Deloitte Touche Tohmatsu International
Deloitte Touche Tohmatsu International
Founded: 1989 as Deloitte & Touche
Sales: $9 billion (1998)
NAIC: 541211 Offices of Certified Public Accountants
Deloitte Touche Tohmatsu International (DTTI) is the fifth-largest accounting and business services firm in the world, and one of the prestigious Big Five accounting firms that dominate public accounting. The partnership was created as a result of the 1989 merger between two of what were then the “Big Eight” accounting firms—Touche Ross and Deloitte, Haskins, and Sells. The two firms were roughly the same size before the merger; the newly combined firm could boast of revenues of nearly $5 billion, with such clients as General Motors, Procter & Gamble, Nabisco, Sears Roebuck and Company, and other Fortune 500 companies. The Tohmatsu name was added to reflect the business of Tohmatsu Avoiki & Sanwa, Japan’s largest audit firm, which was part of Touche Ross at the time of the merger. By 1999, Deloitte Touche Tohmatsu was providing 132 countries worldwide with a host of professional services that included accounting, auditing, and tax services; management consulting; and financial and tax advice. The merger between Touche Ross and Deloitte, Haskins, and Sells was thought by many industry experts to be an unlikely match, given their radically different styles. Still, the accounting industry as a whole had a long history of mergers and acquisitions; over the years more and more partners have become concentrated in a shrinking number of firms. The genealogy of Deloitte Touche Tohmatsu 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.
History of Deloitte, Haskins and Sells
Each of the two predecessor firms to Deloitte & Touche has a long history of growth. 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 Waterhouse. 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 pointed 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 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.
History of Touche Ross
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 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 5,000 staff in the United States and, through Touche Ross International, offices in 45 countries.
Prior to the merger of 1989, Touche Ross had garnered a reputation as a maverick in the industry and the least stuffy member of what was then known as the Big Eight. Deloitte, Raskins, and Sells, however, was known as the industry’s “creaky old man.”
The climate in the industry during this time was somewhat unstable. Contributing to this was a problem that large all 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.
Moreover, competition had created an environment in which 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 savings and loan 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, Raskins, 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 (S&L) environment of the 1980s. During this time, 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.
Despite some negative publicity and skepticism from analysts, and through the work of J. Michael Cook from Deloitte and Ed Kangos at Touche, the firms were able to hammer out an agreement. Together the companies would seem to have 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 & 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. 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.
Diversification in the Early 1990s
As the company moved into the 1990s, it 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 DTTI. 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 Grain’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 offered software applications, such as audits, tax management, and consulting services for various management problems.
Deloitte Touche Tohmatsu is dedicated to delivering world-class service to its world-class clients, and we do this in over 130 countries. Our mission is to help our clients and our people excel These two forces come together in a powerful combination of wide-ranging services in every major business center in the world. Our services include assurance and advisory, management consulting, and tax advice to hundreds of the world’s biggest and most respected companies, including the world’s largest manufacturer, 5 of the 25 largest banks and four of the largest trading companies. Our people also listen in over 100 languages; beyond the major economies many of our professionals serve and assist the emerging markets, advising governments and institutions throughout Central Europe and Asia Pacific.
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 cost $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 also helped companies comply with software-licensing laws.
The U.S. firm Deloitte & Touche L.L.P. had 1992 revenues that 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, DTTI, 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 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 firm was also embroiled in several suits relating to clients that had declared bankruptcy and to its association with Michael Milken, the Drexel Burnham Lambert junk-bond dealer.
Deloitte Touche Tohmatsu’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 was also being fueled; the government of Russia enlisted the aid of an international group of Western advisers, including DTTI, to guide it through its privatization program. The firm was 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.
Growth continued slowly but steadily into the mid-1990s, with revenues rising to $5 billion in 1993, $5.2 billion in 1994, and $5.9 billion in 1995. The firm’s strong presence in Asia was a factor, as it benefited from that area’s booming economy. In addition, DTTI followed the path of the other Big Six firms by focusing on its consulting business rather than its lawsuit-prone auditing practice. To promote the growth of its consulting practice, the firm created a new operating unit, Deloitte & Touche Consulting, in 1995 that combined its consulting business from the United States and the United Kingdom.
In 1996 DTTI diversified its service offerings further by creating a corporate fraud unit, with a subfocus on the Internet. The same year it purchased the largest facilities and location consulting company in the United States, PHH Fantus. Renamed Deloitte & Touche Fantus Consulting, the company became part of the firm’s real estate group. DTTI began NetDox in 1997, a joint venture with the Chicago-based bank Thurston Group. The new company delivered financial, legal, and insurance documents over the Internet.
The firm grew rapidly in 1996 and 1997, with revenues rising to $6.5 billion and $7.4 billion, respectively. Its staff also grew to 65,000 in 1997 as the firm expanded its services and its international presence. Nevertheless, the firm fell to last place in the rankings of the major accounting firms as further consolidation in the industry created new mega-firms. That year Price Waterhouse and Coopers & Lybrand agreed to merge, making the Big Six into the Big Five. Now the smallest of the Big Five, DTTI began an aggressive new advertising campaign. Stating its intention not to merge with any other Big Five firms, DTTI continued its pursuit of growth through internal expansion and the acquisition of smaller practices.
In 1997, the consulting practice was integrated with the firm’s operations in South America, Canada, Europe, Asia Pacific, and Africa, and was reorganized into three units, divided according to the size and purpose of the client. Deloitte Consulting served multinational and global clients; Management Solutions served mid-sized companies; and Emerging Markets Group provided consulting to sovereign governments in emerging economies and international lending agencies. In 1998 the global consulting group had revenues of $3.2 billion and could boast the fastest growth rate in the industry: more than 40 percent in the past year.
The growth in the consulting group contributed to a year of record growth for the firm as a whole. With revenue of $9 billion in 1998, DTTI grew at a rate of 22 percent for the year. The firm’s tax practice expanded significantly, winning new clients and acquiring new practices, to total its revenues at more than $3 billion. Its work environment was praised in several surveys and rankings in the late 1990s, including Fortune’s “100 Best Companies to Work for in America,” which ranked DTTI 14th in 1998. No doubt this reputation helped with the firm’s recruiting, which added 8,500 professionals in 1998, bringing its total staff to more than 82,000 in 1999.
In 1999 the partners of DTTI elected James E. Copeland as its new global chief executive officer. During his four-year term, Copeland would oversee the implementation of a new global management structure. Encouraged by the success of its 1997 integration of its consulting practices, the firm had decided to integrate its other practices. As the smallest of the Big Five, DTTI would have to make the most of its global practices and continue its aggressive growth strategy to maintain its footing in the increasingly consolidated accounting and business consulting industry.
Deloitte & Touche L.L.P.; Deloitte and Touche Real Estate Group; Deloitte Consulting; Management Solutions; Emerging Markets Group.
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—John A. Sarich
—updated by Susan Windisch Brown