1251 Avenue of the Americas
New York, NY 10020
Fax: (212) 790-6620
Sales: $3.89 billion
SICs: 8721 Accounting, Auditing & Bookkeeping Services; 8742 Management Consulting Services
Price Waterhouse holds a reputation as the most traditional and dignified of the big six accounting firms. This reputation has helped it attract more Fortune 100 clients than any other accounting firm.
The firm was founded in London in 1850 by Samuel Lowell Price, who wanted to take advantage of England’s recent parliamentary laws requiring the examination of a company’s financial statements and records. The public accounting profession was growing so rapidly during these years that in 1865 Price took on a partner, Edwin Waterhouse, to help with the expanding business. During the late 1860s and 1870s, while primarily working on arbitrations, bankruptcies, and liquidations, Price and Waterhouse also developed a practice of introducing borrowers to prospective lenders. At this time, many privately-owned businesses were converted to public companies and, consequently, reports on earnings signed by reputable accountants soon became an indispensable ingredient in any firm’s prospectus.
As the nineteenth century drew to a close, the firm of Price Waterhouse had garnered a reputation in Britain as one of the leaders of auditing, accounting, and financial consulting services. And, as many of its European clients established operations in the United States, Price Waterhouse sent its own representatives to evaluate the business ventures and opportunities they were financing in order to protect investments and shareholders’ interests. Although Price had died in 1887, business in the former colonies was so significant that Waterhouse made the commitment to establish a permanent American presence. On September 1, 1890, the American branch of the company opened an office at 45 Broadway Avenue in New York City.
A talented member of the London staff, Lewis D. Jones, was the first office manager in New York. Faced with developing clients over an enormous territory that included North, Central, and South America, and serving the needs of diverse industries such as brewing, mining, steel, railroad, leather, and packing, Jones soon required an assistant. Another member of the firm from London, William J. Caesar, arrived and opened a Chicago office the following year. Caesar’s aggressive style and management ability soon earned him the leadership of the U.S. operation.
At the turn of the century Arthur Lowes Dickinson succeeded Caesar; it was Dickinson who made the United States office a uniquely American firm in both outlook and operation. Rather than continuing the practice of bringing accountants from Britain to serve clients in America, Dickinson focused on hiring native talent. Dickinson also encouraged his employees to develop their professional creativity. This quest to break new ground in accounting methods and procedures led to the firm’s creation of consolidated financial statements. After Price Waterhouse consolidated the accounts of U.S. Steel, the method gained industrywide acceptability.
The financial report for U.S. Steel was the very first to include supporting statements and time schedules that reflected significant balance sheet accounts, such as inventories and long-term debt, and to provide information on assets, operating funds, payroll statistics, and additional facts of interest to stockholders. By this method of fair disclosure, Price Waterhouse set the standard for financial reporting at the beginning of the twentieth century. Price Waterhouse was also the first to provide client shareholders with quarterly financial data and, in 1903, while the firm conducted its first municipal audit, it also pioneered efforts to survey the accounting and audit systems of government organizations. These accomplishments drew attention to accountancy and the role of public accountants in a rapidly developing industrialized economy.
As a young accountant working on the Price Waterhouse’s audit of Eastman Kodak, George 0. May so attracted the attention of George Eastman that Eastman offered him a job. May refused and twenty-odd years later, while Eastman was visiting May’s office, Eastman remarked, “What a mistake you would have made had you accepted.” May, whom many people regard as the father of the accounting profession in the United States, assumed leadership of Price Waterhouse in 1910.
May opened many new offices throughout the United States, and developed new services for clients. In 1913, immediately after Congress enacted a federal income tax, May initiated a tax practice. He also encouraged the firm to provide services for emerging industries, such as the motion picture and automobile industries. It was under May’s stewardship that the firm was contracted to handle the balloting of the Academy Awards in 1935 to assure the honesty of the voting process.
Primarily remembered for his devotion to public service, May campaigned relentlessly during the 1920s for Congress to enact laws stipulating that publicly traded companies adopt standard auditing methods and accounting procedures. May secured the New York Stock Exchange as a client of Price Waterhouse, and his work there in the late 1920s and early 1930s led to the formulation and passage of the Securities Exchange Act of 1934. He retired in 1940 and devoted the remainder of his life to writing about the accounting profession.
