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KPMG -1

KPMG INTERNATIONAL: THE ACCOUNTING SERVICES SEGMENT OF THE PROFESSIONAL BUSINESS SERVICES INDUSTRY

by

George N. Itchev Research Associate Tobin College of Business, St. Johns University Jamaica, NY 11439

Marc E. Gartenfeld Marketing Department Tobin College of Business, St. Johns University 8000 Utopia Pkwy, Jamaica, NY 11439 Tel: (718) 990 7419 Email: sjumktprof@yahoo.com

and Robert J. Mockler Joseph F. Adams Professor of Management Director, Strategic Management Research Group Tobin College of Business, St. Johns University 114 East 90th. Street (1B), New York, NY 10128 Tel.: 212-876-5856; Fax: 212-996-6967 E-mail: mocklerr@stjohns.edu

KPMG -2

KPMG INTERNATIONAL: THE ACCOUNTING SERVICES SEGMENT OF THE PROFESSIONAL BUSINESS SERVICES INDUSTRY

INTRODUCTION In the first quarter of 2002, the collapse of Enron Corp., the largest U.S. energy trader, and the possible demise of Andersen, the accounting firm that audited and did consulting work for Enron Corp, brought an increased scrutiny to the common practice of companies using the same accounting firm both to audit the financial statements and to provide consulting services. In the midst of these developments, Mr. Paul C. Reilly, the Chief Executive Officer of KPMG International, the third largest accounting firm in the world, announced that it would no longer accept internal-audit and consulting work from publicly traded clients to which it provided external audit services [News Roundup, 2002]. All of the well-known companies in the accounting services industry pledged to separate their external audit services and consulting services that were provided for the same clients, as well. The lucrative consulting business, however, was the fastest growing source of revenue for KPMG International. It represented 22% of the companys revenues, amounting to $2.6 billion in 2001. In addition, the company tried to globalize its accounting and consulting services, which were provided from more than 830 offices in almost 160 nations. That had led to a reorganization of companys operations into three regional units: the Americas, Europe/Middle East/Africa, and Asia/Pacific [Hoovers Online, 2002]. The main question to be resolved was how to position the company in the rapidly changing economic and political environment. In early-2002, the U.S. Justice Department brought criminal charges for obstruction of justice against Andersen, the fifth largest accounting firm in the world. In mid-2002, Andersen lost the case and was found guilty. The lawsuit against the accounting firm had badly affected Andersen and the accounting profession. For one thing, it was almost certain that the U.S. Congress would enact new stringent regulations that would govern the accounting profession. Several bills had been prepared and it appeared that the prevailing condition of those bills was to separate the accounting and consulting functions. In the short-term, however, the remaining accounting firms would pick most of Andersens clients. Thus, this could provide future growth opportunities for the remaining Big Four accounting firms. KPMG International was an accounting company that operated and competed in the accounting services industry. The accounting services industry included global accounting firms, regional accounting firms, local accounting firms, and information technology (IT) companies. The global accounting firms also known as the Big Five, Andersen LLP, PricewaterhouseCoopers LLP, KPMG International LLP, Ernst & Young LLP, and Deloitte & Touche Tohmatsu LLP, were the larger providers of accounting and IT consulting services. Among the Big Five, KPMG International held 18% of the total market in 2001, as shown in Figure 1. Newcomers in the IT field were large consulting firms such as Computer Science Corporation (CSC), Electronic Data Systems (EDS), and IBM. Figure 1 MARKET SHARE AMONG THE BIG FIVE ACCOUNTING FIRMS (In Terms of Revenue 2001)
Andersen 14% Earnst & Young 15%

Pricewaterhous eCoopers 34%

KPMG International 18%

Deloitte & Touche 19%

Source: Adapted from Glater, Jonathan D (2002). Audit Firms Await Fallout and Windfall, The New York Times, March 14, pp. C1, C4.

KPMG -3 The regional accounting firms operated primarily in the United States. The IT companies competed primarily in the consulting services segment and operated in global, national, and local markets. With changing political and economic trends in the accounting services industry, Mr. Paul C. Reilly was faced with many decisions about the future strategic focus of the company. The important issues were: How to win clients in the rapidly changing accounting services industry? Should the company divest its IT consulting business for publicly held companies? What industry should the company focus on? Should the company expand its accounting services to new clients and industries? How should the company develop its IT solutions? The main question to be resolved was how to differentiate KPMG International from its competition and achieve a winning edge over competitors within the intensely competitive, rapidly changing immediate, intermediate, and long-term time frames.

INDUSTRY AND COMPETITIVE MARKET ANALYSIS THE PROFESSIONAL BUSINESS SERVICES INDUSTRY The professional business services industry, as shown in Figure 2, consisted of six industries; accounting services, financial services, marketing services, management services, legal services, and information technology services. Figure 2 THE PROFESSIONAL BUSINES SERVICES INDUSTRY
THE PROFESSIONAL BUSINESS SERVICES INDUSTRY

THE ACCOUNTING SERVICES INDUSTRY

THE FINANCIAL SERVICES INDUSTRY

THE MARKETING SERVICES INDUSTRY

THE MANAGEMENT SERVICES INDUSTRY

THE LEGAL SERVICES INDUSTRY

THE INFORMATION TECHNOLOGY SERVICES INDUSTRY

The financial services industry included investment bankers and brokerage firms, asset management firms, investment and venture capital firms, mortgage bankers, consumer lenders, commercial lenders, and leasing companies. Since 1980, the business of financial institutions had grown at about one-and-a-half times the rate of growth of the U.S. gross domestic product, and since 1990, its growth had outpaced GDP growth by about two to one [Department of Commerce, 2002]. Companies in the marketing services industry provided wide range of services. Some of the services provided included advertising, media services, and sales promotions. The primary providers of marketing services were advertising and media companies. According to Veronis Suhler Stevenson, a media merchant bank, advertising and media services were expected to increase at a compound rate of 7.4% from 1999 to 2004 and spending would reach $313.6 billion in 2004 [Veronis Suhler Stevenson, 2002]. The management services industry could be divided into two service categories: business relationship management and customer relationship management. The primary providers of management services were business and customers relationship management companies. The worldwide market for customer-relationship management services totaled $22 billion in 2001, a 10.6% increase from 2000 revenue of $19.9 billion, according to San Jose-based Dataquest Inc., a unit of Gartner Inc. [Sacramento Business Journal, 2002]. In the future, the focus of business and customer relationship management was expected to turn from operational and tactical to analytical and business intelligence. The legal services industry included law firms and individual lawyers. The primary providers of legal services were law firms and individual lawyers. The law firms and the individual lawyers provided a wide range of services. The primary providers of information technology services were computer hardware, software, and services companies. IT referred to the collection of products and services that turned data into useful, meaningful accessible information. The IT industry had several major sub industries: computer hardware, software, and services. Often, telecommunications hardware, software, and services were also included in the definition. According to the Department of Commerce, the United States was the world leader in information and communications technology products and services, representing almost 35% of global spending [Department of Commerce, 2002]. In addition, the IT industry accounted for a full third of all real economic growth and half of all productivity growth between 1995 and 1999.

KPMG -4 According to the same report, the financial services industry was the single biggest consumer of IT products and services, spending over $70 billion in 1999. This industry was followed by the communications services ($61.7 billion), manufacturing ($56.9 billion), wholesale ($50.1 billion), business services ($16.8 billion), retail ($18.7 billion), real estate ($17.1 billion), and transportation ($16.8 billion). At 24%, transportation and business services had experienced the highest average annual rate of IT spending growth between the years 1994 and 1995. This was followed by real estate, retail, and manufacturing at 17%, financial services at 14%, and communications services and wholesale, both at 12%. The rapid change of the economic environment, the increased competition and the development of new technologies had forced companies to realize that the professional services offered by the companies in the professional services business industry were integral part of their business environment. To succeed companies had to focus on their core competencies and utilize their capital assets in the most efficient ways. To achieve that, companies often turned to professional service companies.

THE ACCOUNTING SERVICES SEGMENT OF THE PROFESSIONAL BUSINESS SERVICES INDUSTRY The accounting services segment did not exist as an official industry classification and, therefore, was created, as shown in Figure 3, to fit the companies who competed in the accounting, IT consulting, and financial advisory industries. Figure 3 THE ACCOUNTING SERVICES INDUSTRY
THE ACCOUNTING SERVICES INDUSTRY ACCOUNTING SERVICES IT CONSULTING SERVICES FINANCIAL ADVISORY SERVICES CLIENTS TECHNOLOGY MARKETING & PROMOTIONS OPERATIONS REGULATIONS GEOGRAPHICAL MARKETS EXPANSION STRATEGIES COMPETITION

ASSURANCE SERVICES

ENTERPRISE BUSINESS SOLUTIONS

CORPORATE FINANCE

INDIVIDUALS

INTERNET

SECURITIES AND EXCHANGE COMMITIONS INTERNAL REVENUE SERVICE

GLOBAL MARKET

MERGERS AND ACQUISITIONS

EXTERNAL COMPANIES

AUDITS OF FINANCIAL STATEMENTS

ENABLING TECHNOLOGY IMPLEMENTATION

CORPORATE RECOVERY

BUSINESS COMPANIES

INFORMATION TECHNOLOGY SOLUTIONS

ALLIANCES

INTERNAL COMPANIES

REVIEWS OF FINANCIAL STATEMENTS

IT INFRASTRUCTURE MANAGEMENT SYSTEMS INTEGRATIONS

NON-FORPROFIT ORGANIZATIONS

AMERICAN INSTITUTE OF CERT. PUBLIC ACCOUNTANTS FINANCIAL ACCOUNTING STANDARDS BOARD

PRICE WATER HOUSE COOPERS DELOITTE & TOUCHE TOHMATSU

GOVERNMENT

OTHER ATTEST REQUESTS

TAX SERVICES

INFORMATION ASSURANCE

ERNST & YOUNG LLP.

