The UK’s sixth largest audit firm reported to have agreed a deal in principle to acquire rival firm PKF. As reported in the Daily Telegraph, the deal will see PKF’s UK business separated from PKF International and incorporated into BDO.

The article refers to PKF managing partner Martin Goodchild agreeing to the broad terms of a deal. Goodchild is yet to put this to the firm’s 70 UK partners, but the agreement could include an “equity sweetener” for PKF’s partners – offered in the form of a guaranteed profit share scheme.

However a BDO spokesman denied that a takeover deal was going forward: “We view it as one of many rumours that often appear and have appeared in years gone by, and we’re not commenting. We don’t comment on market rumours or speculation.”

AccountingWEB contributor and former BDO tax partner Mark Lee commented on the speculation, saying it would be a logical move for both BDO and PKF, who would move into Grant Thornton’s number five position.

“They [BDO] have long harboured ambitions to be the largest firm outside the Big Four. A significant amount of conflicted work among the Big Four historically is automatically passed to the largest firm outside.

“We also don’t hear enough about PKF, given its size, so it’s probably a logical move for them as well,” he said.

Lee also commented on the possibility of a reactionary move from GT to recover their position if a BDO deal is done: “To be a credible alternative to the Big Four in terms of breaking their strangle hold on large corporate audits, the next firm down has to be significantly bigger to be able to pull together the size of audit team that those mega audits require. It’s very difficult for either BDO or GT to do that seriously, given their current sizes.”

In recent years BDO and GT have been campaigning for an overhaul of the audit industry to break the Big Four dominance.

The BDO spokesman commented on audit competition: “We absolutely think there are issues with market structure at the moment, which impacts on competition and choice, not just for audit committees but investors.

“There are certain elements that we really think they should be looking at – for example, we support mandatory re-tendering and that’s a position mirrored by GT.”

The Competition Commission is currently investigating the audit market and this week outlined the areas that need looking at.

If a BDO/PKF deal goes ahead, and looking back at past BDO acquisitions, it is important to consider how many PKF partners will be left after a couple of years. In previous deals, such as Moores Rowland and Finnie & Co in the 1990s, BDO managed to release the majority of partners from the acquired firm within two or three years.

Another point to consider is that if PKF UK is separated from the international operation, what happens to PKF International, and will they need to start looking for a new comparable firm in the UK?