Organic Growth Strategies of the Audit and Accounting Firms in Germany

Abstract

Organic growth is one of the fundamental strategic options of Professional Services Firms (PSF). Due to the high degree of concentration at the audit market and the existing market structure consisting of four major players, the Big Four audit and accounting firms, there is little room for inorganic growth through mergers and acquisitions among these companies. In contrast, the current audit market conditions require the Big Four global accountancies to sustain organic growth through higher margin. Larger and long-term audit assignments contribute to professional services firms' growth based upon economies of scale and client relationships. In this study, the author examines tactical approaches of PSF to sustain organic growth through sales of audit products and associated services in Germany for their major target market, the listed companies - the DAX 30. Some of these companies were recently involved in the eminent audit tenders. In contrast to previous field research, which primarily takes demand into consideration (investigating audit market demand by getting clients involved in the research), the author focused on the statuary audit industry (investigating audit market supply by involving auditors in the research field). According to the model that we introduce later in this paper, gaining organic growth for audit firms through revenue and market share requires increasing sales of audit products and the related services: tendering, selecting and appointing auditor respectively. Organising and participating in tenders, selecting a new and changing the current auditor are costly processes for both audit firms and companies. Data elicit that auditor change does not take place on a regular basis within DAX 30 community. Practitioners (clients and policy makers) also claim that there is a lasting inertia in the German audit market. By applying factor analysis, this paper isolates the determining factors for the dynamic of the audit market to change incumbents and appoint new or reappoint existing auditors for DAX listed firms. The author introduces a novel approach explaining the process of auditor change and investigates empirically the related determining factors without providing evidence for the causality among the determining variables. The paper has been revised in March 2009. The recent auditor change in DAX (Siemens), switching KPMG by E&Y, has been addressed. However, data reveals the overall issues associated with selecting and appointing an auditor.