had outpaced accounting revenues, which had lead to power struggles between IT consulting and accounting

firms. However, as explained earlier, it is likely that most of the consulting services provided by the accounting firmswould be separated from the traditional accounting function due to conflict of interest between accounting firms, clients,and shareholders. Thus, the future of the accounting services industry lay on the traditional accounting services as well asthe introduction of new assurance and audit services. Several important factors would affect and shape the future of theaccounting services industry: information technology, competition, corporate structure, and accountability.

Information technology capabilities would continue to advance and costs would continue to decline. Technologicaladvances would continue to make products smaller and information more accessible and user-friendly. The result would bethat more information would be available. Users would be able to customize information to meet their needs. Advanceswould permit radical changes in corporate structures such as outsourcing corporate functions to suppliers and distributors.Thus, these changes would raise security issues and change supplier customer relationships. In addition, information wouldbe accessed more quickly. Decision speeds would increase, which would put more pressure on companies. Conversely,information would become more perishable; old information would be less useful. Thus, the increase in the volume of

information would cause a need for filters to synthesize or select relevant information. Moreover, control functions wouldbe automated and become more complex, requiring new knowledge and new decision models and an increased reliance ontechnologists. Thus, paper would be eliminated, changing the risk of fraud requiring new audit approaches. Finally, workunits would became more decentralized, which might increase efficiency but at the cost of corporate culture and with theneed for additional accountability. In summary, new service opportunities would arise from the changing needs of decision-makers or clients.

The competition among the information-suppliers (including assurance-providers) would increase. Newcompetitors would enter the market including large, well-capitalized organizations not bound by standards or limitationsimposed on accounting firms. The accounting firms would also face competition as they would try to move assuranceservices into areas not currently dominated by the profession. Thus, competition would come from a large number ofsources, public and proprietary databases.

New technologies, competition, and changes in worker relations had led to creation of new organizationalstructures. Communications and computer technology enabled employees to work away from the office. Work had becomea 24-hour proposition and was conducted anywhere. Offices and businesses had become more disaggregated. Smallbusinesses were proliferating. In fact, Fortune 500 companies accounted for less than 20% of total employment [AICPA,2002]. Outsourcing had become common. The result was more entities, more relationships, and more accountability. Inaddition, there would be a change of how entities financial condition and value were measured (e.g., arms-lengthtransactions, entity concept, going-concern assumptions, valuation of intellectual property rights). This new businessenvironment would force firms to change their structure. There would be more alliances, joint ventures, and temporaryfirms. Thus, the new types of entities would result in new information flows creating opportunities for new services.


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The new business environment, explained above, would increase the demand for accountability throughoutsociety. Thus, new opportunities would arise to provide services, or develop criteria for, the parties accounting firms do notserve now: suppliers, customers, employees, and the community.

HOW THE INDUSTRY WORKS

The accounting companies offered combination of accounting services such as audit, tax, and other generalaccounting services, as well as, IT consulting services. The IT consulting services were the fastest growing source of

revenue for the accounting firms. However, as explained earlier that trend was likely to change in the future. This changewould put constrain in the services that the accounting firms could offer to clients. It was likely that most of the futurerevenues would come from the traditional accounting services offered by the accounting firms. However, new opportunitieswould arise for the accounting firms due to changes in the business environment.

In the U.S., law required all publicly held companies listed on major financial stock exchanges such as the NewYork Stock Exchange (NYSE), to audit their financial statements annually. An independent accounting firm had to auditthese financial statements and express an opinion about the fairness of these statements. About 2000 publicly heldcompanies were registered with the Securities and Exchange Commissions (SEC), the government agency that oversaw thefinancial markets. Usually, the clients Board of Directors recommended an auditor to shareholders, who voted on theproposal at the annual meeting. The relationships between audit firms and clients lasted for decades. Until recently,accounting firms provided auditing and any other accounting and consulting services for the same client. However, with thecollapse of Enron Corp. and the indictment of Andersen, the accounting firms, which were perceived as independent from

government regulations, announced that they would no longer perform auditing and consulting services for the same client.In addition to the publicly held corporations, privately owned companies and non-for-profit organizations might decide toattest or validate their financial statement for different business reasons. Moreover, all U.S. companies were required to filea tax return with the Internal Revenue Service (IRS), a U.S government agency. All of the above requirements created ahuge market for the accounting firms.

The IT consulting services offered by accounting firms included a wide line of services such as computers systemanalyses, installation of budgeting processes, accounting information systems, just-in-time and inventory managementsystems, marketing studies, strategic management analysis, and any other service the company had an expertise that wouldbenefit the client.

ACCOUNTING SERVICES

The accounting and tax services segment consisted of three sub-industries: assurance services, tax services, andaccounting and bookkeeping services. In early 2002, five U.S. companies provided these services to large, medium, andsmall size publicly and privately held companies as well as to government and non-for-profit organizations. Law requiredall publicly held companies to seek auditing services. In addition, all companies had to file tax returns. This created a hugemarket place for the competing accounting firms.

Assurance Services

Accounting firms provided assurance services in which the accounting firms attested to information that was theresponsibility of another party. In general, assurance services were independent professional services that improved thequality of information, or its context, for decision makers [AICPA, 2002]. These services included audits of financialstatements, reviews of financial statements, and other attest requests.

Audits of Financial Statements. The Big five accounting firms provided auditing services primarily to the publiclyheld companies, which were required by law to audit their financial statements. The American Accounting AssociationCommittee on Basic Auditing Concepts, the organization for accounting educators, had defined auditing as a systematicprocess of objectively obtaining and evaluating evidence regarding assertions about economic actions and events toascertain the degree of correspondence between those assertions and established criteria and communicating the results tointerested users [Guy, Aldeman, and Winters, 1999]. Thus, in general, the accounting firms were required to thoroughlyunderstand, among other things, the internal controls and the industry of the client. Usually, each of the accounting firmswould develop an expertise on certain industries. In addition, clients would want to avoid auditors that handled its biggestrivals, which increased the cost of the audit [Glater, 2002]. This was true because only few accounting companies providedaudit services to large corporations. For these reasons, companies tried to avoid switching auditors; many relationshipslasted decades.


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Reviews of Financial Statements. The accounting firms might provide a review of the financial statements, whichprovided limited (reasonable) assurance as to whether the financial statements were in conformity with GAAP. This line ofservice was provided to a wide range of clients including, publicly and privately owned companies.

Other Attest Requests. Accounting firms might perform numerous other attest services. For example, they mightattest to reports on description of computer software, reports on investment performance statistics for organizations such asmutual funds, reports for compliance with various types of guidelines, and WebTrust services.

