12 ACCOUNTANTS TODAY • June 2008

M&As: Pros and ConsThe pressures of stiffer competition and higher stakeholder expectations are weighing on smaller

public practice firms. They may have to resort to mergers and affiliations in order to buildcapacity and pool resources to cope with the risks arising from a changing business landscape.There are innumerable threats to small public practices. For instance, there is a risk that smallcompanies may no longer be subject to mandatory audits in future, which could spell disaster forsmall practices that rely primarily on this source of income. Small practices also find it difficult

to recruit talent in a sellers’ market, since long hours and minimal career developmentopportunities are deterrents.

S P E C I A L R E P O R T

M&As could be the most aptsolution since mergedfirms can optimallyachieve economies of

scale, combine complementary resources,reap tax advantages, and eliminate ineffi-ciencies. Other reasons for choosinggrowth through acquisitions include: in-creasing market power by combining cli-ent bases, penetrating new markets, beingable to offer new product and service lines,

and pooling scarce re-sources.

Public practitioners todayare pressured by a plethoraof challenges, chief of whichare stiffer competition andthe need to navigate tighterregulations aimed at protect-ing stakeholders.

The imminent implementation of AFTA/WTO is set to liberalise markets, and will inturn heat up competition in an alreadycrowded marketplace as new entrants try toget a piece of the public practice pie.

Pressure will also be on public practitio-ners to raise their quality of service, whichmay strain existing tight resources and raisesthe question: “Will we be able to do businessas usual?” A key restraint arrived in the formof the International Standards on QualityControl 1 (ISQC 1) which was adopted sinceJuly 2006, which prescribes certain struc-tures for practicing firms offering audit as-surance services. In addition, the soon-to-be-launched Accounting Oversight Board

(AOB) may further impose restrictions oncertain players within the industry.

To mitigate these challenges, the Malay-sian Institute of Accountants (MIA) activelyencourages its members in public practice

to explore merger and affiliation (M&A) ac-tivities. The benefits of M&As are explicit,albeit marrying two different organisationsand cultures is not simple.

Since M&As are such a complex andcontroversial issue, MIA organised abrainstorming session led by theInstitute’s Chairman, Task Force onMergers and Affiliation, Datuk RaymondLiew, on 16 April 2008 with eight memberfirms within the Klang Valley to hear their

views on M&As. Participating firmsincluded senior partners from BDOBinder, Grant Thornton, AnuarulAzizan Chew & Co., and Cheng & Co.

Fear FactorsOn the whole, there are several push

factors that could see more M&Asemerging in the public practice sector.These include:

Possible Exemption of SmallCompanies from AuditingRequirements

The Company Law Reform Commit-tee (CLRC) under the Ministry of Do-mestic Trade & Consumer Affairs iscurrently studying the pros and consof the compliance audit of small com-panies and is expected to wrap up theirfindings soon. Although this move iswelcomed by small business, especiallyin an economic downturn, a proposal

by the CLRC to abrogate the mandatory au-dit requirements could sound the death knellfor many smaller practices since audit ofsmall companies is their bread-and-butter.This looming threat may make it more vi-

Panellists at the brainstorming session (L-R): Beh Tok Koay,DatukNK Jasani and Dr. Paul Cheng

Chairman of the session,Datuk Raymond Liew

Panellists at the brainstorming session (L-R): Lee Lai Huat, SathiaSeelan and Lim Kien Chai

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13June 2008 • ACCOUNTANTS TODAY

M&As: Pros and Cons

able for firms to consider pooling their re-sources, enabling them to offer their servicesto larger corporations which would still needto comply with mandatory audit require-ments going forward.

Talent CrunchSmaller practices these days are finding it

tough to recruit and retain good staff. Surfinternet search firms such as Jobstreet.comand it is clear that it is virtually impossible tomeet the demand for staff in audit assurance.If the Big 4 are suffering from acute staffshortages, what are the chances of smallerfirms finding and recruiting staff for theirpractices? What can such firms offer theirnew employees? Partnership prospects areno longer a carrot, given the long hours thatthe small practitioners have to put in; theprospect of working from 9 a.m. to 12 mid-night everyday, including Sunday, is hardlyappealing to Gen Y employees seeking theoptimal work-life balance. Therefore, merg-ing smaller firms would be one means of ex-panding human resources and ensuring bet-ter use of resources.