COMPLIANCE WORK

ENTERPRISE MANAGEMENT/ OPERATION SUPPORT KNOWLEDGE MANAGEMENT

ANDERSEN

TAX PLANNING SYSTEM ENGINEERING/ SOFTWARE DEVELOPMENT DATA OPERATIONS AND FACILITY MANAGEMENT

ACCOUNTING AND BOOKKEPPING SERVICES

MANAGEMENT CONSULTING

In mid-2002, the accounting industry has faced strong criticism from lawmakers on Capitol Hill and the public due to questionable auditing practices. In addition, the stock market had plunged more than 20% in 2002, although, the economy, according to most economists, remained strong. All of these events had created an uncertain environment for many industries including the accounting services industry. Although the outcome remained unclear, many professionals in the accounting and financial field agreed that the accounting firms would have to give up most of their consulting services. At the same time, many of these professionals agreed that the accounting firms would be presented with new opportunities. Thus, staying afloat in this environment would require a well planned and executed strategy. Although, the accounting firms would give up most of their lucrative consulting services they were still expected play an important role when it came to consulting. For one thing, some of these consulting services would be transformed into new services that would be more in line with the traditional accounting services. For example, the accounting firms had provided clients with advice on network capability and security. In the near future, the accounting firms would provide clients with new assurance and audit services that would be beyond the scope of financial statements. Also, these new services would be expanded to new clients such as customers and suppliers of the traditional clients. In addition to the new services, the accounting firms would continue to provide IT services to the federal government. In the future, when accounting firms provide IT consulting services to corporations, if at all, they would be guided by stringent rules of independence. However, the same rules would not apply when IT services were provided to the federal government.

KPMG -5 The market for information consulting services was sluggish in 2001 due to economic slowdown in the U.S. and the September 11 attack. However, the IT services were expected to grow as the Federal Government planed to increase its spending on IT systems and services. According to Kennedy Information, Inc., the Federal Government would increase spending on IT systems and services at a compound annual growth rate of 11% from $37.1 billion in fiscal year 2002 to $63.3 billion in fiscal year 2007 [Kennedy Information, Inc., 2002]. According to the report, federal agencies with the greatest spending on IT systems and services included the Department of Defense, the Department of the Treasury, the National Aeronautics and Space Administration, the Department of Transportation, and the Department of Justice. The report shows that these five departments would represent nearly 70% of federal spending on information systems and services in fiscal year 2007 [Kennedy Information, Inc., 2002]. The report also shows that the growth in federal spending would be most significant for professional services and outsourcing, as opposed to spending on equipment, software, and telecommunications. Overall, accounting services were expected to grow as advances in information technology continued to reshape the relationships between businesses, customers, and clients. INDUSTRY TRENDS The accounting services industry, which remained stable for decades, had been changing for the last several years. Recent growth in the industry had come from adding new services most notably, IT consulting services to the traditional audit and tax functions. This had created some challenges for accounting firms. For one thing, IT consulting revenues had outpaced accounting revenues, which had lead to power struggles between IT consulting and accounting firms. However, as explained earlier, it is likely that most of the consulting services provided by the accounting firms would be separated from the traditional accounting function due to conflict of interest between accounting firms, clients, and shareholders. Thus, the future of the accounting services industry lay on the traditional accounting services as well as the introduction of new assurance and audit services. Several important factors would affect and shape the future of the accounting services industry: information technology, competition, corporate structure, and accountability. Information technology capabilities would continue to advance and costs would continue to decline. Technological advances would continue to make products smaller and information more accessible and user-friendly. The result would be that more information would be available. Users would be able to customize information to meet their needs. Advances would permit radical changes in corporate structures such as outsourcing corporate functions to suppliers and distributors. Thus, these changes would raise security issues and change supplier customer relationships. In addition, information would be accessed more quickly. Decision speeds would increase, which would put more pressure on companies. Conversely, information would become more perishable; old information would be less useful. Thus, the increase in the volume of information would cause a need for filters to synthesize or select relevant information. Moreover, control functions would be automated and become more complex, requiring new knowledge and new decision models and an increased reliance on technologists. Thus, paper would be eliminated, changing the risk of fraud requiring new audit approaches. Finally, work units would became more decentralized, which might increase efficiency but at the cost of corporate culture and with the need for additional accountability. In summary, new service opportunities would arise from the changing needs of decisionmakers or clients. The competition among the information-suppliers (including assurance-providers) would increase. New competitors would enter the market including large, well-capitalized organizations not bound by standards or limitations imposed on accounting firms. The accounting firms would also face competition as they would try to move assurance services into areas not currently dominated by the profession. Thus, competition would come from a large number of sources, public and proprietary databases. New technologies, competition, and changes in worker relations had led to creation of new organizational structures. Communications and computer technology enabled employees to work away from the office. Work had become a 24-hour proposition and was conducted anywhere. Offices and businesses had become more disaggregated. Small businesses were proliferating. In fact, Fortune 500 companies accounted for less than 20% of total employment [AICPA, 2002]. Outsourcing had become common. The result was more entities, more relationships, and more accountability. In addition, there would be a change of how entities financial condition and value were measured (e.g., arms-length transactions, entity concept, going-concern assumptions, valuation of intellectual property rights). This new business environment would force firms to change their structure. There would be more alliances, joint ventures, and temporary firms. Thus, the new types of entities would result in new information flows creating opportunities for new services.

KPMG -6 The new business environment, explained above, would increase the demand for accountability throughout society. Thus, new opportunities would arise to provide services, or develop criteria for, the parties accounting firms do not serve now: suppliers, customers, employees, and the community. HOW THE INDUSTRY WORKS The accounting companies offered combination of accounting services such as audit, tax, and other general accounting services, as well as, IT consulting services. The IT consulting services were the fastest growing source of revenue for the accounting firms. However, as explained earlier that trend was likely to change in the future. This change would put constrain in the services that the accounting firms could offer to clients. It was likely that most of the future revenues would come from the traditional accounting services offered by the accounting firms. However, new opportunities would arise for the accounting firms due to changes in the business environment. In the U.S., law required all publicly held companies listed on major financial stock exchanges such as the New York Stock Exchange (NYSE), to audit their financial statements annually. An independent accounting firm had to audit these financial statements and express an opinion about the fairness of these statements. About 2000 publicly held companies were registered with the Securities and Exchange Commissions (SEC), the government agency that oversaw the financial markets. Usually, the clients Board of Directors recommended an auditor to shareholders, who voted on the proposal at the annual meeting. The relationships between audit firms and clients lasted for decades. Until recently, accounting firms provided auditing and any other accounting and consulting services for the same client. However, with the collapse of Enron Corp. and the indictment of Andersen, the accounting firms, which were perceived as independent from government regulations, announced that they would no longer perform auditing and consulting services for the same client. In addition to the publicly held corporations, privately owned companies and non-for-profit organizations might decide to attest or validate their financial statement for different business reasons. Moreover, all U.S. companies were required to file a tax return with the Internal Revenue Service (IRS), a U.S government agency. All of the above requirements created a huge market for the accounting firms. The IT consulting services offered by accounting firms included a wide line of services such as computers system analyses, installation of budgeting processes, accounting information systems, just-in-time and inventory management systems, marketing studies, strategic management analysis, and any other service the company had an expertise that would benefit the client. ACCOUNTING SERVICES The accounting and tax services segment consisted of three sub-industries: assurance services, tax services, and accounting and bookkeeping services. In early 2002, five U.S. companies provided these services to large, medium, and small size publicly and privately held companies as well as to government and non-for-profit organizations. Law required all publicly held companies to seek auditing services. In addition, all companies had to file tax returns. This created a huge market place for the competing accounting firms. Assurance Services Accounting firms provided assurance services in which the accounting firms attested to information that was the responsibility of another party. In general, assurance services were independent professional services that improved the quality of information, or its context, for decision makers [AICPA, 2002]. These services included audits of financial statements, reviews of financial statements, and other attest requests. Audits of Financial Statements. The Big five accounting firms provided auditing services primarily to the publicly held companies, which were required by law to audit their financial statements. The American Accounting Association Committee on Basic Auditing Concepts, the organization for accounting educators, had defined auditing as a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users [Guy, Aldeman, and Winters, 1999]. Thus, in general, the accounting firms were required to thoroughly understand, among other things, the internal controls and the industry of the client. Usually, each of the accounting firms would develop an expertise on certain industries. In addition, clients would want to avoid auditors that handled its biggest rivals, which increased the cost of the audit [Glater, 2002]. This was true because only few accounting companies provided audit services to large corporations. For these reasons, companies tried to avoid switching auditors; many relationships lasted decades.

KPMG -7 Reviews of Financial Statements. The accounting firms might provide a review of the financial statements, which provided limited (reasonable) assurance as to whether the financial statements were in conformity with GAAP. This line of service was provided to a wide range of clients including, publicly and privately owned companies. Other Attest Requests. Accounting firms might perform numerous other attest services. For example, they might attest to reports on description of computer software, reports on investment performance statistics for organizations such as mutual funds, reports for compliance with various types of guidelines, and WebTrust services. Keys to success in the area of assurance services were to expand the assurance services to new clients such as suppliers and customers, to expand assurance services to new areas health care providers (assurance services could be provided to employers, patients, unions, and other customers of health care services), electronic commerce providers, and the elderly and their families. In addition, keys to success in this area were to provide assurance services on information system reliability, and on business performance measures. Moreover, keys to success in this area were to evaluate companies that provided outsourcing either when they were selected or on an ongoing basis, to establish processes, controls, accountability, or performance criteria for joint ventures, to provide assurance services on risk assessment (this is an assessment of business risk). Finally, keys to success were to provide arbitration and valuation services and to analyze outsourcing (make or buy) decisions. In the future, investors, creditors, and other interested parties would require audit services to be provided on a continuous basis. In addition, the accounting firms would be required to organize, analyze, and present information in regard to the opportunities, strengths, weakness, and threats of the client. Thus, keys to success in this field were to analyze outsourcing (make or buy decisions), to increase the value of the current assurance services, to develop systems and procedures to detect fraud and illegal acts for assurance engagements, and to provide arbitration and valuation services. Tax Services The tax services segment consisted of two broad types of services: compliance work and tax planning. The accounting firms were the major competitors in this segment because they possessed the expertise in this field. Compliance Work. Compliance work was the actual preparation of tax returns for companies individuals and other organizations. Tax Planning. Tax planning was the advice accounting firms provided to clients, as to how to anticipate the future consequences of taxation and how best to minimize future tax liabilities while meeting the clients requirements. Keys to success in this area were to develop systems that supported outsourcing of the tax function, to develop IT solutions that supported the collection, organizing, analyzing, and presenting tax data in order to improve the client flow of tax information. In addition, keys to success in this area were to develop IT solutions that were compatible with Internet technologies and to develop training programs of employees so that they could stay abreast of new tax regulations and trends. Accounting and Bookkeeping Services Accounting firms could provide accounting and bookkeeping services to their clients. In these situations, the accounting firms might perform various activities such as recording and posting transactions in order to draft financial statements. The keys to success in this area were to develop systems that supported outsourcing of the accounting and bookkeeping functions for clients, and to develop IT solutions that supported the collection, organizing, analyzing, and presenting accounting data in order to improve the client accounting flow of information. In addition, keys to success in this area were to develop IT solutions that could incorporate both the accounting and tax data in order to improve the client ability to make critical decisions, and to develop IT solutions that were compatible with Internet technologies. Finally, a key to success in this area was to develop training programs of employees so that they could stay abreast of new accounting pronouncements and trends. INFORMATION TECHNOLOGY CONSULTING SERVICES