Keys to success in the area of assurance services were to expand the assurance services to new clients such assuppliers and customers, to expand assurance services to new areas health care providers (assurance services could beprovided to employers, patients, unions, and other customers of health care services), electronic commerce providers, andthe elderly and their families. In addition, keys to success in this area were to provide assurance services on informationsystem reliability, and on business performance measures. Moreover, keys to success in this area were to evaluatecompanies that provided outsourcing either when they were selected or on an ongoing basis, to establish processes,controls, accountability, or performance criteria for joint ventures, to provide assurance services on risk assessment (this isan assessment of business risk). Finally, keys to success were to provide arbitration and valuation services and to analyzeoutsourcing (make or buy) decisions.

In the future, investors, creditors, and other interested parties would require audit services to be provided on acontinuous basis. In addition, the accounting firms would be required to organize, analyze, and present information in

regard to the opportunities, strengths, weakness, and threats of the client. Thus, keys to success in this field were to analyzeoutsourcing (make or buy decisions), to increase the value of the current assurance services, to develop systems andprocedures to detect fraud and illegal acts for assurance engagements, and to provide arbitration and valuation services.

Tax Services

The tax services segment consisted of two broad types of services: compliance work and tax planning. Theaccounting firms were the major competitors in this segment because they possessed the expertise in this field.

Compliance Work. Compliance work was the actual preparation of tax returns for companies individuals andother organizations.

Tax Planning. Tax planning was the advice accounting firms provided to clients, as to how to anticipate the future

consequences of taxation and how best to minimize future tax liabilities while meeting the clients requirements.

Keys to success in this area were to develop systems that supported outsourcing of the tax function, to develop ITsolutions that supported the collection, organizing, analyzing, and presenting tax data in order to improve the client flow oftax information. In addition, keys to success in this area were to develop IT solutions that were compatible with Internettechnologies and to develop training programs of employees so that they could stay abreast of new tax regulations andtrends.

Accounting and Bookkeeping Services

Accounting firms could provide accounting and bookkeeping services to their clients. In these situations, theaccounting firms might perform various activities such as recording and posting transactions in order to draft financialstatements.

The keys to success in this area were to develop systems that supported outsourcing of the accounting andbookkeeping functions for clients, and to develop IT solutions that supported the collection, organizing, analyzing, andpresenting accounting data in order to improve the client accounting flow of information. In addition, keys to success in thisarea were to develop IT solutions that could incorporate both the accounting and tax data in order to improve the clientability to make critical decisions, and to develop IT solutions that were compatible with Internet technologies. Finally, akey to success in this area was to develop training programs of employees so that they could stay abreast of new accountingpronouncements and trends.

INFORMATION TECHNOLOGY CONSULTING SERVICES


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In general, the focus of IT consulting services was to improve the usability and efficiency of technological systemsand processes. Companies that provided these services aimed to improve the clients collection, utilization, and executionof information. In addition, IT consulting services focused on providing advice and implementation, on issues related tocomputer systems, telecommunications, and the Internet. This in turn provided an effective flow of information so the clientcould keep on improving its work process, customer retention and acquisition, and other aspects of its business. In general,the consulting services could be categorized in two ways: by size and by specialization. Figures 4 and 5 show the totalmarket by size and specialization.

Figure 4SIZE OF SECTOR AND MAJOR FIRMS BY SECTOR

Information Technology

48%

Big Five Accounting Firms, IBM,

CSC, EDS

Strategy

18%

McKinsey & Co., Bain & Co.,

Boston Consulting Group

Operations Management

24%

Booz-Allen & Hamilton, Arthur

D. Little

Human Resources

10%

Mercer, Towers Perrin, Hewitt

Source: Chase, Aquilano, and Jacobs (2001). Operations Management for Competitive Advantage, New York: McGraw-Hill/Irwin.

Figure 5

CONSULTING MARKET SEGMENTATION BY INDUSTRY SPECIALIZATION

Manufacturing

22%

Financial Services

21%

Government

12%

Communications

11%

Other

34%

Source: Chase, Aquilano, and Jacobs (2001). Operations Management for Competitive Advantage, New York: McGraw-Hill/Irwin.

According to Kennedy Information, the information consulting industry grew 5% to $120 billion in 2001, and wasexpected to grow 6% to $127 billion in 2002 [Kennedy Information, Inc., 2002]. The actual services and products thatwere offered by the IT consulting and accounting firms varied considerably. Usually, companies developed expertise incertain areas of the field and the most common areas of focus included enterprise business solutions, enabling technologyimplementation, IT infrastructure management, systems integration, information assurance, knowledge management,system engineering/software development, enterprise management/operation support, data operations and facilitymanagement, and management consulting.

Enterprise Business Solutions. Some of the services offered to clients in this field included financial management,case management, documents/records management, administrative tracking, and asset and supply chain management.

Enabling Technology Implementation. Some of the services offered to clients in this field included Web-sitedesign/portal development, secure Web-based implementations, database/data warehousing, workflow and imaging, e-business, and legacy systems integration/migration.

IT Infrastructure Management. Some of the services offered to clients in this field included Web-serveradministration, database administration, desktop support, help desk support, and messaging/e-mail administration.

Systems Integration. Some of the services offered to clients in this field included database integration, informationarchitecture design, and Web software technologies.


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Information Assurance. Some of the services offered to clients in this field included user authentication, resourceauthorization, encryption, firewalls, penetration testing, security audits, infrastructure protection, computer networkdefense, and risk management.

Knowledge Management. Some of the services offered to clients in this field included electronic datamanagement, data warehousing, document management systems, enterprise storage networks, and enterprise Web-portals.

System Engineering/Software Development. Some of the services offered to clients in this field included initiation

project planning, requirements management, design, development, testing, deployment, ongoing support, software qualityassurance, configuration management, and subcontracting management.

Enterprise Management/Operation Support. Some of the services offered to clients in this field included enterpriseengineering and integration, network operations and management, managed services, server hosting, security monitoringservices, multi-level user support, network and application performance and monitoring, software enhancement,configuration management, quality assurance, and hardware support.

Data Operations and Facility Management. Some of the services offered to clients in this field included dataoperations design, project management, site preparation, security, application planning, procurement support, and technical,network, and database support.

Management Consulting. Some of the services offered to clients in this field included strategic planning and

performance measurements, knowledge management, process improvement and international standards compliance, humanresources, and capital planning and investment management.

