Deloitte & Touche

views updated

Deloitte & Touche

10 Westport Road
P.O. Box 820
Wilton, Connecticut 06897-0820
U.S.A.
(203) 761-3000
Fax: (203) 834-2200

Private Wholly Owned Subsidiary of Deloitte Touche Tohmatsu International
Founded: 1989
Employees: 16,500
Sales: $4.5 billion
SICs: 8721 Accounting, Auditing & Bookkeeping; 8742 Management Consulting Services

Deloitte & Touche is the fourth largest public accounting firm in the world, one of the prestigious Big Six accounting firms that dominate public accounting. The firm of Deloitte & Touche was created as a result of the 1989 merger between two of what were then the “Big Eight” accounting firms—the firm of Touche Ross and the firm of Deloitte, Haskins, and Sells. The two firms were roughly the same size before the merger; the newly combined Deloitte & Touche could boast of revenues of nearly five billion dollars, with clients such as General Motors, Procter & Gamble, Nabisco, Sears Roebuck and Company, and other Fortune 500 companies.

Deloitte & Touche provides professional services including accounting, auditing and tax services, and management consulting through 15,300 professionals in more than 100 U.S. cities. A private partnership, Deloitte & Touche is also part of Deloitte Touche Tohmatsu International, a global leader in professional managerial consulting services with 56,000 professionals in 108 countries. The Tohmatsu name comes from Tohmatsu Avoiki & Sanwa, Japan’s largest audit firm, which was part of Touche Ross at the time of the merger in 1989.

The 1989 merger between Touche Ross and Deloitte, Haskins, and Sells was thought by many industry experts to be an unlikely match, despite the fact that the accounting industry is one with a long history of mergers and acquisitions—over the years more and more partners have become concentrated in a shrinking number of firms. For the last half century, however, eight firms had dominated public accounting; these firms were dubbed the “Big Eight” by Fortune magazine. But the genealogy of Deloitte & Touche looks much like a large family tree stretching back over 100 years to the rise of the multinational corporation and its need for standardized accounting procedures.

Each of the two predecessor firms to Deloitte & Touche has a long history of growth. For example, Deloitte, Haskins and Sells traces its history back to the mid-1800s in England, when William Welch Deloitte devised the double entry accounting system to help the Great Western Railway to deal with its large capital stock. In those days, as companies grew, due to their size and complexity, new problems were presented over how to depreciate fixed capital. For example, some imagined that as the cost of replacement of locomotives rose, then the value of a firm’s assets rose by the same amount, ignoring depreciation. The system devised by Deloitte solved this problem and was instrumental in the passage in 1844 of the Joint Stock Banking Act in England, which required firms to provide balance sheets and income statements. A number of leading firms were established at this time, including Deloitte in 1845 and Price Water-house. Changes in tax legislation, such as the introduction of an income tax in the United States in 1913, were critical for the growth of accounting as a profession. Thus, as Archibald Richards points out in his historical account of the company, the evolution of accounting as a profession can only be understood in the context of the developing business community. In other words, accountancy became indispensable to any well-run business, and the practice of accountants has roughly paralleled business trends.

Deloitte has evolved for this entire period, moving with the needs of business. For example, in the late 1970s and early 1980s Deloitte began offering administration services for 401(k) retirement plans for companies. Using leased software, Deloitte administered 20 investment funds, offered myriad services for participants, and provided consultants in such areas as legal issues, plan design issues, employee communications, and compliance issues. The service was set up nationwide and administered through regional consulting offices in over 15 offices with a staff of over 250 people. The company also moved increasingly toward management consulting.

The origins of Touche Ross, the other partner in the Deloitte Touche marriage, can also be traced back to England. Founded in 1899, the firm initially provided services needed by investment trust companies. Starting with a staff of 11 that included only two accountants, the firm grew rapidly through directorships, receiverships, and reconstruction, rather than by additional audits. The 1930s were rough years for the company, but by the end of World War II, the firm had a staff of 67 total and was called George A. Touche & Co., then a small- to medium-sized firm. Expansion continued in America, Canada, and overseas, both through internal expansion and by merger. The firm eventually assumed its position as one of the Big Eight.

By the 1970s Touche Ross was the third largest accounting firm in the United Kingdom. By 1972 the firm included 74 offices, 450 partners, and 5000 staff in America and, through Touche Ross International, offices in 45 countries.

Prior to the merger of 1989, Touche Ross had a reputation as the “most scrappy” and “least stuffy” member of what was then known as the Big Eight, while Deloitte, Haskins and Sells was known as the industry’s “creaky old man.” Touche made headlines when two of its employees were accused of insider trading. In 1989 three accountants in the firm’s London office were charged with having profited from information obtained illegally from a Touche audit of a British industrial conglomerate.

Also contributing to the instability of the pre-merger period was a problem that large accounting firms shared; that is, many of the economic disasters of the 1980s, specifically leveraged buyouts and the savings and loan scandal, took place under the watch of Big Eight accounting firms. With Deloitte’s corporate culture, thought to be slow and steady, and Touche’s reputation as an aggressive auditor, many at the time thought the marriage of Deloitte and Touche to be one of strange bedfellows. But under the lead of J. Michael Cook and Ed Kangos at Touche, the firms were able to hammer out a merger agreement.

