Last week, a global Big Four accounting firm, PricewaterhouseCoopers (PwC), took over the tax practice unit of India-based RSM Pvt. Ltd. for an undisclosed sum. With a combined staff strength of more than 4,000, the merged entity is `the largest tax advisory in India,' one learns.

M&A (merger and acquisition) in business is not new to India, though deals in accounting profession are not so frequent. Does the profession need M&A, closer home? Perhaps, yes, says Mr V. Pattabhi Ram, a Chennai-based chartered accountant. "With Indian business going global, size and branding have become crucial. Accounting firms realise that the quickest way to growth is the M&A route. If a firm that is strong in tax practice merges with one that is strong in audit practice there would be the natural expansion in revenue (synergy gains) arising out of cross-selling audit and tax practice to the client. Today clients are happy seeking top class service from a single window. With growing size you tend to beat down the competition," he reasons.

Excerpts from the interview:

What are the pros and cons of mergers? What can go wrong?

It is doubtful whether the mergers that are happening in India are mergers in the real sense. With each entity not dissolving its individual identity, they look more like marriages of convenience. Perhaps this is required because in India the audit firms are driven more by people and individuals and less by process.

The big firms are, perhaps, exceptions. Clients tend to be comfortable with specific partners rather than with any partner. Often the client walks away when a partner elects to walk away. In most organisations `partner' becomes more of a designation than a feeling of ownership that it once entailed. From the client's perspective the global alliance ups the fees without there necessarily being a significant value addition to the client.

What are the niceties in the M&A wave in the accounting profession?

In many cases the M&A doesn't involve one firm legally gobbling up another. Yet for all external purposes they are one firm. For instance, today PwC is the public face of Lovelock and Lewes with those who work for Lovelock and Lewes being simply understood as belonging to PwC.

This has some historical reasons. Such as, that a firm in India cannot have more than 20 partners. A partner cannot sign more than 20 statutory audits. As a firm grows in size two things happen. One, it will have to offer a great career path if it has to attract the best talent. Partnership is an important carrot. The statutory limitation of 20 partners acts as a dampener. Two, the number of audits that the firm picks increases. The statutory limitation of 20 audits per partner comes in the way. There is, therefore, a natural need to float more firms. Little wonder then that we have Price Waterhouse, Price Waterhouse & Co, Price Waterhouse & Co, Bangalore all owing allegiance to PwC. You also have A F Fergusson & Co as well as A F Fergusson and Associates. And finally, S R Batliboi & Co as also S R Batliboi & Associates.

A second nicety is in terms of one accounting firm having different partnerships and being headquartered in different parts of the country. You thus have a Brahmayya & Co headquartered in Chennai with one set of partners, another in Vijayawada with another set of partners. The same is the case with Deloitte, Haskins & Sells (DHS) and with C C Choksi & Co. This gives operational flexibility with a shared brand name.

Whether audit firms should merge or form an informal network of firms are questions that accounting firms are currently seized with. While one could endlessly debate on it, one thing is certain. Size is going to count. Firms will have to build size either directly through partnerships or indirectly through networking. If they don't they will go the dinosaur way, dead.

Do we have a ranking of the big firms in India?

A first of its kind research report made out in March 2006 by Prime Academy, Chennai, ranked audit firms on five key parameters, namely: size of the firm (number of partners); number of audits; turnover of the company audited; turnover of the audit firm; and geographical spread of the firm.

And came out with the following finding:

1. A F Ferguson & Co (DHS)

2. Deloitte, Haskins & Sells (DHS)

3. S B Billimoria & Co (DHS)

4. S R Batliboi & Co (E&Y)

5. B S R & Co (KPMG)

6. Price Waterhouse & Co (PwC)

7. Lodha & Co

8. Lovelock & Lewes (PwC)

9. Price Waterhouse (PwC)

10. S R Batliboi & Associates (E&Y)

Nine of the 10 firms making the grade owe allegiance to one or the other of what the world calls the Big Four. Grabbing the 1st, 2nd and 4th ranks are firms that have an arrangement with the Deloitte banner. Taking the 3rd and 10th slots are firms that are better known in India by the name of their global affiliates, Ernst &and Young (E&Y). Ranks 5, 8 and 9 have gone to the global topper, the PwC group. Ranked 7th is BSR & Co, the Indian arm of the global firm KPMG.

D. Murali