Unlike the accounting services market, the IT consulting market was unregulated and the Big Five did not have amonopoly in this market. However, the accounting firms continued to be rated as the most trusted outside advisors bybusiness owners, investors, and other consumers of professional services. They were recognized for their independence,financial skills, and integrity and were granted a level of access to business decision-makers unmatched by otherprofessional organizations [AICPA, 2002]. It should also be noted that the Big Five might get out of the IT consultingbusiness, partly because the SEC was concerned about possible conflicts of interest between the accounting firms and theirclients. The SEC had expressed concerns as to whether the accounting firms could perform an independent audit work,while striving to perform consulting services for the same client.

The keys to success in this area were to develop technical and business expertise (including hardware, software,

and programming), to develop deep knowledge of business and government industries, to develop training capabilities toenhance consultants, and to retain top consultants to ascertain continuous technical and business expertise. Other keys tosuccess in this area were to develop capabilities to ascertain client technology and business needs, to develop flexibility toreact to changing technology trends, and to secure long-term contracts in order to ascertain understanding of businessstrategy and needs. Finally, a successful company would need to research business trends, commit and involve client SeniorManagement, have sufficient capital resources, focus on clients overall business strategy, and to provide objective advice.

FINANCIAL ADVISORY SERVICES

Financial advisory services were primarily offered to business corporations, whose ultimate goal was to maximizeshareholder value. Some of the most common financial advisory services offered to clients were in the field of corporatefinance and corporate recovery.

Corporate Finance

Many corporations needed an independent financial advice on corporate financial matters. For example, manycorporations needed to raise capital on a continuous basis in order to support their business operations. In the simplest form,these corporations could finance its business operations using debt or/and equity. Companies in the accounting industryprovided financial advice on such matters. Many different corporate financial services were offered to clients but the mostcommon once included advice on mergers & acquisitions, sales and disposals, debt and equity financing, valuations andappraisals, leveraged and management buyouts, flotation and public offering, joint venture, and privatization.

Corporate Recovery


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The most common corporate recovery services offered to clients included restructuring and turnaround. Theadvances in technology and the increased sophistication of the world markets had increased the productivity and efficiencyof businesses. This, however, created a new business environment where many corporations were facing fierce competitionin their line of businesses. Thus, to stay competitive corporations were increasingly forced to make critical businessdecisions. For example, many corporations had unprofitable divisions, which either had to be sold or restructured.However, many companies did not have the time and expertise to come up with sound decisions. Thus, knowledgeablecompanies such as the companies in the accounting services industry could provide a valuable advice on how to approachand resolve the problem.

The keys to success in this area were to develop corporate finance and recovery expertise, to develop financialmarkets expertise, and to retain top financial advisors. In addition, keys to success in this area were the ability to developtraining capabilities to enhance corporate financial and recovery advisors, and the ability to focus on clients overallstrategy.

CLIENTS

The customer base in the accounting services industry consisted of individuals, business companies, non-for-profitorganizations, and governments. In general, the Big Five accounting firms provided all professional services, whereas theexternal companies such as, Computer Science Corporation, Intelligroup, Inc., Vanstar Corporation, IBM, EDS, CSC, andThe Boston Consulting Group provided only IT consulting services.

Individuals

Individuals comprised only a small part of the client base of the companies in the accounting industry. In fact,according to AICPA, in 2001, about 15% of KPMG revenues came from non-SEC clients [AICPA, 2002]. Most of theservices provided to individuals were accounting, tax, and personal financial services. To date, the individual market foraccounting services accounted only for a small portion of the revenues of the Big Five accounting firms. In addition, ITconsulting services accounted for even smaller portion of the revenues of the players in the accounting services industry.However, with the advances in technology, the anticipated changes in the corporate structure, and the ever-increasingnumber of small and individual businesses, individuals would increasingly become valuable clients to the players in theaccounting services industry.

The keys to success in this area were to provide clients with customized accounting, tax, financial advisory, and ITconsulting services, to offer wide range and high quality services (accounting, tax, consulting, and financial advisory), and

to offer accounting and tax services on the Internet.

Business Companies

Business companies included primarily large private and publicly held organizations. In fact, most of the clients ofthe Big Five accounting firms were also SEC clients. Those clients comprised the largest bulk of revenues received by thecompanies. According to Hoovers Online, most of the Fortune 1000 companies were clients of the companies in theaccounting services industry [Hoovers Online, 2002]. In turn, those clients provided the opportunity to the accounting firmsto offer accounting and IT consulting services. Most of the accounting services that were provided to those companies wereauditing and tax services. The IT consulting services that were provided were mostly focused in the field of integratedsolutions that allowed the clients to operate most efficiently. In addition, those clients were specifically important as acustomer base because they offered a global aspect to the industry, and allowed accounting and IT firms to experience alearning curve of a wide range of customers and ideas.

The keys to success in this area were to offer wide range and high quality services (accounting, tax, consulting,and financial advisory), to provide clients with customized accounting, financial advisory, and IT consulting services, tooffer services on the Internet (accounting and tax), to thoroughly assess needs and objectives of clients, and to ascertain anexpertise in client industry.

Government

Government institutions were the second largest source of revenues for the companies in the accounting servicesindustry and included local, state, and federal governments primarily in the U.S. and Europe. The primary services providedto governments were IT consulting services. Usually, government institutions required high maintenance. Services for such


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a client base might include networking solutions, outsourcing, integrated solutions, etc. Most governments followeddifferent sets of rules and procedures when it came to the preparation of financial statements. In fact, in the U.S., agovernment agency was responsible for the creation of government accounting and audit standards. In addition, the auditswere performed by the same government agency. Thus, the Big Five accounting firms did not provide accounting, tax oraudit services to governments. However, governments spent billions of dollars for IT services, thus, providing a hugemarket. Traditionally, the U.S. federal market for IT consulting services had provided a safe haven during economicdownturn for IT consultants. Thus, more IT consultants had sought to increase their presence in the government sector.According to Kennedy Information, the Federal Government planed to spend $63.3 billion on IT systems and services in

fiscal year 2007 [Kennedy Information, Inc., 2001]. Some of the IT companies had proposed to organize the FederalGovernment into an Internet-based network.

Providing IT consulting services to the Federal Government, and even to state and local governments could changedramatically than any other sector as a result of the events of September 11. For one thing, it was clear that the convergenceof a recession, the attack on September 11, and demand for new government services would accelerate the move to a moreefficiently managed government supported by advanced information technologies. However, not everyone in theaccounting services industry would be affected the same way. Unlike the past, it appears that the U.S. Government wouldrely on big companies, which could provide a total package of IT consulting services. This as well as the sluggish economywould pressure the IT service providers to consolidate. In addition, smaller firms that had created value but lacked thecapital would likely be acquired. Thus, it was likely that the Big Five accounting firms would not benefit as much as theother IT service providers. In fact, according to Kennedy Information, the bright spots appeared to be in outsourcing andproviding IT solutions to the federal, state, and local governments. In fact, outsourcing leaders such as IBM, EDS, and CSC

stood to see acceleration in their business [Kennedy Information, Inc., 2001].