KPMG -8 In general, the focus of IT consulting services was to improve the usability and efficiency of technological systems and processes. Companies that provided these services aimed to improve the clients collection, utilization, and execution of information. In addition, IT consulting services focused on providing advice and implementation, on issues related to computer systems, telecommunications, and the Internet. This in turn provided an effective flow of information so the client could keep on improving its work process, customer retention and acquisition, and other aspects of its business. In general, the consulting services could be categorized in two ways: by size and by specialization. Figures 4 and 5 show the total market by size and specialization. Figure 4 SIZE OF SECTOR AND MAJOR FIRMS BY SECTOR
Strategy 18% McKinsey & Co., Bain & Co., Boston Consulting Group

Human Resources 10% Mercer, Towers Perrin, Hewitt Operations Management 24% Booz-Allen & Hamilton, Arthur D. Little

Information Technology 48% Big Five Accounting Firms, IBM, CSC, EDS

Source: Chase, Aquilano, and Jacobs (2001). Operations Management for Competitive Advantage, New York: McGraw-Hill/Irwin.

Figure 5 CONSULTING MARKET SEGMENTATION BY INDUSTRY SPECIALIZATION


Manufacturing 22%

Other 34%

Communications 11%

Financial Services 21% Government 12%

Source: Chase, Aquilano, and Jacobs (2001). Operations Management for Competitive Advantage, New York: McGraw-Hill/Irwin.

According to Kennedy Information, the information consulting industry grew 5% to $120 billion in 2001, and was expected to grow 6% to $127 billion in 2002 [Kennedy Information, Inc., 2002]. The actual services and products that were offered by the IT consulting and accounting firms varied considerably. Usually, companies developed expertise in certain areas of the field and the most common areas of focus included enterprise business solutions, enabling technology implementation, IT infrastructure management, systems integration, information assurance, knowledge management, system engineering/software development, enterprise management/operation support, data operations and facility management, and management consulting. Enterprise Business Solutions. Some of the services offered to clients in this field included financial management, case management, documents/records management, administrative tracking, and asset and supply chain management. Enabling Technology Implementation. Some of the services offered to clients in this field included Web-site design/portal development, secure Web-based implementations, database/data warehousing, workflow and imaging, ebusiness, and legacy systems integration/migration. IT Infrastructure Management. Some of the services offered to clients in this field included Web-server administration, database administration, desktop support, help desk support, and messaging/e-mail administration. Systems Integration. Some of the services offered to clients in this field included database integration, information architecture design, and Web software technologies.

KPMG -9 Information Assurance. Some of the services offered to clients in this field included user authentication, resource authorization, encryption, firewalls, penetration testing, security audits, infrastructure protection, computer network defense, and risk management. Knowledge Management. Some of the services offered to clients in this field included electronic data management, data warehousing, document management systems, enterprise storage networks, and enterprise Web-portals. System Engineering/Software Development. Some of the services offered to clients in this field included initiation project planning, requirements management, design, development, testing, deployment, ongoing support, software quality assurance, configuration management, and subcontracting management. Enterprise Management/Operation Support. Some of the services offered to clients in this field included enterprise engineering and integration, network operations and management, managed services, server hosting, security monitoring services, multi-level user support, network and application performance and monitoring, software enhancement, configuration management, quality assurance, and hardware support. Data Operations and Facility Management. Some of the services offered to clients in this field included data operations design, project management, site preparation, security, application planning, procurement support, and technical, network, and database support. Management Consulting. Some of the services offered to clients in this field included strategic planning and performance measurements, knowledge management, process improvement and international standards compliance, human resources, and capital planning and investment management. Unlike the accounting services market, the IT consulting market was unregulated and the Big Five did not have a monopoly in this market. However, the accounting firms continued to be rated as the most trusted outside advisors by business owners, investors, and other consumers of professional services. They were recognized for their independence, financial skills, and integrity and were granted a level of access to business decision-makers unmatched by other professional organizations [AICPA, 2002]. It should also be noted that the Big Five might get out of the IT consulting business, partly because the SEC was concerned about possible conflicts of interest between the accounting firms and their clients. The SEC had expressed concerns as to whether the accounting firms could perform an independent audit work, while striving to perform consulting services for the same client. The keys to success in this area were to develop technical and business expertise (including hardware, software, and programming), to develop deep knowledge of business and government industries, to develop training capabilities to enhance consultants, and to retain top consultants to ascertain continuous technical and business expertise. Other keys to success in this area were to develop capabilities to ascertain client technology and business needs, to develop flexibility to react to changing technology trends, and to secure long-term contracts in order to ascertain understanding of business strategy and needs. Finally, a successful company would need to research business trends, commit and involve client Senior Management, have sufficient capital resources, focus on clients overall business strategy, and to provide objective advice. FINANCIAL ADVISORY SERVICES Financial advisory services were primarily offered to business corporations, whose ultimate goal was to maximize shareholder value. Some of the most common financial advisory services offered to clients were in the field of corporate finance and corporate recovery. Corporate Finance Many corporations needed an independent financial advice on corporate financial matters. For example, many corporations needed to raise capital on a continuous basis in order to support their business operations. In the simplest form, these corporations could finance its business operations using debt or/and equity. Companies in the accounting industry provided financial advice on such matters. Many different corporate financial services were offered to clients but the most common once included advice on mergers & acquisitions, sales and disposals, debt and equity financing, valuations and appraisals, leveraged and management buyouts, flotation and public offering, joint venture, and privatization. Corporate Recovery

KPMG -10 The most common corporate recovery services offered to clients included restructuring and turnaround. The advances in technology and the increased sophistication of the world markets had increased the productivity and efficiency of businesses. This, however, created a new business environment where many corporations were facing fierce competition in their line of businesses. Thus, to stay competitive corporations were increasingly forced to make critical business decisions. For example, many corporations had unprofitable divisions, which either had to be sold or restructured. However, many companies did not have the time and expertise to come up with sound decisions. Thus, knowledgeable companies such as the companies in the accounting services industry could provide a valuable advice on how to approach and resolve the problem. The keys to success in this area were to develop corporate finance and recovery expertise, to develop financial markets expertise, and to retain top financial advisors. In addition, keys to success in this area were the ability to develop training capabilities to enhance corporate financial and recovery advisors, and the ability to focus on clients overall strategy. CLIENTS The customer base in the accounting services industry consisted of individuals, business companies, non-for-profit organizations, and governments. In general, the Big Five accounting firms provided all professional services, whereas the external companies such as, Computer Science Corporation, Intelligroup, Inc., Vanstar Corporation, IBM, EDS, CSC, and The Boston Consulting Group provided only IT consulting services. Individuals Individuals comprised only a small part of the client base of the companies in the accounting industry. In fact, according to AICPA, in 2001, about 15% of KPMG revenues came from non-SEC clients [AICPA, 2002]. Most of the services provided to individuals were accounting, tax, and personal financial services. To date, the individual market for accounting services accounted only for a small portion of the revenues of the Big Five accounting firms. In addition, IT consulting services accounted for even smaller portion of the revenues of the players in the accounting services industry. However, with the advances in technology, the anticipated changes in the corporate structure, and the ever-increasing number of small and individual businesses, individuals would increasingly become valuable clients to the players in the accounting services industry. The keys to success in this area were to provide clients with customized accounting, tax, financial advisory, and IT consulting services, to offer wide range and high quality services (accounting, tax, consulting, and financial advisory), and to offer accounting and tax services on the Internet. Business Companies Business companies included primarily large private and publicly held organizations. In fact, most of the clients of the Big Five accounting firms were also SEC clients. Those clients comprised the largest bulk of revenues received by the companies. According to Hoovers Online, most of the Fortune 1000 companies were clients of the companies in the accounting services industry [Hoovers Online, 2002]. In turn, those clients provided the opportunity to the accounting firms to offer accounting and IT consulting services. Most of the accounting services that were provided to those companies were auditing and tax services. The IT consulting services that were provided were mostly focused in the field of integrated solutions that allowed the clients to operate most efficiently. In addition, those clients were specifically important as a customer base because they offered a global aspect to the industry, and allowed accounting and IT firms to experience a learning curve of a wide range of customers and ideas. The keys to success in this area were to offer wide range and high quality services (accounting, tax, consulting, and financial advisory), to provide clients with customized accounting, financial advisory, and IT consulting services, to offer services on the Internet (accounting and tax), to thoroughly assess needs and objectives of clients, and to ascertain an expertise in client industry. Government Government institutions were the second largest source of revenues for the companies in the accounting services industry and included local, state, and federal governments primarily in the U.S. and Europe. The primary services provided to governments were IT consulting services. Usually, government institutions required high maintenance. Services for such

