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Auditors see slow growth, less consulting deals

Old actors, new client attitudes keep audit market moving.

The proportion of tax consulting tasks has increased within the profiles of big auditing companies, while the share of management and financial consulting has decreased, executives of the top financial consulting firms unanimously say. As far as the basic auditing profile is concerned, the number of assignments has grown; the total revenues they have generated, however, have not yet reached pre-crisis levels.

In some respects, the market was not changed much by the crisis. Corporate actors are the same as before. So is the ranking of companies. Even pre-crisis trends tend to continue; the only significant change is that clients have grown more cautious. “Big corporations are spending less on things they can do themselves. On the other hand, they are willing to pay more in order to avoid the sanctions of tax authorities and optimize their tax burdens,” István Havas told the Budapest Business Journal.

In the experience of Ernst & Young’s managing director, the number of assignments coming from the central government has dropped even more radically than corporate commissions.

According KPMG’s managing partner, Robert Stöllinger, slow GDP growth and lower volumes of FDI have resulted in the stagnation of the audit market. “In addition, over that last 12 to 18 months, companies have been simplifying their business organization and structures in Hungary which, after a short-term increase, results in a decline in work. On the other hand, continued growth of financial shared service centres is providing some additional work to audit firms.”

PricewaterhouseCoopers (PwC) went counter to this trend when it decided to purchase Scale Consulting, the regional market leader in IT financial consulting. “This deal is absolutely in line with our strategy which is to enhance the share of our business consulting group in the sectors of financial services, energy, telecoms and shared services consulting,” said George Johnstone, managing director of PwC.

But a competitor of the firm voiced his doubts about that reasoning. In his opinion, the only argument supporting the acquisition might have been the favorable price, as the corporate consulting sector is unlikely to expand in the near future.

Executives of the big auditing companies agree that mergers & acquisitions is currently the most dynamically developing area. “Since the crisis ebbed away, primarily German investment funds have been seeking our consulting services,” said Roland Felkai, managing director of Rödl & Partner, a third-tier consultant. He thinks the healthcare sector may potentially provide several promising clients, although private healthcare in Hungary is not yet well-developed. Government regulations do not always point to broadening market participation in helathcare either.

Philip Bruno Michalak, managing director of Mazars, thinks it is unfortunate that the acquisition of Hungarian pharmacies by foreign investors has been prohibited by a recent piece of legislation – the 2010 Act on the Regulation of the Secure Trading with Pharmaceuticals; such transactions are not possible anymore as no more than four pharmacies may be held by one investor.

The core business: auditing

The field of auditing has recently been characterized by two fundamental tendencies. On the one hand, big auditing companies have been gaining ground at the expense of single-person auditing businesses; on the other hand, price competition has been intensifying. “Ernst & Young has increasingly been turning toward Hungarian-owned mid-size companies, which used to be the traditional clients of small auditors,” reports Havas. Within the total revenues of the Big Four, a growing proportion has been derived from assignments for trans-pricing documentation and tax compliance. Both are manadatory for mid-size companies. According to our sources, however, mid-size firms find these obligations rather burdensome. “When it comes to trans-pricing documentation”, an expert from Colling explained, “it is not quality clients expect, but a minimalization of costs.”

Tax legislation

“It is a pity that the effects of the 10% profit tax, which would theoretically make companies in Hungary extremely competitive, are undermined by the infamous crisis taxes levied on banks, telcos and retail chains,” Roland Felkai said. Executives of other companies shared his opinion. They welcome many of the government’s tax reforms, intended to expand the pool of taxpayers; however, they share the worries of many foreign investors regarding the crisis taxes, being uncertain about when these taxes will expire.

“Regarding taxation, what the business sector needs the most is stability, so that medium- to longer-term plans can be made on a reliable basis. Two specific items where changes should be considered are the local business tax and employer social security charges. The former represents a very significant tax burden on corporate profits, especially for the innovation and service based sectors of the future. With the latter, a cap would be helpful in attracting investment and would quite likely result in an overall increase in tax revenue,” Robert Stöllinger told the BBJ.


This article appeared in the BBJ's Law & Tax special report on May 6, 2011.