The keys to success in this area were to offer high level and wide range of IT consulting services, to thoroughlyassess needs and objectives of clients, and to provide clients with customized and IT consulting services.

Non-For-Profit Organizations

Non-for-profit organizations might include education providers, community organizations, religious organizations,and the like. Those organizations needed service solutions just like other clients. These solutions might include networking,system integration, custom software, outsourcing, and other professional services. To date, non-for-profit organizationswere the third largest source of revenue of the companies in the accounting services industry. However, the anticipatedchanges in the accounting services industry, mainly the expansion of the accounting and IT services, the attack onSeptember 11, and the ever-increasing population of poor people in the world, would likely increase the size and number of

non-for-profit organizations. Thus, non-for-profit organizations would become an increasingly important source of revenuefor the companies in the accounting services industry.

The keys to success in this area were to provide clients with customized accounting and IT consulting services,and to offer wide range and high quality accounting and IT consulting services.

TECHNOLOGY

To date, no clear-cut technology existed that companies in the accounting services industry should use. This wastrue because a wide range of services had been offered that had been provided through a wide range of technologies. Forexample, companies providing IT consulting services used different tools or IT solutions to provide these services.Ultimately, the IT solutions for accounting and consulting services would be tailored and shaped based on the userrequirement for information. However, two main areas would be critical for companies in the accounting service industry,the Internet and IT solutions.

Internet

Most business companies believed that the Internet would have a profound effect on the role those companiesplayed in their industries with nearly one-third expecting to see e-business changing their core businesses. The Internetwas a medium through which companies conducted their business. Many of the services would be provided using theInternet. For example, many companies would outsource their accounting functions to outside parties. The actualcommunication or service performance between the company and the outside party would be done with the use of theInternet. Thus, in order to provide these outsourcing services an outside party had to develop IT solutions, including


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software applications, that supported such outsourcing services. Therefore, if a company wanted to take advantage of newopportunities, it had to thoroughly understand the Internet in order to use it.

The keys to success in this area were to develop technical expertise of the Internet including hardware andsoftware applications, to develop Internet-based IT solutions, to develop systems that could ascertain the ability todistribute and share information quickly, to incorporate Internet technology with client strategic plan, and to developtechnical Internet technology expertise.

Information Technology Solutions

Many different types of IT solutions existed in the market. Almost every firm in the accounting services industryhad the ability to develop IT solutions. The basic purpose of IT solutions was to incorporate the flow of the clientinformation. Thus, a firm in the accounting services industry would recommend an IT solution package that met the needsof the client.

Increasingly, clients were searching for IT solution packages that could incorporate all aspects of their businesses.For example, the U.S. Government had created a new homeland security agency as a response to the attack on September11. Apart from the security of U.S., the main role and purpose of the new government agency would be to integrate thealready existing government agencies so that the flow of information became more efficient. This would enable thehomeland security agency to collect, analyze, and prepare crucial information more easily and efficiently. This was whymany IT consultant firms had prepared IT solution packages, which would incorporate the flow of information between all

government agencies. Similarly, business companies were searching for the same IT solution packages that couldincorporate all aspects, departments, and operations of their businesses. To accomplish this, IT consultant firms had todevelop IT solution packages that were compatible with other solution packages. In addition, the IT solution packages hadto be reliable and upgradeable. Moreover, IT consultant firms had to be in the market for the long-hall so that clients couldrely on a continuous support.

The keys to success in this area were to develop a strong knowledge of the functionality and capability of ITsolutions, and to develop broad based IT solutions.

MARKETING AND PROMOTIONS

There was no formal way of advertisement in the accounting services industry. The Big Five accounting firmswere not allowed to advertise their accounting services because of rules and regulations in the industry. However, firms

were allowed to advertise their IT consulting services. The most common way of advertising was through magazines andthe Internet. To date, the most effective way to promote and market services in the accounting services industry had beenthrough previous engagements. As mentioned earlier, the Big Five had a steady client base, which did not change verymuch over the years. Some of the clients of the Big Five accounting firms had been for decades with them.

The keys to success in this area were to use the firms reputation for expertise in internal control, reputation forexpertise in measurements, reputation for trust, and reputation for expertise of clients industry and services.

OPERATIONS

As mentioned above, the Board of Directors of the prospective client had to approve the firm that would provideaccounting, IT consulting, and/or financial advisory services. Usually, companies followed certain procedures whenpreparing for the job or the engagement (assuming they had received the engagement). In a typical engagement a team ofaccountants/consultants were sent to perform the job. Thus, the right professional staff had to be correctly allocated to theright kinds of jobs. It was assumed that to develop the right team of accountants/consultants firms find the right balancebetween partners and the professional staff. Companies used a partner-to-junior ratio to measure the effectiveness of theengagement. The actual audit engagement had to follow rules and procedures prescribed by the AICPA. However, thedesign and the way the audit engagement was performed could differ from one firm to the other. Usually, a typical auditengagement was divided into two phases: planning and fieldwork. In the planning phase of the engagement, accountingfirms were required to obtain knowledge of clients industry and business. In the fieldwork phase the actual audit wasperformed.

Understanding the client industry was essential if the auditor was to perform the audit with due professional care.The most common approach of learning about the client industry was to discuss the industry with auditors who had audited


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the client in prior years or other clients in the same industry. In addition, auditors might use numerous published sources todevelop understanding of the clients industry. Understanding the clients industry was important for understanding theclients business. Performing the audit or the fieldwork required that the auditor followed certain procedures. For example,to determine that cash was fairly presented in conformity with generally accepted accounting principles the auditor wouldperform certain tests including cash counts, footing of cash journals, and tracing of postings to the general ledger, bankconfirmations, and cutoff bank statements, bank transfer schedules, and proofs of cash. In performing those tests, an auditormight use audit programs/databases to facilitate its work. Thus, a sophisticated audit database was essential given theamount of audit work and the sophisticated computer systems of the clients. However, a sophisticated audit database was

no substitute to a well-selected and organized audit team.

The keys to success in this area were to develop systems that could ascertain a high partner to junior ratio inengagements, and to form and develop high quality engagement teams. Another keys to success in this area were to developand design operational systems and procedures that supported the clients needs, and to develop and design operationalsystems and procedures that increased the operational efficiency of the companies in the accounting services industry.

