Domestic regulation goes global
Globalisation has driven greater cross-border co-ordination in regulatory enforcement, with demand for seamless international advice therefore increasing from corporates for effective legal and forensic accountancy services.
The US Department of Justice (DOJ) and Securities and Exchange Commission (SEC) are focusing on more rigorous implementation of Foreign Corrupt Practices Act (FCPA) regulations. Their remit covers both US headquartered businesses and international businesses with US operations involved in corrupt activities. In addition, there are a large number of other federal and state regulators in the US tasked with identifying and prosecuting white collar crime.
Co-ordination between the US and international authorities is increasing, particularly with the crack-down on cross-border crimes. This collaboration exposes corporates to potential fines and prosecution in multiple jurisdictions (as evidenced by cross-border investigations into Alstom, Airbus, Siemens and numerous financial institutions). As a result, increasing opportunities for accounting and litigation support services are arising throughout Europe, Latin America and even some parts of Asia as regulators in these geographies turn to their US counterparts for collaboration and advice.
The rise in deferred prosecution agreements (DPAs) and monitorships in the US has also driven significant growth in the global forensic accounting market in recent years. The regulators have sought ways not only to punish corporate wrong-doing, but to also ensure they take appropriate remediation measures to prevent future misdemeanours. Recent examples of high profile monitorships include HSBC, Volkswagen and Credit Suisse. Whilst DPAs are primarily used in the US, they have recently been introduced in the UK (e.g. Rolls Royce) and Brazil and are under active consideration in other geographies such as France and Germany.
The complex and international nature of regulatory enforcement is creating greater opportunities for firms that can provide expert advice in multiple geographies. Forensic accounting firms are increasingly looking to M&A as a way to build international scale – for example, in acquiring Kroll in 2018, Duff & Phelps was able to increase its footprint outside the US, especially in Europe and Latin America.
Technology and the impact on white collar investigations
The complexity of white collar investigations increasingly requires forensic accounting firms to adopt the latest technology to combine with more traditional accounting techniques. M&A is a common means to secure this ‘full service’ offering.
Both financial and non-financial data sets are being collected and stored on a variety of platforms and mediums by corporates. This exponential growth in the volume of data and time it must legally be stored for poses significant risk to corporates. More sophisticated forensic technology and eDiscovery solutions are required as a result. Forensic accounting providers are finding they are required to provide a combination of traditional investigative techniques and the latest functionality, such as predictive coding and machine learning. Cases involving large data sets or sensitive data privacy considerations are becoming the norm so leveraging both proprietary and ‘off the shelf’ forensic technology, in conjunction with human expertise, firms are able to reduce time and cost in complex engagements, as well as generate the edge needed to remain competitive.
As mentioned above, traditional advisory firms are looking to M&A to plug gaps in their technology offering as represented by AON’s acquisition of Stroz Friedberg, a specialist provider of cyber security and digital forensics capabilities. The deal brings together two highly-skilled and accomplished teams that can now provide clients with access to the most advanced thinking and solutions in the industry; improving their proactive posture to confront cyber risk and respond more effectively in the event of an attack. We expect more providers to explore these avenues to not only expand their offerings in new markets, but to also fill gaps that could otherwise amount to lost opportunities.
Lost labour: the skills shortage shifting the sector
The demand for forensic accounting experts who can advise on potentially damaging litigation, or ‘bet the company’ investigations, is fast outpacing supply in most geographies. This skills shortage drives price inflation in the short term, however is incumbent on firms to invest in structured recruitment and retention. Investing in long-term recruitment and retention strategies enables firms to identify, recruit, train and harness high quality, skilled and motivated individuals for sustained long-term success. In an effort to hire and retain staff who can provide competitive edge, M&A provides a significant opportunity by connecting firms with specialised skills and synergies required to drive a business forward.
Boutique firms are being forced to develop innovative remuneration packages to attract qualified and experienced practitioners from Big Four accountancies and large consultancies and provide them with interesting career development opportunities in a supportive culture to aid staff retention. This can take many forms such as:
- Realistic utilisation targets to accommodate non-chargeable business development activities
- Early and varied client exposure
- International secondments, mentoring and formal and on-the-job training
It’s no secret that establishing a high quality and loyal workforce across multiple geographies firms can enhance a firm’s ability to win larger, cross-border and more lucrative engagements; M&A is increasingly being used in the forensic accounting and litigation support space to achieve this.
The recently announced acquisition of RGL Forensics by Baker Tilly Virchow Krause not only bolsters Baker Tilly’s international presence, but also provides their respective employees with more career development opportunities across multiple geographies and disciplines. DC Advisory acted as the exclusive financial adviser to RGL in this transaction.
The demand for tech-enabled, cross-border forensic accounting services is set to grow, as more countries follow the US in pursuit of stronger enforcement against white collar crime. We anticipate the creation and expansion of specialist, international boutiques which can provide a more tailored and responsive service to their clients compared to the Big Four and larger consultancies which still control a large share of the market.
In addition to strong market fundamentals, both corporate and private equity investment are continually attracted to the sector due to not only the strong profit margins and high cash conversion, but also the increasingly visible and predictable revenue streams. This was demonstrated recently when Ankura acquired Navigant’s DFLT business and through Carrick Capital’s minority investment in Exiger.
M&A continues to provide significant opportunities for sector operators. To capitalise on these opportunities, industry operators should:
- Be aware of the developing regulatory trends and how they are shifting the competitive landscape
- Understand the evolving technologies and service platforms and how these can be utilised to generate completive edge
- Be familiar with the skills deficit and understand how M&A can offset this shortage
Should you have any questions regarding this content or our credentials in the global forensic accounting and litigation support space, DC Advisory’s Business Services team would be delighted to discuss in more detail.