High Compliance CostStandards are changing at an alarming

rate, while new standards are being churnedout speedily. The IASs that we are familiarwith are undergoing reform with the en-hanced version expected to impact industryas early as January 2009. There is the possi-bility that MASB might choose to do awaywith PERS and adopt the IFRS SME Stan-dards that were disclosed recently in an ex-posure draft, in the interests of convergence.Can the smaller practices deal with all thesecompliance costs?

Uneven Playing FieldsAs clients become more and more edu-

cated, they may demand more “cutting edge”products and services. Smaller firms lack theinnovation and resources to compete on thatlevel. The solution may lie in the pooling ofresources so that each partner within amerged outfit can choose to “specialise” inhis or her respective area and becomes anexpert, which could potentially enhance cli-ents’ loyalty to certain practices. Furtherdown the road, M&A activities could be anavenue for firms to create certain specialtiesby inviting the “right” people to join the en-

larged practices.

Competition from Non-TraditionalSources & the Threat of BogusAccountants

Competition is very real and varied, andarises from both traditional and non-tradi-tional sources. For example, Microsoft is talk-ing about re-launching its accounting soft-ware and it certainly has the marketing cloutto push for huge product acceptance.

The situation is compounded by the men-ace of the bogus accountants, whose badbehaviour reflects badly on the genuine ar-ticle.

To counter the impact of such competition,legal or otherwise, practitioners need certaineconomies of scale as well as the financialbudget to implement a successful brandingstrategy. Pooling of such financial resourcesmay be an attractive option by itself.

M&A MeritsNevertheless, we must not let fear rule us

in this brave new world, since fear can cloudus to the many merits of successful M&As.These include:

Potential for Capacity Building byPooling Resources

Pooling of staff may lead to better staffretention for several reasons. First, a betterpool of resources allows firms to specialisein different areas of expertise. Second, a bet-ter pool of resources provides for a greatersharing of technical information, which is cer-tainly a very powerful selling point for anyprofessional setup. Third, with a bigger re-source pool, higher budgets can be allocatedfor R&D programmes, which in turn, canlead to better innovative offerings.

Increasing size and building capacity willalso enable firms to be registered as Tier Oneservice providers once the AOB has beencreated by the Securities Commission.

Expanding the Range of Servicesand Geographical Coverage

Other than auditing and taxation services,M&As enable firms to expand their range ofservices and geographical coverage thanksto the mitigation of resource constraints.Firms will also be able to demonstrate bet-ter commitment to fulfilling clients’ needs byproviding better personal attention, even at

the partners’ level. Last but not least, firmscan achieve better cost efficiency due to theeconomies of scale.

Through a successful M&A, a bigger en-larged firm can consider setting up branchoffices throughout Malaysia and even over-seas. This allows for the provision of a seam-less service to clients as they contemplatemoving to other states within the country oroverseas to expand their businesses.

Wider geographical coverage may alsoallow the practicing firm to tap into the vari-ous economic corridors that the governmentis currently launching between now and2010, which are anticipated to boost eco-nomic activities outside of the Klang Valley.Currently, more than 50% of practicing firmsare concentrated in the Klang Valley.

Practice ContinuityAs more than 90% of the accounting firms

in Malaysia are sole proprietor practices,M&A activities will reduce the concentrationof sole practitioner firms, which are plaguedwith continuity and succession issues.

By enlarging the firm through an M&A,the admission of additional partners is madeeasier since an existing partnership structureis put in place for practicing firms alreadyinvolved in any M&A initiative.

Clients will also be at ease and more reas-sured of continuity of service if practice con-tinuity and succession concerns have beentaken care of.

The Way ForwardThe Institute is committed to doing more

to help member firms build capacity. In fu-ture, we will be organising various round-table discussions around the country to cre-ate awareness and educate our members onthe advantages of M&A initiatives.

We feel that holding many round tableswith limited participants is an appropriatechannel since a small discussion group willenable more honest and open interactionbetween participants and facilitators. Face-to-face interactions will of course be sup-ported with website communications. TheInstitute strongly believes that genuine andhonest communication will be a start in theright direction of bringing about positivechange in the operating landscape of the pro-fession in the coming years.

So please stay tuned for updates. AT

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