REGULATIONS

Congress established the Securities and Exchange Commission (SEC) in 1934 to regulate the distribution ofsecurities to the public and the interstate trading of securities in the securities exchanges [Guy, Aldeman, and Winters,1999]. Thus, a primary concern of the SEC was that investors had appropriate financial information when they madeinvestment decisions. The SEC required that prospective and current publicly held companies filed annual audited financial

statements along with other regulatory documents with the agency, thus, creating a huge market for the accounting firms.In addition, the same requirements, although lees stringent had to be followed by foreign companies that wanted to raisecapital in the U.S. stock markets. The SEC also required that prospective and publicly held companies followed GeneralAccepted Accounting Principles (GAAP) when preparing their financial statements. In general, GAAP were accountingstandards created by the Financial Accounting Standards Board (FASB), an independent accounting organization. In orderto audit the financial statements and express an opinion as to the fairness of these statements, the accounting firms had tocomply with certain procedures prescribed by the American Institute of Certified Public Accountants (AICPA).

Ultimately, the greatest threat to the survival of the accounting profession, as we know it today, was legislation. Theindictment of Andersen the accounting firm that audited the financial statements of Enron Corp. was the fourth majorsetback to the accounting profession. The first time was in the mid-1970, when Congress successfully overrode the FASBs(the agency that set accounting standards) position (which required that publicly held companies used the full-cost methodof accounting) and ruled that companies could use either the successful-efforts or the full-cost method for oil and gas

accounting. The second time was in the 1990s, when both houses of Congress initiated legislation to exempt publiccompanies from an FASB proposal that mandated expense recognition for stock options [Beresford, 2001]. The perceivedhigh probability of this legislations passage caused a majority of Board members to vote for disclosure of the effect ofstock options rather than mandatory expensing [Beresford, 2001]. Finally, the accounting profession clashed withCongressional leaders over the accounting rules for business combinations and intangibles. Despite these events, theaccounting profession had been able to maintain its independence from government regulators.

Although not as stringent as in the U.S., similar regulations were followed by publicly held companies in Europe,the other major region of opportunity growth for the companies in the accounting services industry. However, as mentionedbefore, the intention of the U.S. and Europe was to standardize the rules and procedures that govern the companies in theaccounting services industry.

GEOGRAPHICAL MARKETS

The increased globalization in the financial markets created an opportunity for the firms in the accounting servicesindustry. Businesses would require information that was compatible across nations. This, of course, created a need forstandardized accounting and business information. In such a market, successful companies had to possess a thoroughexpertise of accounting and IT services across borders. Most of the companies in the accounting services industry wereglobal companies. After all, most of their clients were global organizations. However, one particular region, Europe, wouldcreate tremendous opportunities for the companies in the accounting services industry, along with the U.S. market. TheEuropean market was changing and was becoming more efficient and integrated. There were few indicators suggesting thatEurope would be a region of opportunity. Increasingly more government run organizations were privatized and Europeanmarkets were liberated, which would open up new markets. Regulatory harmonization and the development of newEuropean capital markets would help to increase competition and created capital markets based on industry sectors rather


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than countries. Thus, the new Europe would offer enormous opportunities to businesses that prepared well for the changesahead. Those who did not would be exposed to increasing risks and unforeseen threats.

The new Europe would create a more competitive environment where the flow of information would increase,thus, forcing companies to decrease the speed of the decision making process. In addition, the liberalization of capitalmarkets and the privatization of government owned entities would diminish the traditional business role of the government.Investors and creditors would become the main force of the capital markets and the economy. Thus, the need for timelyreliable and relevant information from the creditors and investors point of view would increase, which in turn would

increase the opportunities of the firms in the accounting services industry.

The keys to success in this area were to develop a global reputation as a worldwide name in accounting and ITconsulting, to secure long-term contracts, and to develop expertise in international capital markets, accounting services,financial advisory services, and IT services.

EXPANSION STRATEGIES

Many of the short-term opportunities would come from large assignments and contracts. As mentioned before,many clients were searching for a total package of services. Naturally, most of those services were offered by largecompanies, which possessed the necessary expertise and capital. In fact, small-scale companies might offer valued servicesbut lacked the necessary capital. Thus, to ascertain growth and development most of the firms in the accounting servicesindustry had tried to align themselves with other companies. This provided and opportunity to stay abreast of technological

developments, new trends, and new market opportunities. The most common practices used to expand into new marketsand/or services were through acquisitions and alliances.

Acquisitions

There were many reasons why one company might want to acquire another but the most common reasons were toexpend its line of business and enter new markets. Where appropriate, acquisitions were preferred to other forms ofbusiness convergence because the managers of the buying company could exercise full control over the acquired entity.

The keys to success in this area were to develop sufficient technical and business knowledge of the acquiredcompany, to possess adequate capital, and to match the corporate cultures and business strategies of both companies.

Alliances

Like acquisitions, alliances were formed for the same basic reasons to expand the business line, to enter into newmarkets, and to decrease the burden of the capital requirements. However, unlike acquisitions, in alliances the managers ofeither company could not exercise full control over either company.

The keys to success in this area were to commit management in order to ascertain that the new alliances supportthe company strategic business plan, to maintain client perception of independence and objectivity, and to ascertain thestrategic focus of all partners.

COMPETITION

The competing companies consisted of internal and external companies to the accounting services industry. Asindicated before, the internal competitors were the Big Five accounting firms, and the largest external competitors wereIBM, Electronic Data Systems, and Computer Science Corporation.

Internal Companies

The main internal competitors for KPMG were the other four of the Big Five accounting firms:PricewaterhouseCoopers LLP, Andersen LLP, Ernst & Young LLP, and Deloitte & Touche Tohmatsu.

PricewaterhouseCoopers LLP. PricewaterhouseCoopers was the worlds largest accounting professional servicecompany. In 2001, global revenues reached $22.3 billion, a 7.6% increase over the previous years revenues of $20.7billion. The company operated in 150 countries in four main geographic areas, North America, South America, Asia-Pacific, and Europe/Middle East/Africa. In 2001, revenue growth was 2.3% in North America, to $10.1 billion, and up


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3.1% in South America to $821 million. In Asia-Pacific, it was up 18% to $2.4 billion, and in Europe/Middle East/Africawas up 12% to reach nearly $9 billion. The company provided services in four major areas including assurance, tax,financial advisory, and IT consulting services. In 2001, assurance services revenues grew 7.4% to $8.7 billion. Tax servicesregistered double-digit growth in a row, amounting to $4.4 billion, an increase of 14.7% over the previous year. As shownin Figure 6, the company received most of its revenues from its consulting and financial advisory practices (45%), followedby its accounting and audit practices (36%), and tax practices (19%).

Figure 6

PRICEWATERHOUSECOOPERSS GLOBAL REVENUES BY SERVICE (2001)

Accounting &

Audit Services

36%

Tax Services

19%

Consulting &

Financial

Advisory

Services

Source: PricewaterhouseCoopers (2002). [Online]. http://www.pwcglobal.com.Accessed July 31.