During the 1940s, the firm faced its first major crisis. A highly profitable drug wholesaler, McKesson & Robbin, Inc., was the victim of an embezzlement scheme carried out by a senior executive and the man’s three brothers. The scheme, extremely complex and carefully conceived, eluded detection by the independent auditors from Price Waterhouse. Although a subsequent investigation indicated that the firm’s auditing procedures were in strict compliance with the law and the industry’s professional standards, the inability of the auditors to discover the embezzlement was of concern to both the firm and the industry at large.
When senior partner John C. Scobie, a Scotsman with a reputation for being scrupulously honest, became head of the firm, he implemented new auditing procedures which were designed to provide auditors with more access to a client’s operations. Scobie’s plan was to improve the auditor’s ability to evaluate whether accounting data reflected the actual performance of any given company; this, in turn, would enable auditors to provide advice to clients on the many operational factors that influence financial results.
After World War II, overseas expansion and investment by companies previously maintaining a national or even regional profile led to the demand for Price Waterhouse to develop a stronger international organization. During this period, the first U.S. senior partner, Percival F. Brundage, and a native New Zealander, John B. Inglis, acted as co-leaders of the firm. Their strategy was twofold: to initiate broader national and international approaches to serving the needs of clients and to build and improve the firm’s operational structure.
In concert with the British arm of the organization, the Price Waterhouse International Firm—which promoted uniform accounting standards for all Price Waterhouse offices around the world—was established in late 1945. A management consulting service, MCS, otherwise known as the systems department, was founded in 1946 as part of the evolution of manual accounting systems the firm had been developing for various clients throughout the years. The importance of electronic data became increasingly obvious during the war, and the leadership at Price Waterhouse was quick to recognize the advent of the computer age. Full-time auditors and data processing professionals were hired to design charts for account and pro forma financial statements, develop accounting and various financial systems, and provide advice on productivity improvements. During these years, Price Waterhouse was called upon more and more to recommend the kinds of systems used to organize and produce financial and management information.
When Brundage resigned as senior partner in 1954 to accept a position in the Eisenhower Administration, John Inglis took over sole command and guided the firm into an era of specialization. Since clients more frequently needed nonauditing services, Inglis created four specialized divisions, including accounting research, international tax, SEC review, and an international department. Following the comprehensive revision of the U.S. tax code in 1954, the tax department developed into one of the most important of the firm. The firm’s success was indisputable—in 1959 its gross income was nearly $28.5 million.
Inglis retired in 1960 and was replaced by Herman W. Bevis, a brilliant theoretician and writer, who garnered a reputation for leading the debates on the controversial issues of the day, such as deferred taxation and investment tax credits. He led Price Waterhouse through an enormous period of expansion. Within the United States, federal, state and local governments became important clients of the firm’s services. In the international arena, Price Waterhouse was sought after by many companies to supply information on foreign business practices, taxes, and government regulations, and to help assess the comparability of financial statements. The firm also helped companies such as Toyota and Sony secure capital from American financial markets by making sure their financial statements were in full compliance with the requirements of the Securities and Exchange Commission.
From its earliest days, Price Waterhouse’s elite image had helped the firm bring in blue-chip corporations. Oil and steel industry giants had always been high profile clients, and over the years their presence prompted more and more blue-chip companies to want to share in the prestige of the firm. By the time John C. Biegler became U.S. chairman in 1969, Price Waterhouse counted almost 100 of the Fortune 500 as clients.
Yet Biegler’s appointment came at a time of dramatic changes not only for Price Waterhouse but for the accounting profession itself. The expanding economy the firm knew since World War II had suddenly vanished, and a creeping inflation and slow national growth ushered in recession. Dramatic drops in the stock market and futures exchanges during 1970 led to a decade of financial instability. Moreover, many of the big eight accounting firms were served with lawsuits from disgruntled owners of failed businesses. These problems led directly to an increased competition for clients among all the accounting firms. As a result, Price Waterhouse could no longer rely on its reputation and high-quality work to secure accounts. In order to compete more effectively for clients, the firm was forced to develop aggressive hard-sell marketing techniques, expand the scope and range of its services, and reduce fees.
