Partners at the big four accountants are paid fortunes: Why?

It’s that time of year. The leaves are falling and the big accounting firms are publishing their annual results and, as usual, astonishing us with the remarkable sums paid to their equity partners.
Deloitte reported this week that average annual pay of its UK partners was £1.01 million. PwC revealed the other day pay per partner pay of £862,000, while EY said its UK partners got £761,000.
To be clear, we are not talking about the handful of super-talented stars of tax avoidance and dealmaking here, but the average across thousands of competent, hardworking but not always particularly exceptional people. Deloitte has 749 equity partners in the UK, PwC has 1,057. These are not entrepreneurs or pop stars or Premiership footballers, with rare and measurable skills. The “beancounter” label is deeply unfair, but few accountants are known for their creativity, innovation, charisma or management skills, attributes we might think business rewards the most.
The averages skew perceptions a bit. Hywel Ball, the departing UK chairman of EY, was paid £3.6 million last year, so there will doubtless be some partners getting by on a mere half million or less. But these are still eye-catching sums, and paid to relative plodders in some cases.
Also, the rewards are much more certain than the bonuses paid to company directors, say, or hotshot investment bankers. The partners may be required to recycle a portion of their rewards as fresh equity back into their firms, but the bulk is paid in hard cash with no nonsense about restricted shares or clawbacks.
The largesse also tends to go on for a long, long time. An accountant who makes partner at 35, say, can reasonably expect to stay on the partnership gravy train for 15-25 years. Compare that to the job term of a FTSE 100 chief executive, of perhaps five years. Or a professional footballer, of maybe ten.
For the bright, ambitious, plausible, numerate graduate, but one with no outstanding flair or specialist talent, accountancy is a potentially fabulous career choice, or will be by the time they reach middle age. For comparison, typical pay for people in their 50s, say, is £38,000 to £45,000, according to the Office for National Statistics. Add in the £10-15,000 premium that a degree confers (according to the Department for Education) you still only get to £48,000-to £60,000. That hoary yardstick, the prime minister’s salary, is £172,000.
There’s no mystery about why the partners pay themselves so much. It is because their firms make huge and reliable profits. Deloitte UK reported a profits pool of £756 million last year on the back of a 2.4 per cent rise in revenues to £5.7 billion.
The shocks and disasters that plague their clients never seem to seriously dent the bottom lines of big accounting firms. Even in the most cataclysmic of times, such as the global financial crisis, the fees kept rolling in. Per partner pay at PwC, which audited Lloyds TSB and Northern Rock before their collapses, dropped from £797,000 in 2008 to £777,000 in 2009.
You have to go back to 2002 for the last time senior accountants were seriously discomforted financially. Arthur Anderson was shut down after the Enron scandal, reducing the big five to the big four. Even then, many Andersen partners simply jumped ship to other firms.
The tailwinds have been favourable for years. The growing complexity of tax law, the mushrooming compliance obligations in so many industries, the insatiable need for IT advice and the hollowing out of in-house expertise from client companies have all been meat and drink for the accountants, who now call themselves professional services firms.
Why aren’t market forces and competition more successful in bringing in new entrants to the industry in pursuit of these strong returns and outsize pay packets?
First, it is a bit of a self-perpetuating cartel. Only the big four have the international scale and expertise to satisfy the largest clients, while no one ever got sacked for hiring a big name accountant. Audit appointments are usually a merry-go-round for the big four. The regulator, the Financial Reporting Council, is too cosy with the profession and fines for botched audits too low to have a deterrent effect.
Second, the accountants help shape the rules that make their services so essential, whether advising regulators on new audit and accounting rules or the Treasury on tax changes. The more complicated it all gets, the greater the demand for billable hours. Accounting rules, compliance requirements and tax law have never been so complex.
Third, according to some sceptics at least, clients don’t question the accounting and consultancy bills in the same way they might play hardball with other suppliers. These, after all, are people they might encounter directly in the boardroom or at the alumni dinner.
Rewards did come down a bit this year for some: that PwC partner profit was down 5 per cent. Others have never done better: RSM UK, the firm built out of the old Baker Tilly, raised profits per partner 7 per cent to £708,000, we report today.
Where are partner profits heading next? Up, probably. The claims for artificial intelligence have been overcooked, no doubt, but in professional services at least, AI could make a huge difference. Of all the sectors of the economy, accounting is the single most promising area for AI, according to a report last week from the recruitment group Indeed.
Already entirely digitised, the activities of book-keeping, data handling and analysis, financial reporting, rule-checking, suspicious activity spotting, compliance-testing and low-level financial communications are in many ways perfectly suited to being handled by AI.
That has profound implications for the hundreds of thousands of people in professional services firms who might be freed up for other things. Whether the reduced costs feed through to wider society, or just swell the pay packets of partners at the top is another matter.