The company provided an expertise in twenty-four market sectors, which could be grouped into three clustersconsistent with the services that the company provided: consumer and industrial products and services, financial services,

and technology, information, communication, and entertainment services. In the consumer and industrial products andservices sector, the company provided expertise to pharmaceuticals, biotech, healthcare, energy and utilities, andautomotive companies. The companys market share among the pharmaceutical and biotech companies was 50% and 30%,respectively. In the financial services sector, the company provided expertise primarily to banks, insurance, and venturecapitalist companies. The companys market share among the venture capitalist companies was 48%. In the technology,information, communication, and entertainment services sector the company provided expertise to networking &communication equipment, semiconductors, software, and media & entertainment companies. The companys market shareamong the networking & communication equipment, software, and semiconductor companies was 54%, 49%, and 41%,respectively. In addition, the company provided audit, tax, financial advisory, and consulting services to more media andentertainment companies than any other company in the industry.

In the service area, PricewaterhouseCoopers was strong in providing assurance, tax, and bookkeeping services.The company offered those services to a wide range of clients and covered a vast number of industries. However, the

company was lacking in tailoring and customizing those services based on the clients needs. In addition, the company wasweak in providing IT consulting services to the U.S. and international federal, state, and local governments. In thetechnology area, PricewaterhouseCoopers was strong in developing technical expertise of the Internet including hardwareand software applications. In addition, the company had a strong ability to develop broad based IT solutions.

Deloitte & Touche Tohmatsu. Deloitte & Touche Tohmatsu was the worlds third largest accounting professionalservice company. The company operated in 140 countries and served approximately one-fifth of the worlds largestcompanies as well as well as large national enterprises, public institutions, and successful fast-growing companies [Deloitte& Touche Tohmatsu, 2002]. In 2001, global revenues reached $12.4 billion. The company provided services in four majorareas including assurance, tax, financial advisory, and IT consulting services. As shown in Figure 7, the company receivedmost of its revenues from its accounting and audit practices (44%), followed by its consulting and financial advisorypractices (34%), and tax practices (22%).

Figure 7DELOITTE & TOUCHE TOHMATSUS GLOBAL REVENUES BY SERVICE (2001)

Accounting &

Audit Services

44%

Tax Services

22%

Consulting &

Financial

Advisory

Services

Source: Deloitte & Touche Tohmatsu (2002). [Online]. http://www.delloite.com.Accessed July 31.


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The company provided an expertise in five market sectors including financial services, energy, manufacturing,retail and consumer products, and technology, media, and telecommunications. In the energy sector, the company providedexpertise to electric power, mining, oil & gas, and water companies. In the manufacturing sector, the company providedexpertise to aerospace & defense, automotive, consumer products, technology, chemical, metal, and paper companies. Inthe retail & consumer products sector, the company provided expertise to agribusiness, food manufacturing, generalmerchandise manufacturing, retail, and wholesalers companies.

In the service area, the company was strong in providing traditional accounting and bookkeeping services.

However, it was weak in providing assurance and tax services. The company covered fewer industries than bothPricewaterhouseCoopers and KPMG International. In addition, the company was weak in providing IT consulting servicesto the U.S. and international federal, state, and local governments. In the area of technology, it was strong in developingtechnical expertise of the Internet including hardware and software applications. However, the company was weak indeveloping Internet-based IT solutions. The company lacked the capital to develop innovative technologies.

Ernst & Young LLP. Ernst & Young was the worlds fourth largest accounting professional service company. In2001, global revenues reached $9.9 billion, a 7.2% increase over the previous years revenues of $9.2 billion. The companyprovided services in four major areas including assurance, tax, financial advisory, and IT consulting services. In 2001,assurance services revenues grew 5.3%, tax services revenues grew by 8.8%, and financial advisory services revenuesposted the largest revenue increase of 18.7%. In addition, the company provided audit services to 18.4% of BusinessWeeks Global 1,000 companies. As shown in Figure 8, the company received most of its revenues from its accountingand auditing practices (51%), followed by its tax practices (31%), and consulting and financial advisory practices (18%).

Figure 8

ERNST & YOUNGS GLOBAL REVENUES BY SERVICE (2001)

Accounting &

Audit Services

51%Tax Services

31%

Consulting &

Financial

Advisory

Services

Source: Ernst & Young (2002). [Online]. htpp://www.ey.com. Accessed July 31.

The company provided an expertise in ten market sectors including automotive, energy & utilities, chemicals,financial, health, real estate, retail and consumer products, technology, communication, and entertainment. The companyoperated in 130 countries in three main geographic areas, the Americas (which comprised the United States, Canada andLatin America), Asia-Pacific, and Europe/Middle East/Africa. In 2001, revenue growth was 8.3% in the Americas, and20% in Europe/Middle East/Africa.

In the service area, Ernst & Young was strong in providing traditional accounting and bookkeeping services.However, the company was weak in providing assurance and tax services. The company covered fewer industries than bothPricewaterhouseCoopers and KPMG International. In addition, the company was weak in providing IT consulting servicesto the U.S. and international federal, state, and local governments. In the technology area, Ernst & Young was weak indeveloping technical expertise of the Internet including hardware and software applications. In addition, the company wasweak in developing Internet-based IT solutions. The company lacked the capital to develop innovative technologies.

Andersen LLP. Andersen was the worlds fifth largest accounting professional service company. In 2001, globalrevenues reached $9.3 billion, a 9.4% increase over the previous years revenues of $8.5 billion. The company providedservices in four major areas including assurance, tax, financial advisory, and IT consulting services. In 2001, assuranceservices revenues grew 8.7% to $4.26 billion. Tax services revenues posted the largest revenue increase of 13.7%amounting to $2.98 billion. Financial advisory services revenues grew by 4.9% to $390 million and consulting servicesgrew by 4.9% to $1.7 billion. As shown in Figure 9, the company received most of its revenues from its accounting andauditing practices (44%), followed by its tax practices (30%), and consulting and financial advisory practices (26%).


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Figure 9

ANDERSENS GLOBAL REVENUES BY SERVICE (2001)

Accounting &

Audit Services

44%

Tax Services

30%

Consulting &

Financial

Advisory

Services

26%

Source: Andersen (2002). [Online]. http://www.andersen.com. Accessed July 31.

