PwC Restructuring Positions Firm to Tap Tax Demand, Grow Profits

PwC LLP’s decision to end its experiment as a two-segment firm reflects pressure on the firm to address competitive labor trends and market conditions squeezing the accounting industry.

Incoming Senior Partner Paul Griggs began to lay out his vision for the US firm last week, exerting his influence even before the start of his term that begins in July. Reinstating PwC’s tax practice to its traditional spot among the firm’s core offerings tops his to-do list.

The US firm said last week that it would scrap a 2021 restructuring that had packaged the firm’s compliance work into a single business and combined its consulting work into a second line. That plan, steered by retiring Senior Partner Tim Ryan, spliced the firm’s tax work: its tax strategy services joined with advisory while its tax reporting work was paired with audit.

“In order to stay competitive, they have to be willing to adapt as needed, as dictated by the business landscape,” said Michelle Harding, an assistant accounting professor at Virginia Tech University.

Combined, the firm’s tax services could be more profitable and use of staff time more efficiently than they do apart, Harding said.

Propping up revenue is critical as the Big Four firms continue to grapple with higher interest rates and a slower economy that have crimped demand for consulting services—especially for deals work. The firms cut thousands of jobs last year across their largest markets in response.

But compliance challenges facing corporations from global minimum taxes to climate reporting offer fresh opportunities for the Big Four and other professional services firms to put their experts to work and begin to plug those revenue holes.

Bundling tax as a stand-alone unit allows the firm to better serve its multinational tax clients and to align with the structure used by other PwC affiliates around the world. It would also provide more opportunities for its tax professionals to advance their careers and to better market its tax brand, the firm said previously.

The firm also announced an initiative meant to respond to client demand for emerging technology like artificial intelligence—another cash generator for PwC, which reported $23 billion in US revenue last year.

PwC, also known as PricewaterhouseCoopers, declined to comment.

Paradigm Shift

Tax consulting is driven in large part by the firms’ tax preparation work, as staff spot new opportunities to help clients minimize their obligations. Meanwhile tax preparation helps to groom future tax strategists, providing a launchpad for junior staff to advance their careers.

Reconnecting those two parts of the practice opens up more career paths for junior staff and provides a resource the firm could tap to shoulder some of the more lucrative advisory work.

That’s critical as firms face renewed demand for their expertise, said Frank Tirelli, chair of professional services for alliantgroup and the former CEO of Deloitte Italy.

“We see just an unbelievable amount of growth, exponential growth in the marketplace and a very significant shrinking of the supply of people who can service that ever-expanding marketplace,” Tirelli said. “Sometimes a paradigm like that forces you to make some changes.”

The US accounting industry has shed 340,000 jobs since the start of the pandemic while the number of accounting graduates has steadily declined since its peak in 2016.

Big Four tax practices aren’t immune to the shortfall in qualified accountants even though many of those professionals and partners are lawyers, not CPAs.

Firms were in the middle of a pandemic-fueled hiring spree when PwC’s reorganization was announced in June 2021. They struggled to keep pace with demand and then with the “great resignation” that followed as staff jumped to new employers for bigger paydays.

Culture Challenges

Internal challenges in meshing the different work cultures and varied partner compensation between tax and audit also may have contributed to Griggs’ decision to reverse the restructuring, said Barbara Porco, director of the Center for Professional Accounting Practices at Fordham University.

Ethics rules, for example, that bar the cross-selling of most advisory services to audit clients don’t apply to tax professionals, who can pitch strategy work to tax reporting clients.

The restructuring was in part intended to put even more separation between auditors and the firm’s consultants—safeguarding PwC’s independence from its audit clients.

“They were the innovators by trying this and no one followed,” Porco said.

Even the firm’s own affiliates around the world stuck with the traditional structure of tax, audit and advisory rather than copy the much-hyped realigment.

This isn’t the first time a Big Four firm has run into roadblocks—from competing interests of partners, regulators, and clients—in pushing for major changes.

Competitor Ernst & Young’s efforts to spin off its consulting business, most notably, fell apart last year amid infighting over compensation and issues related to how to split up its tax practice. The US arm responded to the fallout by revamping its leadership structure, giving partners more say in governance and strategy.

Other firms have reworked their ownership and finance structure including BDO USA P.C., which extended equity stakes to frontline workers, and Grant Thornton LLP, which inked a deal with private equity firm New Mountain Capital LLC.

Firms have to be willing to adjust their recipe for success to match the evolving needs of clients. “Sometimes experimentation works out really well and sometimes it doesn’t,” Tirelli said.