KPMG -11 a client base might include networking solutions, outsourcing, integrated solutions, etc. Most governments followed different sets of rules and procedures when it came to the preparation of financial statements. In fact, in the U.S., a government agency was responsible for the creation of government accounting and audit standards. In addition, the audits were performed by the same government agency. Thus, the Big Five accounting firms did not provide accounting, tax or audit services to governments. However, governments spent billions of dollars for IT services, thus, providing a huge market. Traditionally, the U.S. federal market for IT consulting services had provided a safe haven during economic downturn for IT consultants. Thus, more IT consultants had sought to increase their presence in the government sector. According to Kennedy Information, the Federal Government planed to spend $63.3 billion on IT systems and services in fiscal year 2007 [Kennedy Information, Inc., 2001]. Some of the IT companies had proposed to organize the Federal Government into an Internet-based network. Providing IT consulting services to the Federal Government, and even to state and local governments could change dramatically than any other sector as a result of the events of September 11. For one thing, it was clear that the convergence of a recession, the attack on September 11, and demand for new government services would accelerate the move to a more efficiently managed government supported by advanced information technologies. However, not everyone in the accounting services industry would be affected the same way. Unlike the past, it appears that the U.S. Government would rely on big companies, which could provide a total package of IT consulting services. This as well as the sluggish economy would pressure the IT service providers to consolidate. In addition, smaller firms that had created value but lacked the capital would likely be acquired. Thus, it was likely that the Big Five accounting firms would not benefit as much as the other IT service providers. In fact, according to Kennedy Information, the bright spots appeared to be in outsourcing and providing IT solutions to the federal, state, and local governments. In fact, outsourcing leaders such as IBM, EDS, and CSC stood to see acceleration in their business [Kennedy Information, Inc., 2001]. The keys to success in this area were to offer high level and wide range of IT consulting services, to thoroughly assess needs and objectives of clients, and to provide clients with customized and IT consulting services. Non-For-Profit Organizations Non-for-profit organizations might include education providers, community organizations, religious organizations, and the like. Those organizations needed service solutions just like other clients. These solutions might include networking, system integration, custom software, outsourcing, and other professional services. To date, non-for-profit organizations were the third largest source of revenue of the companies in the accounting services industry. However, the anticipated changes in the accounting services industry, mainly the expansion of the accounting and IT services, the attack on September 11, and the ever-increasing population of poor people in the world, would likely increase the size and number of non-for-profit organizations. Thus, non-for-profit organizations would become an increasingly important source of revenue for the companies in the accounting services industry. The keys to success in this area were to provide clients with customized accounting and IT consulting services, and to offer wide range and high quality accounting and IT consulting services. TECHNOLOGY To date, no clear-cut technology existed that companies in the accounting services industry should use. This was true because a wide range of services had been offered that had been provided through a wide range of technologies. For example, companies providing IT consulting services used different tools or IT solutions to provide these services. Ultimately, the IT solutions for accounting and consulting services would be tailored and shaped based on the user requirement for information. However, two main areas would be critical for companies in the accounting service industry, the Internet and IT solutions. Internet Most business companies believed that the Internet would have a profound effect on the role those companies played in their industries with nearly one-third expecting to see e-business changing their core businesses. The Internet was a medium through which companies conducted their business. Many of the services would be provided using the Internet. For example, many companies would outsource their accounting functions to outside parties. The actual communication or service performance between the company and the outside party would be done with the use of the Internet. Thus, in order to provide these outsourcing services an outside party had to develop IT solutions, including

KPMG -12 software applications, that supported such outsourcing services. Therefore, if a company wanted to take advantage of new opportunities, it had to thoroughly understand the Internet in order to use it. The keys to success in this area were to develop technical expertise of the Internet including hardware and software applications, to develop Internet-based IT solutions, to develop systems that could ascertain the ability to distribute and share information quickly, to incorporate Internet technology with client strategic plan, and to develop technical Internet technology expertise. Information Technology Solutions Many different types of IT solutions existed in the market. Almost every firm in the accounting services industry had the ability to develop IT solutions. The basic purpose of IT solutions was to incorporate the flow of the client information. Thus, a firm in the accounting services industry would recommend an IT solution package that met the needs of the client. Increasingly, clients were searching for IT solution packages that could incorporate all aspects of their businesses. For example, the U.S. Government had created a new homeland security agency as a response to the attack on September 11. Apart from the security of U.S., the main role and purpose of the new government agency would be to integrate the already existing government agencies so that the flow of information became more efficient. This would enable the homeland security agency to collect, analyze, and prepare crucial information more easily and efficiently. This was why many IT consultant firms had prepared IT solution packages, which would incorporate the flow of information between all government agencies. Similarly, business companies were searching for the same IT solution packages that could incorporate all aspects, departments, and operations of their businesses. To accomplish this, IT consultant firms had to develop IT solution packages that were compatible with other solution packages. In addition, the IT solution packages had to be reliable and upgradeable. Moreover, IT consultant firms had to be in the market for the long-hall so that clients could rely on a continuous support. The keys to success in this area were to develop a strong knowledge of the functionality and capability of IT solutions, and to develop broad based IT solutions. MARKETING AND PROMOTIONS There was no formal way of advertisement in the accounting services industry. The Big Five accounting firms were not allowed to advertise their accounting services because of rules and regulations in the industry. However, firms were allowed to advertise their IT consulting services. The most common way of advertising was through magazines and the Internet. To date, the most effective way to promote and market services in the accounting services industry had been through previous engagements. As mentioned earlier, the Big Five had a steady client base, which did not change very much over the years. Some of the clients of the Big Five accounting firms had been for decades with them. The keys to success in this area were to use the firms reputation for expertise in internal control, reputation for expertise in measurements, reputation for trust, and reputation for expertise of clients industry and services. OPERATIONS As mentioned above, the Board of Directors of the prospective client had to approve the firm that would provide accounting, IT consulting, and/or financial advisory services. Usually, companies followed certain procedures when preparing for the job or the engagement (assuming they had received the engagement). In a typical engagement a team of accountants/consultants were sent to perform the job. Thus, the right professional staff had to be correctly allocated to the right kinds of jobs. It was assumed that to develop the right team of accountants/consultants firms find the right balance between partners and the professional staff. Companies used a partner-to-junior ratio to measure the effectiveness of the engagement. The actual audit engagement had to follow rules and procedures prescribed by the AICPA. However, the design and the way the audit engagement was performed could differ from one firm to the other. Usually, a typical audit engagement was divided into two phases: planning and fieldwork. In the planning phase of the engagement, accounting firms were required to obtain knowledge of clients industry and business. In the fieldwork phase the actual audit was performed. Understanding the client industry was essential if the auditor was to perform the audit with due professional care. The most common approach of learning about the client industry was to discuss the industry with auditors who had audited

KPMG -13 the client in prior years or other clients in the same industry. In addition, auditors might use numerous published sources to develop understanding of the clients industry. Understanding the clients industry was important for understanding the clients business. Performing the audit or the fieldwork required that the auditor followed certain procedures. For example, to determine that cash was fairly presented in conformity with generally accepted accounting principles the auditor would perform certain tests including cash counts, footing of cash journals, and tracing of postings to the general ledger, bank confirmations, and cutoff bank statements, bank transfer schedules, and proofs of cash. In performing those tests, an auditor might use audit programs/databases to facilitate its work. Thus, a sophisticated audit database was essential given the amount of audit work and the sophisticated computer systems of the clients. However, a sophisticated audit database was no substitute to a well-selected and organized audit team. The keys to success in this area were to develop systems that could ascertain a high partner to junior ratio in engagements, and to form and develop high quality engagement teams. Another keys to success in this area were to develop and design operational systems and procedures that supported the clients needs, and to develop and design operational systems and procedures that increased the operational efficiency of the companies in the accounting services industry. REGULATIONS Congress established the Securities and Exchange Commission (SEC) in 1934 to regulate the distribution of securities to the public and the interstate trading of securities in the securities exchanges [Guy, Aldeman, and Winters, 1999]. Thus, a primary concern of the SEC was that investors had appropriate financial information when they made investment decisions. The SEC required that prospective and current publicly held companies filed annual audited financial statements along with other regulatory documents with the agency, thus, creating a huge market for the accounting firms. In addition, the same requirements, although lees stringent had to be followed by foreign companies that wanted to raise capital in the U.S. stock markets. The SEC also required that prospective and publicly held companies followed General Accepted Accounting Principles (GAAP) when preparing their financial statements. In general, GAAP were accounting standards created by the Financial Accounting Standards Board (FASB), an independent accounting organization. In order to audit the financial statements and express an opinion as to the fairness of these statements, the accounting firms had to comply with certain procedures prescribed by the American Institute of Certified Public Accountants (AICPA). Ultimately, the greatest threat to the survival of the accounting profession, as we know it today, was legislation. The indictment of Andersen the accounting firm that audited the financial statements of Enron Corp. was the fourth major setback to the accounting profession. The first time was in the mid-1970, when Congress successfully overrode the FASBs (the agency that set accounting standards) position (which required that publicly held companies used the full-cost method of accounting) and ruled that companies could use either the successful-efforts or the full-cost method for oil and gas accounting. The second time was in the 1990s, when both houses of Congress initiated legislation to exempt public companies from an FASB proposal that mandated expense recognition for stock options [Beresford, 2001]. The perceived high probability of this legislations passage caused a majority of Board members to vote for disclosure of the effect of stock options rather than mandatory expensing [Beresford, 2001]. Finally, the accounting profession clashed with Congressional leaders over the accounting rules for business combinations and intangibles. Despite these events, the accounting profession had been able to maintain its independence from government regulators. Although not as stringent as in the U.S., similar regulations were followed by publicly held companies in Europe, the other major region of opportunity growth for the companies in the accounting services industry. However, as mentioned before, the intention of the U.S. and Europe was to standardize the rules and procedures that govern the companies in the accounting services industry. GEOGRAPHICAL MARKETS The increased globalization in the financial markets created an opportunity for the firms in the accounting services industry. Businesses would require information that was compatible across nations. This, of course, created a need for standardized accounting and business information. In such a market, successful companies had to possess a thorough expertise of accounting and IT services across borders. Most of the companies in the accounting services industry were global companies. After all, most of their clients were global organizations. However, one particular region, Europe, would create tremendous opportunities for the companies in the accounting services industry, along with the U.S. market. The European market was changing and was becoming more efficient and integrated. There were few indicators suggesting that Europe would be a region of opportunity. Increasingly more government run organizations were privatized and European markets were liberated, which would open up new markets. Regulatory harmonization and the development of new European capital markets would help to increase competition and created capital markets based on industry sectors rather