Andersen specialized in seven industry sectors including energy and utilities, financial services, healthcare(healthcare providers and healthcare products), government services, manufacturing, professional and environmentalservices, real estate and hospitality, and technology, media and communications. In the energy and utility sector, thecompany provided expertise to mining, oil & gas, utility, and energy trading companies. In the financial sector, thecompany provided expertise primarily to insurance and banking companies. In the manufacturing sector, the companyprovided expertise to retail, transportation, distribution, and industrial construction companies. The company operated inabout 17 countries in four main geographic areas, North America, Latin America, Asia-Pacific, and Europe/MiddleEast/Africa. In 2001, revenue growth was 11.7% in North America, to $4.49 billion, and up 2.7% in Latin America to $0.40

billion. In Asia-Pacific, it was up 7.1% to $1.2 billion, and in Europe/Middle East/Africa was up 9% to nearly $3.26 billion.

In the service area, Andersen was weak in providing assurance, tax, and bookkeeping services. Traditionally,Andersen was strong in providing assurance and tax services. In fact, the company had more clients than the rest of theaccounting firms. However, the company was found guilty of obstruction of justice in the U.S., which forced many of theAndersen clients to abandon the company. In addition, Andersen would not be able to provide accounting services in Texasbecause the company was stripped of its accounting license in Texas. In addition, the company was weak in providing ITconsulting services to the U.S. and international federal, state, and local governments. In the area of technology, Andersenwas weak in developing technical expertise of the Internet including hardware and software applications. In addition, thecompany was weak in developing Internet-based IT solutions. The company lacked the capital to develop innovativetechnologies.

External Companies

The major companies competing in the accounting services industry were the big giants such as IBM, ElectronicData Systems, and CSC as well as smaller companies such as The Arthur D. Little, BDO International, Bain & Company,Booz-Allen, Boston Consulting, Grant Thornton International, Marsh & McLennan, McKinsey & Company, TowersPerrin, and American Management Systems.

IBM. IBM was the worlds largest IT company, as well as the world's largest hardware company providing a widerange of services and products. In addition, the company was the worlds largest provider of outsourcing services. Thecompany had also developed service and product expertise in a wide range of industries. In 2001, total revenues decreased$2.5 billion, or 2.8%, to $85.9 billion when compared with $88.4 billion in 2000. In 2001, about 40% of the total revenueswere received from IT serviced including IT consulting services. About 38% of the total revenues were received fromhardware products. In addition, about 15% of the total revenues were received from software products. IBM was one of theleading providers of IT consulting services to the U.S. federal, state, and local governments. IBM had been a partner with

the U.S. Federal Government for most of the 90 years of the company history. Given the size, expertise, and solidrelationships, IBM had positioned itself to be one of the main services and products providers to the U.S. Government.IBM had developed IT expertise in more than 15 industries. In addition, the company provided services and products tolarge, small, and medium size companies.

According to the IMB mission statement, the company strove to develop and manufacture the most advancedinformation technologies, including computer systems, software, networking systems, storage devices, andmicroelectronics. In addition, the company strove to translate these advanced technologies into value for their customersthrough their professional solutions and services businesses worldwide [IBM, 2002]. According to this strategic position,the company strove to first develop advanced information technologies and than implement these technologies in the


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framework of its business clients, rather than first develop competitive strategies for its clients, and then develop advancedtechnologies to meet these competitive strategies.

In the service area, IBM was strong in providing IT consulting services to public, private, and the U.S. andinternational governments. In fact, the company was the leading provider of IT consulting services in the world. Moreover,the company was the leader in providing outsourcing services. The company offered those services to a wide range ofclients and covered a vast number of industries. In the technology section, IBM was strong in developing technicalexpertise of the Internet including hardware and software applications. In addition, the company had a strong ability to

develop broad based IT solutions. The company had the necessary capital to develop innovative technologies.

Electronic Data System (EDS). EDS was a global services company providing strategy, implementation, andhosting services and solutions. The company had more than 35,000 business and government clients around the world, andin 2001 received more than 40% of its revenues from non-U.S. organizations. Total revenues increased $2.3 billion, or12%, in 2001 to $21.5 billion when compared with $19.2 billion in 2000. Revenues from base clients increased $2.6 billion,or 16%, to $18.5 billion in 2001. A major client of EDS was General Motors (GM). In fact, 19% of the revenues in 2001were earned from services offered to GM. However, revenues from GM decreased $297 million, or 9%, in 2001 primarilydue to GM's decision to tighten discretionary spending due to the current state of the worldwide economy and theautomotive marketplace [EDS, 2002]. EDS offered a wide range of products and services. The main products offered wereinformation solution packages. In fact, 75% of the revenues in 2001 came from the sale of information solutions products.In 2001, revenues from information solutions products increased $2.1 billion, or 15%, in 2001 to $16.2 billion. In addition,the company offered IT consulting services, which in 2001 amounted to $2.4 billion or 11% of total revenues.

In the service area, EDS was strong in providing IT consulting services to public, private, and the U.S. andinternational governments. However, the company was weak in offering those services to a wide range of clients andindustries. The company offered those services to a wide range of clients and covered a vast number of industries. In thetechnology area, EDS was strong in developing technical expertise of the Internet including hardware and softwareapplications. In addition, the company had a strong ability to develop broad based IT solutions.

Computer Science Corporation (CSC). CSC was a global services company providing clients with three main linesof services: management consulting/professional, outsourcing, and systems integration. In 2001, total revenues increased$1.1 billion, or 11.7%, to $10.5 billion when compared with $9.4 billion in 2000. The company received most of itsrevenues from outsourcing services (44%), followed by management consulting/professional services (34%), and systemintegration services (22%). In addition, the company received most of its revenues in the U.S. (55%), followed by Europe(25%). CSC provided an expertise in eight market sectors including aerospace & defense, chemical, communications &

high tech, consumer products, financial services, government, health services, and retail [CSC, 2002].

In the service area, CSC was strong in providing IT consulting services to public, private, and the U.S. andinternational governments. However, the company was weak in offering those services to a wide range of clients andindustries. The company offered those services to a wide range of clients and covered a vast number of industries. In thetechnology section, CSC was strong in developing technical expertise of the Internet including hardware and softwareapplications. In addition, the company had a strong ability to develop broad based IT solutions. The company lacked thenecessary capital to develop innovative technologies.

THE COMPANY

HISTORY

KPMG International was formed in 1987 with the merger of Peat Marwick International (PMI) and Klynveld MainGoerdeler (KMG) and their individual member firms. The organization's history could be traced through the names of itsprincipal founding members whose initials form the name "KPMG." K stands for Klynveld, the surname of Piet Klynveldwho founded the accounting firm Klynveld Kraayenhof & Co. in Amsterdam in 1917. P is for Peat, the surname of WilliamBarclay Peat who founded the accounting firm William Barclay Peat & Co. in London in 1870. M stands for Marwick, thesurname of James Marwick who founded the accounting firm Marwick, Mitchell & Co. with Roger Mitchell in New YorkCity in 1897. Finally, G is for Goerdeler, the surname of Dr. Reinhard Goerdeler who was for many years chairman ofDeutsche Treuhand-Gesellschaft and later chairman of KPMG [KPMG International, 2002].