Besides, both firms, had Fortune 500 clients locked up: Touche had Chrysler while Deloitte had General Motors; Touche had retail giants Sears, Macy’s, Litton Industries, and Pillsbury while Deloitte had the Wall Street buyout powerhouse of Kohlberg Kravis Roberts as well as Kimberly Clark, Monsanto, and Procter and Gamble. After the merger, the Deloitte contingent largely took control of the new firm, with long-time Deloitte chief J. Michael Cook taking over as Chairman and Chief Executive Officer. Cook was a life-long Deloitte employee who, in 1986, at the age of 43, had become chairman of Deloitte, Haskins, and Sells. The merger took place the same year that another major merger between Big Eight firms, Ernst & Whinney and Arthur Young, reduced the Big Eight to the Big Six.

Competition had created an environment where the accounting industry was no longer a bunch of bookkeepers but a broad-based consulting practice serving a network of multinational organizations that included corporate, governmental, and financial institutions. This created the background for Deloitte’s involvement in the S&L fiasco—with a pressure to retain clients so strong that by the 1980s, a government accounting office study of 11 bankrupt thrifts found that a number of accounting audits, including some completed by Deloitte, Haskins and Sells, failed to meet professional standards. The long held view that these accounting firms played a disinterested neutral advisory role was burst asunder. The competition for clients had obviously intensified in the deregulated savings and loan environment of the 1980s.

Most recently, as the company moves further into the 1990s, it has ventured into complementary services with data processing applications to ease out of the slide in its management consulting business, while still trying to recover from its ill-fated involvement (along with other Big Six firms) in the disastrous S&L slide. This effort, coupled with the recession at the beginning of the decade, made the period a difficult one for Deloitte & Touche. In the glory days of management consulting of the 1980s, when mergers and acquisitions were running wild, Deloitte & Touche had reported double digit annual growth rates in its consulting business. In 1991, however, Deloitte’s New York consulting business plunged 30 to 40 percent, due mainly to the slumping financial services sector.

In response to the slump, Deloitte slashed its own costs, or as Alan Breznick, writing in Crain’s in 1992 put it: “Instead of just cutting other people’s jobs these days, high-priced management consultants are cutting their own for the first time.” Deloitte also began revamping its other business services as well and in turn cut its consulting rates.

To expand its management consulting services, Deloitte & Touche entered into an operating agreement with Software 2000 of Hyannis, Massachusetts, to offer customers complementary services. The agreement combined Deloitte’s personnel and training knowledge with Software 2000’s software expertise. The software products were installed in Deloitte’s joint technology centers in New York and Charlotte, North Carolina, and offer software applications such as audits, tax management, and consulting services for various management problems.

In other software ventures, Deloitte & Touche joined with Brightwork Development and Egghead Discount Software in July 1992 to provide a software license auditing service to find and eliminate illegal software copies. The service costs $10,000 to $30,000 for a 500 workstation site. The need for the service was apparent since, in 1991 alone, the Software Publishers Association collected $3 million in litigation involving pirated software. In another venture in July 1992, Deloitte launched Microcomputer Asset Management Services, which will also help companies comply with software-licensing laws.

Deloitte & Touche’s revenues rose sharply over 1991, with gross revenues for the year of $2 billion, 50 percent of which was derived from environmental risk management consulting services—manufacturing plant audits, waste minimization plans, regulatory and public policy analysis, risk financing, and design of management systems, among other services. Deloitte & Touche’s international parent, Deloitte Touche Tohmatsu International, also had a big year, reporting global fee income up seven percent to $4.8 billion (U.S. dollars) in fiscal year ending September 1992.

In the late 1980s and early 1990s, however, the company continued to devote a substantial portion of its resources to settling matters related to the S&L crisis. In December 1992 the firm, according to chairman and Chief Executive Officer J. Michael Cook, began negotiating with the federal government to resolve an estimated $1.4 billion in claims from the failure of the federally insured thrifts. In general, many of the Big Six were accused of negligent auditing practices that may have overstated the value of failing thrifts. The settlements for the allegedly faulty audits are under negotiation with the federal government regulators (Resolution Trust Corporation). It remains to be seen whether or how much the firm’s legal liability from the S&L situation will weigh it down in the future.

Deloitte & Touche appears to be diversifying its business and will undoubtedly continue to remain a formidable presence in public accounting. It keeps adding new partners and has launched a program to accelerate the promotion of women to the level of partner. While other firms have started similar programs, Deloitte & Touche’s is considered more comprehensive than those of other companies.

Deloitte & Touche’s risk management consulting services continued to grow as well, posting a 12.7 percent increase in revenues to $13.3 million for 1992. Overseas growth is also being fueled; the government of Russia has enlisted the aid of an international group of western advisors, including Deloitte & Touche, to guide it through its privatization program. The firm is also seeing growth prospects in Asia, especially Korea. Growth, however, was slower in the company’s more traditional financial services businesses like insurance program reviews, but the company noted that these areas were expected to rebound.