ConsultingMid-tier firms

GROWING PAINSMid-tier firms are finding that size does matter, as they respond to a stricter compliance environment and try to get their heads, and hands, around big dataIllustrations by Benedetto Cristofani

26 April 2016

aplus

April 2016 27

ConsultingMid-tier firms

H ong Kong’s mid-tier firms are experiencing grow-ing pains. Bridging the

gap in the market between small audit-based accounting firms and the increasingly advisory-focused space the Big Four occupy, Hong Kong’s mid-sized firms are look-ing at both consolidation and expansion.

An increase in initial public offerings, mergers and acquisitions is creating ample business oppor-tunities in advisory services, while big data and other digital innovation are opening the profession up to new possibilities. However, at the same time it has become more chal-lenging for all firms, whether big or small, to reinvent themselves and fight for the talent in order to thrive.

The challenge for the mid-sized firms is meeting the business world’s growing advisory needs, while maintaining their traditional bread and butter role of supporting small- and medium-sized enter-prises with their audits, amid ever tougher compliance and reporting requirements.

“The Big Four are shifting their business focus into advisory ser-vices, whereas mid-sized firms are still struggling with the traditional statutory audit work, which is highly commoditized and therefore price competitive,” says Albert Au, Chairman of BDO Hong Kong.

With a headcount of 1,000 and rising, BDO Hong Kong is one of the largest of the medium-sized

firms in the city. Au, a past presi-dent of the Hong Kong Institute of CPAs, says regulatory issues are determining the type of profession-als he is looking to hire.

“Industry or sector specialization is important because of the increas-ing regulation in clients’ businesses, for example financial regulations such as those from the Securities and Futures Commission, Hong Kong stock exchange and Institute of Internal Auditors, as well as anti-money laundering and know-your-customer requirements.”

RSM Hong Kong has a staff of 450, which has been steadily growing, and is looking to hire more graduates in the coming year, driven in part by requirements for new skills, in areas such as data analytics.

“Apart from the regulatory issues, the convergence of account-ing, finance and IT skills is not only having an impact on hiring demand, but also additional requirements, e.g. feeling comfortable working with various technologies. Account-ing professionals need to use tech-nological tools now to create new ways in analysing and presenting clients’ financial data,” says RSM Hong Kong’s Managing Partner Wong Poh Weng.

Talent poolThis competition for data-savvy accounting professionals from both the Big Four and mid-tier firms is putting pressure on the talent pool.

“We would like to recruit more talent to cope with the increased workload,” says Mazars Hong Kong Managing Director Ste-phen Weatherseed. “However, it has been very difficult to recruit talent of the right calibre and we have been experiencing very tight resources in the past 12 months.”

This workload has come from increased M&A and capital market activity from existing customers along with new businesses from international clients with world-wide operations and new entrants to the Hong Kong and Mainland markets. Weatherseed expects the Hong Kong office to remain steady at around 300 staff this year. “The 2016 outlook is mixed. While we see our clients continuing to

“ While we see our clients continuing to be active, we are cautious in our re-cruitment because of the uncertainty in the economic and political envi-ronments in Hong Kong, Mainland and Europe.”

28 April 2016

aplus

be active, we are cautious in our recruitment because of the uncer-tainty in the economic and political environments in Hong Kong, the Mainland and Europe.”

The prospect is more bullish at ShineWing (HK) CPA, which expects to increase its headcount by up to 10 percent in 2016. It is currently at around 350. Manag-ing Partner Roy Lo identifies more Chinese IPOs, and an emphasis on risk management, and envi-ronmental, social and governance reporting as driving the demand.

“There is an increasing awareness on ESG reporting, and professionals who could help issu-ers on ESG disclosure are highly wanted, since issuers nowadays are required to make disclosure in its annual report or ESG report whether they have complied with the ‘comply or explain’ provi-sions,” says Lo.

“The HKEx has highlighted the importance of corporate governance and ESG disclosure in recent years, as seen by its proposal on making changes to the Corporate Gover-nance Code and the implementation of ESG disclosure requirements,” he says, adding that there is an increas-ing expectation from investors and other stakeholders.

It is a similar story with the Big Four. Striving to expand their advi-sory and consulting services, they are on the hunt for industry specific experience, Mainland tax experts and those with data analytics skills.

“The challenge is to get the best people. Everyone wants to get the best ones,” says Derek Lai, Deloitte China’s Southern Region Managing Partner. “We focus a lot on advisory and there is no longer simply compliance but solution driven. There will continue to be space for small, medium and large firms in Hong Kong.”

Recruitment firms report the demand for professionals with IT and data skills and experience from both mid-sized and large firms is strong and competitive.