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KPMG International was the global network of professional advisory firms whose aim was to turn knowledge intovalue for the benefit of its clients, its people and communities [KPMG International, 2002]. KPMG International was thesecond largest accounting firm in the world. In 1987, after completing what was the accounting profession's first mega-merger, KPMG International had taken a number of innovative steps to transform the professional services industry. It wasthe first multidisciplinary organization to establish itself along industry-specific lines of business. This enabled KPMGInternational member firms to tailor services and strategies to the individual needs of clients across a range of globalindustry markets [KPMG International, 2002].

INDUSTRY COMPETENCE

KPMG International provided professional services with expertise in ten major industries: banking, insurance,industrial, automotive, chemical, pharmaceutical, consumer markets, electronics, communication, and energy & naturalresources.

The Banking Industry

KPMG International was dedicated to the financial services sector. The firm provided services around the world tocommercial banks, investment managers, mutual fund companies, brokerage firms, investment banks, private banking andtrust operations, savings banks, credit unions, mortgage banking companies, international banks, and finance companies. Inthe banking industry, KPMG International provided professional services to 47% of the world's 500 largest banks, whichwas the largest line of business.

The Insurance Industry

In the insurance industry, KPMG provided professional services to 67% of the top 100 insurance companies. Thefirm also provided professional services to eight out of ten of the world's top reinsurance companies and audited 26% of theworld's top 100 insurance companies.

The Industrial Industry

In the industrial industry, KPMG International specialized in the engineering technology based industries, whichincluded aerospace & defense, machinery and electrical equipment, metal processing, and metal products.

The Automotive Industry

KPMG International provided a wide range of assurance, tax, financial advisory, and consulting services tomanufactures and suppliers in the automotive industry.

The Chemical Industry

KPMG International provided a broad range of financial and non-financial advisory and assurance services tochemical companies. The firm was recognized globally as one of the leading accounting, tax, and advisory firms for thechemicals industry. KPMG International chemical teams worked closely with and for many of the world's largest chemicalcompanies [KPMG International, 2002].

The Pharmaceutical Industry

KPMG International provided a broad range of financial and non-financial advisory and assurance services topharmaceutical companies. The firm was recognized globally as one of the leading accounting, tax, and advisory firms forthe pharmaceutical industry. KPMG International pharmaceutical teams worked closely with and for many of the world'slargest pharmaceutical companies [KPMG International, 2002].

The Consumer Markets Industry

KPMG International was a leading provider of advisory services to national and international retailers. The firmadvised on many of the commercial and financial issues, which arise in this area.


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The Electronics Industry

KPMG International provided a broad range of financial and non-financial advisory and assurance services toelectronics, software, communications, and media & entertainment companies. The accounting firm served 9 of the top 10global electronics companies including Siemens, Hitachi, Matsushita, Sony Electronics, Fujitsu, NEC, Royal PhilipsElectronics, IBM, and Hewlett-Packard.

The Communication Industry

KPMG International provided communication industry-focused services that were highly integrated acrossassurance, tax, corporate finance, and consulting.

The Energy and Natural Resources Industry

KPMG International offered assurance and assurance-based advisory; tax and legal; financial advisory; andconsulting services to companies that operated in four areas, oil & gas, power & utilities, mining, and forestry.

In summary, KPMG International covered a wide range of industries. The company was strong in providing allservices to the financial, insurance, and electronics industries. However, the company was weak in providing all services tothe rest of the industries.

ACCOUNTING SERVICES

In general, KPMG International offered three types of services: accounting, IT consulting, and financial advisory.Accounting services could be divided into two sub-categories: assurance, and tax and legal.

Assurance Services

The assurance practice helped clients manage risk so they could focus on their core businesses. By intimatelyunderstanding each client's business, KPMG International converted information into insights to uncover hiddenopportunities to improve client efficiency and performance [KPMG International, 2002]. KPMG International assuranceservices were the largest source of revenue for the company. In 2001, approximately 45% of the total revenues werederived from assurance services. The company offered two types of assurance services: financial statements audit services,and management assurance services.

Financial Statements Audit Services. The financial statement audit was the cornerstone of assurance services.KPMG International financial statements audit services were the most profitable line of business compared to all otherassurance services that the company provided to clients. Most of the clients were large publicly held companies. In fact, thecompany provided audit services to over 1,800 clients. KPMG International believed that the role of the auditing processwas to reflect and make sense of the risks faced by organizations. The company had developed and employed a BusinessMeasurement Process (BMP) methodology that helped the firm to analyze clients businesses in the context of the clientsmarket environment and industry. BMP provided a framework for examining financial and non-financial information flowsthat affected the financial statements, and it enabled the accounting companys service team to work with the client toidentify opportunities for improving the clients financial performance. In addition, these models provided up-to-dateinformation on key industry trends and issues that could affect the client business. They identified the areas that posed thehighest risk to the clients financial statements. The BMP methodology provided a continuous audit process. It enabled theauditor to stay in touch with the client year-round-keeping current with the client business and changing market conditions,

and providing the client with ongoing feedback.

Management Assurance Services. The internal audit was the cornerstone of the management assurance services.The traditional internal audit model was developed over 100 years ago, and it had been transaction-based and cost-driven.Today, however, the internal audit was focused on risk. In fact, companies were looking for the internal audit function,which could assess and manage their strategic risks, adding value to the organization and identifying operationalimprovement opportunities. KPMG continued to demonstrate its commitment to advancing the internal audit function witha substantial investment in leading-edge technologies. These technology tools were designed specifically to integrateknowledge into the internal audit process. Many of these database and analytical tools were Web-based and gave theinternal audit professionals access to an extensive store of information. KPMG International's combination of industryknowledge, technology tools, and global internal audit methodology could help the client to get a greater return on the


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clients internal audit investment. The specific services offered in this area were comprehensive business risk assessment,quality assurance review, strategic sourcing (co-sourcing and outsourcing), establishing an internal audit function, andreengineering the internal audit function.

KPMG International was strong in providing assurance services. In fact, the company offered those services to awide range of clients and industries. In addition, the company was able to tailor and customize the assurance services basedon the clients needs.

Tax and Legal Services

KPMG International tax services were focused on finding opportunities and leveraging them to the advantage ofclients in the form of significant tax savings. Through tailored and innovative initiatives, the services could help reduce aclient's bottom-line expenses. K

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Kpmg International

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