KPMG -14 than countries. Thus, the new Europe would offer enormous opportunities to businesses that prepared well for the changes ahead. Those who did not would be exposed to increasing risks and unforeseen threats. The new Europe would create a more competitive environment where the flow of information would increase, thus, forcing companies to decrease the speed of the decision making process. In addition, the liberalization of capital markets and the privatization of government owned entities would diminish the traditional business role of the government. Investors and creditors would become the main force of the capital markets and the economy. Thus, the need for timely reliable and relevant information from the creditors and investors point of view would increase, which in turn would increase the opportunities of the firms in the accounting services industry. The keys to success in this area were to develop a global reputation as a worldwide name in accounting and IT consulting, to secure long-term contracts, and to develop expertise in international capital markets, accounting services, financial advisory services, and IT services. EXPANSION STRATEGIES Many of the short-term opportunities would come from large assignments and contracts. As mentioned before, many clients were searching for a total package of services. Naturally, most of those services were offered by large companies, which possessed the necessary expertise and capital. In fact, small-scale companies might offer valued services but lacked the necessary capital. Thus, to ascertain growth and development most of the firms in the accounting services industry had tried to align themselves with other companies. This provided and opportunity to stay abreast of technological developments, new trends, and new market opportunities. The most common practices used to expand into new markets and/or services were through acquisitions and alliances. Acquisitions There were many reasons why one company might want to acquire another but the most common reasons were to expend its line of business and enter new markets. Where appropriate, acquisitions were preferred to other forms of business convergence because the managers of the buying company could exercise full control over the acquired entity. The keys to success in this area were to develop sufficient technical and business knowledge of the acquired company, to possess adequate capital, and to match the corporate cultures and business strategies of both companies. Alliances Like acquisitions, alliances were formed for the same basic reasons to expand the business line, to enter into new markets, and to decrease the burden of the capital requirements. However, unlike acquisitions, in alliances the managers of either company could not exercise full control over either company. The keys to success in this area were to commit management in order to ascertain that the new alliances support the company strategic business plan, to maintain client perception of independence and objectivity, and to ascertain the strategic focus of all partners. COMPETITION The competing companies consisted of internal and external companies to the accounting services industry. As indicated before, the internal competitors were the Big Five accounting firms, and the largest external competitors were IBM, Electronic Data Systems, and Computer Science Corporation. Internal Companies The main internal competitors for KPMG were the other four of the Big Five accounting firms: PricewaterhouseCoopers LLP, Andersen LLP, Ernst & Young LLP, and Deloitte & Touche Tohmatsu. PricewaterhouseCoopers LLP. PricewaterhouseCoopers was the worlds largest accounting professional service company. In 2001, global revenues reached $22.3 billion, a 7.6% increase over the previous years revenues of $20.7 billion. The company operated in 150 countries in four main geographic areas, North America, South America, AsiaPacific, and Europe/Middle East/Africa. In 2001, revenue growth was 2.3% in North America, to $10.1 billion, and up

KPMG -15 3.1% in South America to $821 million. In Asia-Pacific, it was up 18% to $2.4 billion, and in Europe/Middle East/Africa was up 12% to reach nearly $9 billion. The company provided services in four major areas including assurance, tax, financial advisory, and IT consulting services. In 2001, assurance services revenues grew 7.4% to $8.7 billion. Tax services registered double-digit growth in a row, amounting to $4.4 billion, an increase of 14.7% over the previous year. As shown in Figure 6, the company received most of its revenues from its consulting and financial advisory practices (45%), followed by its accounting and audit practices (36%), and tax practices (19%). Figure 6 PRICEWATERHOUSECOOPERSS GLOBAL REVENUES BY SERVICE (2001)
Consulting & Financial Advisory Services Accounting & Audit Services 36%

Tax Services 19%

Source: PricewaterhouseCoopers (2002). [Online]. http://www.pwcglobal.com. Accessed July 31.

The company provided an expertise in twenty-four market sectors, which could be grouped into three clusters consistent with the services that the company provided: consumer and industrial products and services, financial services, and technology, information, communication, and entertainment services. In the consumer and industrial products and services sector, the company provided expertise to pharmaceuticals, biotech, healthcare, energy and utilities, and automotive companies. The companys market share among the pharmaceutical and biotech companies was 50% and 30%, respectively. In the financial services sector, the company provided expertise primarily to banks, insurance, and venture capitalist companies. The companys market share among the venture capitalist companies was 48%. In the technology, information, communication, and entertainment services sector the company provided expertise to networking & communication equipment, semiconductors, software, and media & entertainment companies. The companys market share among the networking & communication equipment, software, and semiconductor companies was 54%, 49%, and 41%, respectively. In addition, the company provided audit, tax, financial advisory, and consulting services to more media and entertainment companies than any other company in the industry. In the service area, PricewaterhouseCoopers was strong in providing assurance, tax, and bookkeeping services. The company offered those services to a wide range of clients and covered a vast number of industries. However, the company was lacking in tailoring and customizing those services based on the clients needs. In addition, the company was weak in providing IT consulting services to the U.S. and international federal, state, and local governments. In the technology area, PricewaterhouseCoopers was strong in developing technical expertise of the Internet including hardware and software applications. In addition, the company had a strong ability to develop broad based IT solutions. Deloitte & Touche Tohmatsu. Deloitte & Touche Tohmatsu was the worlds third largest accounting professional service company. The company operated in 140 countries and served approximately one-fifth of the worlds largest companies as well as well as large national enterprises, public institutions, and successful fast-growing companies [Deloitte & Touche Tohmatsu, 2002]. In 2001, global revenues reached $12.4 billion. The company provided services in four major areas including assurance, tax, financial advisory, and IT consulting services. As shown in Figure 7, the company received most of its revenues from its accounting and audit practices (44%), followed by its consulting and financial advisory practices (34%), and tax practices (22%). Figure 7 DELOITTE & TOUCHE TOHMATSUS GLOBAL REVENUES BY SERVICE (2001)
Consulting & Financial Advisory Services Tax Services 22%

Accounting & Audit Services 44%

Source: Deloitte & Touche Tohmatsu (2002). [Online]. http://www.delloite.com. Accessed July 31.

KPMG -16 The company provided an expertise in five market sectors including financial services, energy, manufacturing, retail and consumer products, and technology, media, and telecommunications. In the energy sector, the company provided expertise to electric power, mining, oil & gas, and water companies. In the manufacturing sector, the company provided expertise to aerospace & defense, automotive, consumer products, technology, chemical, metal, and paper companies. In the retail & consumer products sector, the company provided expertise to agribusiness, food manufacturing, general merchandise manufacturing, retail, and wholesalers companies. In the service area, the company was strong in providing traditional accounting and bookkeeping services. However, it was weak in providing assurance and tax services. The company covered fewer industries than both PricewaterhouseCoopers and KPMG International. In addition, the company was weak in providing IT consulting services to the U.S. and international federal, state, and local governments. In the area of technology, it was strong in developing technical expertise of the Internet including hardware and software applications. However, the company was weak in developing Internet-based IT solutions. The company lacked the capital to develop innovative technologies. Ernst & Young LLP. Ernst & Young was the worlds fourth largest accounting professional service company. In 2001, global revenues reached $9.9 billion, a 7.2% increase over the previous years revenues of $9.2 billion. The company provided services in four major areas including assurance, tax, financial advisory, and IT consulting services. In 2001, assurance services revenues grew 5.3%, tax services revenues grew by 8.8%, and financial advisory services revenues posted the largest revenue increase of 18.7%. In addition, the company provided audit services to 18.4% of Business Weeks Global 1,000 companies. As shown in Figure 8, the company received most of its revenues from its accounting and auditing practices (51%), followed by its tax practices (31%), and consulting and financial advisory practices (18%). Figure 8 ERNST & YOUNGS GLOBAL REVENUES BY SERVICE (2001)
Consulting & Financial Advisory Services Accounting & Audit Services 51%

Tax Services 31% Source: Ernst & Young (2002). [Online]. htpp://www.ey.com. Accessed July 31.

The company provided an expertise in ten market sectors including automotive, energy & utilities, chemicals, financial, health, real estate, retail and consumer products, technology, communication, and entertainment. The company operated in 130 countries in three main geographic areas, the Americas (which comprised the United States, Canada and Latin America), Asia-Pacific, and Europe/Middle East/Africa. In 2001, revenue growth was 8.3% in the Americas, and 20% in Europe/Middle East/Africa. In the service area, Ernst & Young was strong in providing traditional accounting and bookkeeping services. However, the company was weak in providing assurance and tax services. The company covered fewer industries than both PricewaterhouseCoopers and KPMG International. In addition, the company was weak in providing IT consulting services to the U.S. and international federal, state, and local governments. In the technology area, Ernst & Young was weak in developing technical expertise of the Internet including hardware and software applications. In addition, the company was weak in developing Internet-based IT solutions. The company lacked the capital to develop innovative technologies. Andersen LLP. Andersen was the worlds fifth largest accounting professional service company. In 2001, global revenues reached $9.3 billion, a 9.4% increase over the previous years revenues of $8.5 billion. The company provided services in four major areas including assurance, tax, financial advisory, and IT consulting services. In 2001, assurance services revenues grew 8.7% to $4.26 billion. Tax services revenues posted the largest revenue increase of 13.7% amounting to $2.98 billion. Financial advisory services revenues grew by 4.9% to $390 million and consulting services grew by 4.9% to $1.7 billion. As shown in Figure 9, the company received most of its revenues from its accounting and auditing practices (44%), followed by its tax practices (30%), and consulting and financial advisory practices (26%).

KPMG -17 Figure 9 ANDERSENS GLOBAL REVENUES BY SERVICE (2001)


Accounting & Audit Services 44%

Consulting & Financial Advisory Services 26%

Tax Services 30% Source: Andersen (2002). [Online]. http://www.andersen.com. Accessed July 31.