When Joseph E. Connor replaced Biegler to lead the firm in 1978, he succeeded in implementing a specific market-driven strategy which had immediate payoffs. Connor developed “industry services groups” which were comprised of specialists with extensive knowledge and experience in various industries. This strategy helped bring in new clients. Expanding services in the firm’s traditional areas of tax, audit and management consulting also helped retain many previous clients.
Notwithstanding the success of his strategy, in 1984 Connor met with chairman Charlie Steel and discussed a merger with Deloitte Haskins & Sells, another of the big eight accounting firms, widely known in accounting circles as the “auditors’ auditor.” The intention behind the merger was to create an organization of such proportions that no other accounting firm could ever again gain a competitive advantage. A letter of intent was signed on October 11, 1984, and, conditional upon the approval of the partners, the merger would take place on January 1, 1985. Yet despite Connor and Steele’s confidence in the benefits of such a union, when the balloting was finished the U.S. partners of Price Waterhouse approved while the influential British part of the firm vetoed the merger. For both men, it was a personal and professional defeat. Steel was forced to resign in 1986, while Connor remained as chairman of the U.S. firm until he was replaced in 1988 by Shaun F. O’Malley.
The failure of the proposed merger between Price Waterhouse and Deloitte had raised the possibility of creating a giant accounting firm, and many of the big eight partners discussed little else beside potential mergers. After Ernst & Whinney merged with Arthur Young on June 22, 1989, to create Ernst and Young, within weeks four other firms announced plans to merge: Deloitte Haskins & Sells with Touche Ross, and Price Waterhouse with Arthur Anderson.
The proposed merger between Price Waterhouse and Anderson seemed doomed from the start. The Anderson people thought the new firm should be named Arthur Anderson while the Price Waterhouse people thought it should be named Price Water-house; Anderson thought it would be acquiring an auditing practice while Price Waterhouse thought it was acquiring a consulting practice, but neither firm wanted to give the impression that its services were “acquired” by the other; and finally, O’Malley and Anderson’s chairman, Larry Weinbach, were new in their positions and just starting to implement development and marketing strategies for their own respective firms. O’Malley and Weinbach agreed to halt merger negotiations after three months.
The year 1990 did not begin auspiciously for Price Waterhouse. In May, a federal judge ordered Price Waterhouse to offer a partnership and nearly $400,000 in back pay to Ann B. Hopkins, who claimed that she had been denied a promotion to partner on grounds of sexual discrimination. In November of the same year, a British bank, Standard Charter PLC, sued the firm for negligence in failing to provide an accurate financial accounting during the acquisition of United Bank of Arizona in 1987. Financial analysts interpreted this latter action as another setback for the accounting industry in the United States: more than $3 billion in damage claims had already been brought against accounting firms by regulatory agencies during the collapse of many savings and loan associations.
Entering the 1990s, Price Waterhouse had been expanding its services to clients. The firm offered accounting, tax, and consulting products and services in relation to information systems technology, corporate finance, financial services, petroleum, public utilities, retailing, entertainment, and other industries. With the highest partner earnings and more blue-chip clients— including IBM, USX, J.P. Morgan, Westinghouse, and Shell Oil—than any of the other big six U.S. accounting firms, the partners at Price Waterhouse may not seem worried about the firm’s future. But as its blue-chip client base shows signs of shrinking, and with its sterling image tarnished by two aborted merger attempts, Price Waterhouse will have to fight vigorously for smaller clients and market itself aggressively to survive in the modern world of consulting services.
Allen, David Grayson, and Kathleen McDermott, Accounting for Success: A History of Price Waterhouse in America, 1890–1990, Cambridge, Massachusettes: Harvard Business School Press, 1993.
O’Malley, Shaun F., Price Waterhouse: 100 Years of Service in the United States, New York: Newcomen Society, 1990, pp. 1–28.
Stevens, Mark, The Big Eight, New York: MacMillan Publishing Co., Inc., 1981, pp. 10–12, 38–42, 70–72.
____, The Big Six, New York: Simon and Schuster, 1991, pp. 175–182, 195–199, 236–243.