Adam Johnston, Managing Director of Robert Half Hong Kong and Japan, says with increased reporting there is strong demand for professionals with compliance experience. “Aside from knowledge of global regula-tions, the most highly sought after candidates also have several years of experience with local regula-tors including the Hong Kong Monetary Authority and Securi-

ties and Futures Commission.”Michael Page Hong Kong

Director Rebecca Chan says the HKEx’s changes to the Corporate Governance Code earlier this year have led to a demand for experi-enced professionals as well as a focus on data skills. “There is an increasing demand for talent in compliance, IT auditing and the risk advisory sector,” she says.

To merge or not to mergeWhile mid-sized firms offer management consultant services to SMEs such as outsourcing, accounting and payroll services, and act as business advisors, it is a matter of debate whether further growth into larger scale advisory work is likely to be organic rather than from mergers with manage-ment consultant companies.

BDO’s Au says organic growth may be too slow for those mid-sized firms in a hurry, but mergers are also problematic.

“For mid-sized firms, mergers with management consultants are not really feasible because they [mid-sized firms] lack a brand name. Also, acquisitions are not viable because of the lack of finan-cial resources,” says Au.

After starting off to build up internally, the Big Four opted for acquisitions: Deloitte acquiring Monitor in 2013; PwC acquiring Booze & Co. in 2014; EY acquir-ing Parthenon in 2014; and KPMG acquiring Tower Watson’s human

“ For mid-sized firms, mergers with management consultants are not really feasible because they [mid-sized firms] lack a brand name.”

In February, Mazars merged

with Chinese accounting firm

Union Power, making it rank 13th

in China.

April 2016 29

ConsultingMid-tier firms

30 April 2016

aplus

resources services delivery prac-tice in 2015.

Mazar’s Weatherseed says there is continuing pressure on resources at an international level to invest in technology and talent and to keep abreast of corporate developments.

“The challenge is to find the optimum operating model to allow for excellent client service, all round technical quality and profitable delivery across borders. All firms, including the Big Four, continue to aim to find the right solution, and hold talks at senior levels to explore possible tie-ups. There is nothing new in this, but as we have seen there have not been sufficient incen-tives to lead to any global mergers now for some years.”

ShineWing’s Lo says firms will need to explore some kind of partnership with consulting firms to respond to the rising demand for management consultancy services.

“We would expect that more firms would look to partner with

consulting firms, so that they could join forces to provide more comprehensive services to meet the diversified needs of clients”.

Nevertheless, many mid-tier firms are continuing to build up their strength internally.

“Our other services, especially the specialized advisory and con-sulting services are continuously expanding, and accounting profes-sionals are embracing the increased responsibilities with a more strate-gic role,” says Wong of RSM.

Loosening the beltThe ubiquitous One Belt One Road initiative, proposed to encompass 65 countries and more than 4 billion people, is also cited as potentially creating new business for the mid-tier firms. Hong Kong is perceived to be a key centre for providing professional services to support it.

“This would create a great deal of economic activities, providing immense opportunities for Hong Kong professionals to work in different engagements, including accountants, who could help build a bridge between the Mainland and the rest of the world,” says Lo.

Sentiments echoed by Wong. “Due to the growing economy and the effect of One Belt One Road, the growth-focused entrepreneurial and the new start-up businesses will need professional corporate advi-sory, M&A, IPO, financial advisory services, hence, business opportuni-ties will rise, and there will be a lot of room to develop on both audit and

non-assurance services.”This means that it is crucial for

mid-tier firms to have some form of presence, tie up or partnership with a Mainland domestic firm to service their Hong Kong clients’ busi-ness growth with local expertise. According to BDO’s Au, depending on your specific situation, the tie up could take the form of a loose affili-ation to a merger of sorts.

In January, Mazars opted for the latter. Mazars had already built up a Mainland practice servicing inbound foreign investment “but we needed a domestic merger to gain access to the local market and the growing outbound opportunities,” says Weatherseed. “This is why we have recently merged with Zhong-Shen ZhongHuan, giving us the opportunity to grow a truly Chinese practice with international reach.”

ShineWing has branches in 23 Mainland cities while RSM Hong Kong has a close relationship with its China firm, Ruihua Certified Public Accountants, which is a member of the RSM network.

With greater demands for accountability and ESG reporting, along with Hong Kong intricately linking with the Mainland, jug-gling old roles and new respon-sibilities will define the space mid-sized firms occupy.

“The market is large and diverse, and so as long as there are mandatory audit requirements there will be a need for firms of all sizes,” says Weatherseed.

“ The challenge is to find the optimum operating model to allow for excellent client service, all round technical quality and profitable delivery across borders.”

April 2016 31