Andersen specialized in seven industry sectors including energy and utilities, financial services, healthcare (healthcare providers and healthcare products), government services, manufacturing, professional and environmental services, real estate and hospitality, and technology, media and communications. In the energy and utility sector, the company provided expertise to mining, oil & gas, utility, and energy trading companies. In the financial sector, the company provided expertise primarily to insurance and banking companies. In the manufacturing sector, the company provided expertise to retail, transportation, distribution, and industrial construction companies. The company operated in about 17 countries in four main geographic areas, North America, Latin America, Asia-Pacific, and Europe/Middle East/Africa. In 2001, revenue growth was 11.7% in North America, to $4.49 billion, and up 2.7% in Latin America to $0.40 billion. In Asia-Pacific, it was up 7.1% to $1.2 billion, and in Europe/Middle East/Africa was up 9% to nearly $3.26 billion. In the service area, Andersen was weak in providing assurance, tax, and bookkeeping services. Traditionally, Andersen was strong in providing assurance and tax services. In fact, the company had more clients than the rest of the accounting firms. However, the company was found guilty of obstruction of justice in the U.S., which forced many of the Andersen clients to abandon the company. In addition, Andersen would not be able to provide accounting services in Texas because the company was stripped of its accounting license in Texas. In addition, the company was weak in providing IT consulting services to the U.S. and international federal, state, and local governments. In the area of technology, Andersen was weak in developing technical expertise of the Internet including hardware and software applications. In addition, the company was weak in developing Internet-based IT solutions. The company lacked the capital to develop innovative technologies. External Companies The major companies competing in the accounting services industry were the big giants such as IBM, Electronic Data Systems, and CSC as well as smaller companies such as The Arthur D. Little, BDO International, Bain & Company, Booz-Allen, Boston Consulting, Grant Thornton International, Marsh & McLennan, McKinsey & Company, Towers Perrin, and American Management Systems. IBM. IBM was the worlds largest IT company, as well as the world's largest hardware company providing a wide range of services and products. In addition, the company was the worlds largest provider of outsourcing services. The company had also developed service and product expertise in a wide range of industries. In 2001, total revenues decreased $2.5 billion, or 2.8%, to $85.9 billion when compared with $88.4 billion in 2000. In 2001, about 40% of the total revenues were received from IT serviced including IT consulting services. About 38% of the total revenues were received from hardware products. In addition, about 15% of the total revenues were received from software products. IBM was one of the leading providers of IT consulting services to the U.S. federal, state, and local governments. IBM had been a partner with the U.S. Federal Government for most of the 90 years of the company history. Given the size, expertise, and solid relationships, IBM had positioned itself to be one of the main services and products providers to the U.S. Government. IBM had developed IT expertise in more than 15 industries. In addition, the company provided services and products to large, small, and medium size companies. According to the IMB mission statement, the company strove to develop and manufacture the most advanced information technologies, including computer systems, software, networking systems, storage devices, and microelectronics. In addition, the company strove to translate these advanced technologies into value for their customers through their professional solutions and services businesses worldwide [IBM, 2002]. According to this strategic position, the company strove to first develop advanced information technologies and than implement these technologies in the

KPMG -18 framework of its business clients, rather than first develop competitive strategies for its clients, and then develop advanced technologies to meet these competitive strategies. In the service area, IBM was strong in providing IT consulting services to public, private, and the U.S. and international governments. In fact, the company was the leading provider of IT consulting services in the world. Moreover, the company was the leader in providing outsourcing services. The company offered those services to a wide range of clients and covered a vast number of industries. In the technology section, IBM was strong in developing technical expertise of the Internet including hardware and software applications. In addition, the company had a strong ability to develop broad based IT solutions. The company had the necessary capital to develop innovative technologies. Electronic Data System (EDS). EDS was a global services company providing strategy, implementation, and hosting services and solutions. The company had more than 35,000 business and government clients around the world, and in 2001 received more than 40% of its revenues from non-U.S. organizations. Total revenues increased $2.3 billion, or 12%, in 2001 to $21.5 billion when compared with $19.2 billion in 2000. Revenues from base clients increased $2.6 billion, or 16%, to $18.5 billion in 2001. A major client of EDS was General Motors (GM). In fact, 19% of the revenues in 2001 were earned from services offered to GM. However, revenues from GM decreased $297 million, or 9%, in 2001 primarily due to GM's decision to tighten discretionary spending due to the current state of the worldwide economy and the automotive marketplace [EDS, 2002]. EDS offered a wide range of products and services. The main products offered were information solution packages. In fact, 75% of the revenues in 2001 came from the sale of information solutions products. In 2001, revenues from information solutions products increased $2.1 billion, or 15%, in 2001 to $16.2 billion. In addition, the company offered IT consulting services, which in 2001 amounted to $2.4 billion or 11% of total revenues. In the service area, EDS was strong in providing IT consulting services to public, private, and the U.S. and international governments. However, the company was weak in offering those services to a wide range of clients and industries. The company offered those services to a wide range of clients and covered a vast number of industries. In the technology area, EDS was strong in developing technical expertise of the Internet including hardware and software applications. In addition, the company had a strong ability to develop broad based IT solutions. Computer Science Corporation (CSC). CSC was a global services company providing clients with three main lines of services: management consulting/professional, outsourcing, and systems integration. In 2001, total revenues increased $1.1 billion, or 11.7%, to $10.5 billion when compared with $9.4 billion in 2000. The company received most of its revenues from outsourcing services (44%), followed by management consulting/professional services (34%), and system integration services (22%). In addition, the company received most of its revenues in the U.S. (55%), followed by Europe (25%). CSC provided an expertise in eight market sectors including aerospace & defense, chemical, communications & high tech, consumer products, financial services, government, health services, and retail [CSC, 2002]. In the service area, CSC was strong in providing IT consulting services to public, private, and the U.S. and international governments. However, the company was weak in offering those services to a wide range of clients and industries. The company offered those services to a wide range of clients and covered a vast number of industries. In the technology section, CSC was strong in developing technical expertise of the Internet including hardware and software applications. In addition, the company had a strong ability to develop broad based IT solutions. The company lacked the necessary capital to develop innovative technologies.

THE COMPANY HISTORY KPMG International was formed in 1987 with the merger of Peat Marwick International (PMI) and Klynveld Main Goerdeler (KMG) and their individual member firms. The organization's history could be traced through the names of its principal founding members whose initials form the name "KPMG." K stands for Klynveld, the surname of Piet Klynveld who founded the accounting firm Klynveld Kraayenhof & Co. in Amsterdam in 1917. P is for Peat, the surname of William Barclay Peat who founded the accounting firm William Barclay Peat & Co. in London in 1870. M stands for Marwick, the surname of James Marwick who founded the accounting firm Marwick, Mitchell & Co. with Roger Mitchell in New York City in 1897. Finally, G is for Goerdeler, the surname of Dr. Reinhard Goerdeler who was for many years chairman of Deutsche Treuhand-Gesellschaft and later chairman of KPMG [KPMG International, 2002].

KPMG -19 KPMG International was the global network of professional advisory firms whose aim was to turn knowledge into value for the benefit of its clients, its people and communities [KPMG International, 2002]. KPMG International was the second largest accounting firm in the world. In 1987, after completing what was the accounting profession's first megamerger, KPMG International had taken a number of innovative steps to transform the professional services industry. It was the first multidisciplinary organization to establish itself along industry-specific lines of business. This enabled KPMG International member firms to tailor services and strategies to the individual needs of clients across a range of global industry markets [KPMG International, 2002]. INDUSTRY COMPETENCE KPMG International provided professional services with expertise in ten major industries: banking, insurance, industrial, automotive, chemical, pharmaceutical, consumer markets, electronics, communication, and energy & natural resources. The Banking Industry KPMG International was dedicated to the financial services sector. The firm provided services around the world to commercial banks, investment managers, mutual fund companies, brokerage firms, investment banks, private banking and trust operations, savings banks, credit unions, mortgage banking companies, international banks, and finance companies. In the banking industry, KPMG International provided professional services to 47% of the world's 500 largest banks, which was the largest line of business. The Insurance Industry In the insurance industry, KPMG provided professional services to 67% of the top 100 insurance companies. The firm also provided professional services to eight out of ten of the world's top reinsurance companies and audited 26% of the world's top 100 insurance companies. The Industrial Industry In the industrial industry, KPMG International specialized in the engineering technology based industries, which included aerospace & defense, machinery and electrical equipment, metal processing, and metal products. The Automotive Industry KPMG International provided a wide range of assurance, tax, financial advisory, and consulting services to manufactures and suppliers in the automotive industry. The Chemical Industry KPMG International provided a broad range of financial and non-financial advisory and assurance services to chemical companies. The firm was recognized globally as one of the leading accounting, tax, and advisory firms for the chemicals industry. KPMG International chemical teams worked closely with and for many of the world's largest chemical companies [KPMG International, 2002]. The Pharmaceutical Industry KPMG International provided a broad range of financial and non-financial advisory and assurance services to pharmaceutical companies. The firm was recognized globally as one of the leading accounting, tax, and advisory firms for the pharmaceutical industry. KPMG International pharmaceutical teams worked closely with and for many of the world's largest pharmaceutical companies [KPMG International, 2002]. The Consumer Markets Industry KPMG International was a leading provider of advisory services to national and international retailers. The firm advised on many of the commercial and financial issues, which arise in this area.

KPMG -20 The Electronics Industry KPMG International provided a broad range of financial and non-financial advisory and assurance services to electronics, software, communications, and media & entertainment companies. The accounting firm served 9 of the top 10 global electronics companies including Siemens, Hitachi, Matsushita, Sony Electronics, Fujitsu, NEC, Royal Philips Electronics, IBM, and Hewlett-Packard. The Communication Industry KPMG International provided communication industry-focused services that were highly integrated across assurance, tax, corporate finance, and consulting. The Energy and Natural Resources Industry KPMG International offered assurance and assurance-based advisory; tax and legal; financial advisory; and consulting services to companies that operated in four areas, oil & gas, power & utilities, mining, and forestry. In summary, KPMG International covered a wide range of industries. The company was strong in providing all services to the financial, insurance, and electronics industries. However, the company was weak in providing all services to the rest of the industries. ACCOUNTING SERVICES In general, KPMG International offered three types of services: accounting, IT consulting, and financial advisory. Accounting services could be divided into two sub-categories: assurance, and tax and legal. Assurance Services The assurance practice helped clients manage risk so they could focus on their core businesses. By intimately understanding each client's business, KPMG International converted information into insights to uncover hidden opportunities to improve client efficiency and performance [KPMG International, 2002]. KPMG International assurance services were the largest source of revenue for the company. In 2001, approximately 45% of the total revenues were derived from assurance services. The company offered two types of assurance services: financial statements audit services, and management assurance services. Financial Statements Audit Services. The financial statement audit was the cornerstone of assurance services. KPMG International financial statements audit services were the most profitable line of business compared to all other assurance services that the company provided to clients. Most of the clients were large publicly held companies. In fact, the company provided audit services to over 1,800 clients. KPMG International believed that the role of the auditing process was to reflect and make sense of the risks faced by organizations. The company had developed and employed a Business Measurement Process (BMP) methodology that helped the firm to analyze clients businesses in the context of the clients market environment and industry. BMP provided a framework for examining financial and non-financial information flows that affected the financial statements, and it enabled the accounting companys service team to work with the client to identify opportunities for improving the clients financial performance. In addition, these models provided up-to-date information on key industry trends and issues that could affect the client business. They identified the areas that posed the highest risk to the clients financial statements. The BMP methodology provided a continuous audit process. It enabled the auditor to stay in touch with the client year-round-keeping current with the client business and changing market conditions, and providing the client with ongoing feedback. Management Assurance Services. The internal audit was the cornerstone of the management assurance services. The traditional internal audit model was developed over 100 years ago, and it had been transaction-based and cost-driven. Today, however, the internal audit was focused on risk. In fact, companies were looking for the internal audit function, which could assess and manage their strategic risks, adding value to the organization and identifying operational improvement opportunities. KPMG continued to demonstrate its commitment to advancing the internal audit function with a substantial investment in leading-edge technologies. These technology tools were designed specifically to integrate knowledge into the internal audit process. Many of these database and analytical tools were Web-based and gave the internal audit professionals access to an extensive store of information. KPMG International's combination of industry knowledge, technology tools, and global internal audit methodology could help the client to get a greater return on the

KPMG -21 clients internal audit investment. The specific services offered in this area were comprehensive business risk assessment, quality assurance review, strategic sourcing (co-sourcing and outsourcing), establishing an internal audit function, and reengineering the internal audit function. KPMG International was strong in providing assurance services. In fact, the company offered those services to a wide range of clients and industries. In addition, the company was able to tailor and customize the assurance services based on the clients needs. Tax and Legal Services KPMG International tax services were focused on finding opportunities and leveraging them to the advantage of clients in the form of significant tax savings. Through tailored and innovative initiatives, the services could help reduce a client's bottom-line expenses. KPMG International tax services were the second largest source of revenue for the company. In 2001, approximately 25% of the total revenues were derived from tax services. The company provided expertise to clients in national and international corporate taxation in all levels individuals, business organizations, governments (state, local, and federal), and non-for-profit organizations. The tax services offered were e-tax solutions, global transfer pricing, international corporate tax, international executive, mergers & acquisitions, indirect tax, trade & customs, and legal. E-Tax Solution Services & Global Tax Services. KPMG International e-tax solutions and global tax services helped clients to achieve global tax efficiency. In addition, these services helped clients understand the global tax implications of e-business. Moreover, the e-tax solution services were designed to improve clients tax efficiency, and reduce compliance costs related to e-commerce. Global Transfer Pricing Services. KPMG International global transfer pricing services helped multinational clients to comply with local tax legislations. The accounting firm used an integrated team of economists, tax practitioners, and financial analysts to provide clients with effective transfer planning tools. International Corporate Tax Services. KPMG International corporate tax services helped multinational clients to address problems arising from their multinational business activities. The company specialized in key international issues such as international holding company structures as well as hybrid instruments and entities. International Executive Services. KPMG International executive services helped multinational clients to better manage their international assignment programs. Specifically, KPMG professionals provided ideas and advised clients on international human resources and tax best practices. The accounting firm provided expertise in four key international services areas: tax compliance, human resources, assignment management, and solutions. KPMG International tax compliance services helped the clients international assignees to complete tax returns; a service that was personalized for each assignee. In addition, the accounting firm provided consulting services that helped the client derive long-term tax savings. KPMG International human resource services provided support to clients business objectives that maximized the return on investment made in international assignees. KPMG International assignment management services provided the key administrative support vehicle that companies needed to quantify cost and assist clients in managing their international programs. Specifically, the accounting firm specialized in pre-departure and coordinating services. KPMG International solution services helped clients to increase the efficiency of international assignment programs from a tax standpoint. Mergers & Acquisitions Services. KPMG International mergers & acquisitions services helped clients with mergers & acquisitions transactions. Specifically, the accounting firm provided expertise in acquisition tax planning, joint venture tax planning, post merger integration, and disposition tax planning. Indirect Tax Services. KPMG International indirect tax services helped clients to assess the current tax position of the client. Specifically, the accounting firm provided expertise in Value Added Tax (VAT), state and local taxes, property taxes, and insurance premium taxes.

KPMG -22 Trade and Customs Services. KPMG International trade and customs services helped clients to plan their trade and customs activities from an international perspective. Legal Services. KPMG International provided legal services through KLegal International, a global association of law firms. Although separate and independent from KPMG International, KLegal International lawyers worked in teams with KPMG International professionals. KLegal linked 2,500 practicing lawyers worldwide in 50 jurisdictions who offered services such as corporate law, banking and financial services, and human resources management. KPMG International was strong in providing tax and legal services. In fact, the company offered those services to a wide range of clients and industries. In addition, the company was able to tailor and customize the tax and legal services based on the clients needs. INFORMATION TECHNOLOGY CONSULTING SERVICES KPMG International IT consulting services were the third largest source of revenue for the company. In 2001, approximately 22% of the total revenues were derived from IT consulting services. KPMG International IT consulting business focused on Internet applications and integration. The company provided expertise in devising business strategies, transforming business processes and technology systems, and advising and deploying new software applications and hardware. In addition, the company had created center for defining, testing, and building IT solutions. According to the company, these cutting-edge facilities would help the company create the next generation of IT and communications systems for companies that would provide infrastructure services. Moreover, the company had formed alliances with wellknown companies such as Cisco, Compaq, Microsoft, Oracle, and SAP. KPMG International offered information risk management (IRM) services, which helped the client to manage risks from the use of IT. The company understood that a successful business entity had to have reliable systems with high availability. In fact, the ability to quickly recover should anything serious go wrong was becoming a key differentiator in the e-business world. Things other than the traditional "disaster" could impair service capabilities, including inadequate change management plans, hardware failure, virus attack, or telecommunications failure. KPMG International could help clients to plan for these events through risk analysis, network and system design, and recovery planning improving the availability, reliability, and recoverability of the key information systems that were relied upon [KPMG International, 2002]. The specific services offered in this area were business systems controls, e-business services, e-assurance services, information system (IS) governance, project risk management, information security services, and business continuity management. KPMG International was strong in providing IT consulting services to the U.S. and international federal, state, and local governments. In addition, the company was able to tailor and customize the IT consulting services based on the clients needs. However, the company was weak in providing the II consulting services to publicly held corporations. FINANCIAL ADVISORY SERVICES KPMG International financial advisory services were the fourth largest source of revenue for the company. In 2001, approximately 8% of the total revenues were derived from financial advisory services. KPMG International financial advisory services focused primarily on corporate finance and corporate recovery. The company provided expertise in valuations, mergers and acquisitions, privatizations, due diligence, and restructuring. In addition, the company also provided services on insolvency, fraud, money laundering, and expert witness services. The company had a strong reputation in this area. In fact, more companies were seeking KPMGs corporate finance services than any other firm. CLIENTS In early 2002, most of KPMG International accounting, tax, financial advisory, and IT consulting services were provided to large to mid-sized business organizations, as well as governments (federal, state, and local). In 2001, the company audited 1,808 clients most of them large publicly held corporations. Most of the revenues received from the 1,808 SEC clients were for accounting and auditing services approximately 61%. Approximately 21% of the revenues came from tax services offered to SEC clients, and these services were provided to 1,266 clients. Only 10% of the revenues came from IT consulting services offered to SEC clients, and these services were provided to 470 clients. In addition, KPMG International received no IT consulting revenues from 1,336 SEC clients; thus, all of the revenues received from these clients were from accounting and tax services. Moreover, 334 SEC clients were charged up to 25% for IT consulting services. Another 60 SEC clients were charged up to 50% for IT consulting services; 48 SEC clients were charged up to

KPMG -23 100% for IT consulting services; and 28 SEC clients were charged over 100% for IT consulting services in 2001 [KPMG International, 2002]. The two largest lines of businesses were audit and IT consulting services. Since most of the individual and nonfor-profit clients did not require a great amount of those services, KPMG International received much less revenues form individuals and non-for-profit organizations than from business organizations and governments. In fact, most of the revenues received from individuals and non-for-profit organizations were from tax services. MARKETING AND PROMOTIONS KPMG International did not advertise its accounting services because the company was not allowed to advertise due to rules and regulations in the industry. However, KPMG International did advertise its IT consulting services predominately through magazines and the Internet. To date, the most effective way to promote and market services in the accounting services industry had been through previous engagements. Thus, KPMG International used its previous engagements to promote its accounting services. As indicated before, KPMG International had a steady client base, which did not change very much over the years. Some of the clients of KPMG International had been for decades with the firm. TECHNOLOGY No predominant technology existed in the accounting services industry. This was true because a wide range of services and IT solutions as well as a large number of competing companies were in the market. Thus, the IT solutions and services were tailored and shaped based on the client need of information. Most of the firms in the accounting services industry had the capabilities to develop IT solutions. However, it would be critical for the companies in the accounting services industry to make these solutions compatible with the Internet. KPMG International was overall weak in developing innovative technologies and solutions. The company lacked the capital resources needed to develop IT solutions. Thus, the company depended on joint ventures and acquisitions to develop innovative technology solutions. REGULATION The government agency that regulated the financial markets and the stock exchanges was the SEC. The SEC required that prospective and current publicly held companies filed annual audited financial statements along with other regulatory documents with the agency, thus, creating a huge market for the accounting firms. In addition, the same requirements, although lees stringent had to be followed by foreign companies that wanted to raise capital in the U.S. stock markets. The SEC also required that prospective and publicly held companies followed GAAP when preparing their financial statements. In order to audit the financial statements and express an opinion as to the fairness of these statements, the accounting firms had to comply with certain procedures prescribed by the AICPA GEOGRAPHICAL MARKETS The company operated in 150 countries in four main geographic areas, North America, South America, AsiaPacific, and Europe/Middle East/Africa. In 2001, revenue growth was 2.3% in North America, to $10.1 billion, and up 3.1% in South America to $821 million. In Asia-Pacific, it was up 18% to $2.4 billion, and in Europe/Middle East/Africa was up 12% to reach nearly $9 billion. FINANCIALS KPMG International was the worlds second largest accounting professional service company. In 2001, global revenues reached $11.7 billion, a 9.4% increase over the previous years revenues of $10.7 billion. The company provided services in four major areas including assurance, tax, financial advisory, and IT consulting services. In 2001, assurance services revenues grew by 5% to $5.4 billion. Tax services registered double-digit growth in a row, amounting to $2.9 billion, an increase of 16% over the previous year. The financial advisory services grew by 22% to $0.9 billion, and the consulting services grew by 11% to 2.6 billion. As shown in Figure 10, the company received most of its revenues from its accounting and auditing practices (45%), followed by its tax practices (25%), consulting practices (22%), and financial advisory practices (8%). The Chief Executive Officer of KPMG International, Mr. Paul C. Reilly, described fiscal 2001 to had been a successful year, where the company extended its client base and service offerings [KPMG International, 2002].

KPMG -24 Figure 10 KPMG INTERNATIONALS GLOBAL REVENUES BY SERVICE (2001)

Financial Advisory Services 8% Consulting Services 22% Accounting & Audit Services 45%

Tax Services 25%

Source: KPMG International (2002). [Online]. http://www.kpmg.com. Accessed April 1.

MANAGEMENT AND STRATEGY In the past, KPMG International had managed its practices around the world from the perspective of the country where the particular practice was located. The company did not have uniform standards to which the member firms could adhere. The positive result of this strategy was that the member firms were deeply involved in the local business. Even though, this was very important, the company lost vision of the global picture. This resulted in lower operational efficiency. In addition, the flow of information between the member firms was crippled, which had a negative effect on the service performance of the company. Over the years, many resources were wasted, and many tasks and services were duplicated. Overall, the member firms were run inefficiently, and changes to KPMG Internationals decision-making processes needed to occur. The present strategy of KPMG International was to globalize its resources, which included building industry knowledge and specializing at the local level. The company had globalized its services through the three operating regions the Americas, Europe/Middle East/Africa, and Asia Pacific. This had enabled the company to ensure that the vast network of professional talent, the technologies, and the product solutions came together around clients. The strategy focused on serving the complex needs of large global companies by committing to them the companys best people, products and services, and technologies. This restructuring of the business had enabled the company to develop a framework in which market developments could be understood and addressed, which in turn had enabled the company to create the necessary solutions and the right team of professionals to do the job. The future strategy of KPMG International would be based on past and present strategies with a focus on new strengths and future developments. The future success of KPMG International would depend on the companys ability to implement two basic strategies. First, KPMG International must standardize its operations and services so that the company could utilize its knowledge, expertise, and resources in the most efficient way. In addition, this strategy would be consistent with the existing tendency of globalization and standardization. Second, the company must develop capabilities to offer new services and expand into new industry sectors. This would enable the company to capture new market opportunities and adjust to the ever-changing business and market environment. The managers of KPMG International believed that consolidation and globalization would continue and it would bring great changes to the marketplace. This would result in further deregulation of markets, intense competitive pressure domestically and internationally, and increased demand for global services. In order to capture future opportunities and stay competitive, KPMG International would continue to acquire companies, and where appropriate would form alliances.

LOOKING TOWARDS THE FUTURE In mid 2002, Mr. Paul C.Reilly, made a key decision to globalize KPMG International operations and services. This would enable the company to streamline its operations and services so that the company would be better able to utilize its knowledge of the marketplace. This result came about because KPMG International was loosing business and needed to change its vision of the global economy. One manager suggested that KPMG International abandon the lucrative IT consulting business except the services provided to governments, and focus on developing capabilities to offer new services, capture new industries, and standardize its operations.

KPMG -25 The benefit of this strategy would be the possibility to capture new service and industry opportunities, as well as profit from the changing accounting services industry. IT capabilities would continue to advance and costs would continue to decline. Technological advances would continue to make products smaller and information more accessible and userfriendly. In addition, information would be accessed more quickly. This would change the relationship between businesses and corporate structures. It would also create more business entities. Thus, new service opportunities would arise from the changing needs of decision-makers or clients. This alternative was feasible because KPMG International would be focusing on its most profitable line of business accounting, and the future state of the accounting services industry. In addition, the company would still be able to profit from the lucrative IT consulting business in the government sector. It was expected that the U.S. Government would speed up and increase the amount of capital spent on IT consulting services. This alternative could win against the competition because of KPMG Internationals strength as the leader provider of wide range of accounting services. In addition, the company had begun to globalize its operations and services so that the company could efficiently utilize its knowledge and expertise of old and new industries. In fact, the company had developed expertise in ten industries, which were the largest in terms of capital. The most important ones were the financial (including banking and insurance), the automotive, and the consumer market industries. KPMG International provided professional services to 47% of the worlds 500 largest banks. It audited 26% of the worlds top 100 insurance companies, and was the main provider of financial advisory and IT consulting services to national and international retailers. The company was well ahead of Delloite&Touche, Ernst&Young, and Andersen when it came to industry exposure and expertise. PricewaterhouseCoopers, the closest competitor, covered 24 industries but lacked the exposure to several big industries such as insurance, automotive, and consumer market. KPMG Internationals leadership position, its focus on new services and industries, and its expertise in the largest industries would allow KPMG International to win over competitors in the long term. After the attack on September 11, a major shift had occurred in the U.S. government market for IT consulting services. U.S. government agencies would join forces to combat terrorism, improve security, and become more efficient. These drivers were likely to increase for IT consultants, especially those who were already positioned in the sector. There would be a need for large IT organizations, which could be reliable and offer total package of services. KPMG International was one of the leading providers of IT consulting services to the state and local U.S. governments. In 2002, the company had secured contracts for $500 million to $1 billion. KPMG International was way ahead of PricewaterhouseCoopers, which had secured less than $100 million from the state and local U.S. governments. Although, EDS and IBM had secured more than $1 billion from the state and local U.S. governments, KPMG International had focused on a different strategy when it came to providing services to the U.S. governments. The company was not emphasizing on technology, but on providing strategies to governments to improve efficiencies. With proven leadership in IT services to governments, KPMG would be a leading provider of IT services in the long term. The main drawback to this alternative was that the company would lose touch with local business developments and its appeal to small businesses. This might eventually lead KPMG International to lose revenues and clients. A way around the drawback was for KPMG International to carefully plan its globalization of operations and services so that a framework was developed for each market. This would give KPMG International the ability to stay current in local market developments. Another manager suggested acquiring as many Andersens worldwide units as possible. This could open the door to a larger expansion of KPMG International in the lucrative U.S. and international markets and enable the company to expand its customer base. In addition, the manager suggested that the company develop capabilities to offer new services. In the past KPMG International had not been able to expand significantly its customer base. The company had about 1,808 clients whereas the rest of the Big Five accounting firms had a much larger customer base. This result came about because Andersen was found guilty of obstruction of justice and the company lost many clients. The benefit to this alternative would be that KMPG International would significantly increase its customer base and industry competence, therefore, wining more business. In addition, the company would be able to capture new market opportunities and adjust to the ever-changing business and market environment. The strategy was feasible because KPMG International was one of the leaders in the industry and had the capability to serve and offer services to additional clients. It was also feasible, because Andersen was selling many units of its business, thus, offering an opportunity to KPMG International to increase its client base in the lucrative U.S. and international markets.

KPMG -26 This alternative could win against the competition because KPMG International had developed a wide range of expertise in many industries. The company already had an exposure to ten major industries, a way ahead of Delloite&Touche, Ernst&Young, and Andersen. The new member firms would bring new clients and add even more depth into KPMG Internationals existing industries exposure. This could create an environment where KPMG International WOULD become the leading provider of accounting, tax, financial advisory and IT consulting services to a wide range of clients in several major industries. This would give KPMG International the opportunity to take advantage of the situation and expand its business practices to new clients and industries. In addition, the company would become a leading provider of services in many of these industries. KPMG Internationals focus on new clients and industries, and its ability to provide a wide range of services would allow KPMG International to be a major competitor in the accounting services industry. The main drawback to this alternative would be the cost associated with the acquisitions and the unknown future financial and legal liabilities associated with the merger. To date, the future of Andersen was unknown. It was possible that the company could face many shareholder suits. Thus, the legal liabilities surrounding Andersen were still unknown. A way around the drawback would be to research thoroughly all of the costs as well as the financial and legal liabilities associated with this merger. Both alternatives would provide KPMG International with a presence in the market over the long-term as trends moved toward separating the accounting and IT consulting functions. Mr. Paul C. Reilly decided to look further into both alternatives in order to decide which would enable KPMG International to become a market leader. Based on the discussion, both alternatives remained promising so that Mr. Paul C. Reilly set about exploring what he should do about this and other strategic decisions he faced.

KPMG -27 REFERENCES Andersen (2002). [Online]. http://www.andersen.com. Accessed July 31. AICPA (American Institute of Certified Public Accountants) (2002). [Online]. http://www.aicpa.org. Accessed April 1. Beresford, Dennis R (2001). Congress Looks at Accounting for Business Combinations, Accounting Horizon, Vol.15, No.1, March, pp. 73-86. Chase, Aquilano, and Jacobs (2001). Operations Management for Competitive Advantage, New York: McGraw-Hill/Irwin. CSC (2002). [Online]. http://www.csc.com. Accessed July 31. Deloitte & Touche Tohmatsu (2002). [Online]. http://www.delloite.com. Accessed July 31. Department of Commerce (2002). [Online]. http://www.doc.gov. Accessed April 1. EDS (2002). [Online]. http://www.eds.com. Accessed July 31. Ernst & Young (2002). [Online]. htpp://www.ey.com. Accessed July 31. Glater, Jonathan D (2002). Audit Firms Await Fallout and Windfall, The New York Times, March 14, pp. C1, C4. Guy, Dan M., C. Wayne Alderman, and Alan J. Winters (1999), Auditing, Fort Worth, TX: The Dryden Press/Harcourt Brace College Publishers. IBM (2002). [Online]. htpp://www.ibm.com. Accessed July 31. Kennedy Information, Inc. (2001). IT Consulting for Government Sector Shifts Course, Global IT Consulting Report, October, pp. 1, 11-14. KPMG International (2002). [Online]. http://www.kpmg.com. Accessed April 1. Hoovers Online (2002). http://www.hoovers.com. Accessed March 20. News Roundup (2002). Companies Mull Separation of Auditing, Consulting, The Wall Street Journal, February 4, p. A6. PricewaterhouseCoopers (2002). [Online]. http://www.pwcglobal.com. Accessed July 31. Sacramento Business Journal (2002). [Online]. Forecast: CRM services revenue to increase 15 percent, http://sacramento.bizjournals.com/sacramento/stories/2002/04/08/daily13.html. Accessed May 14. Veronis Suhler Stevenson (2002). [Online]. http://www.veronissuhler.com/specialty/segment.html. Accessed May 14.

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