On 1 October 2007, KPMG Europe went live. Seen as groundbreaking and brave in equal measure, the move aims to bring together under common ownership the national practices of the Big Four firm throughout Europe. Despite the setback caused by the Dutch firm's failure to vote in favour of joining the European super-firm, plans to create a single firm continue as talks progress with a number of national firms. It's a move made possible thanks to the Eighth European Directive - implementation of the directive will allow cross-border ownership of audit firms within the EU.

Initially, KPMG announced last October that the UK and German practices would merge and that other European firms would then be able to join the party at a later date. The Swiss accepted the invitation, announcing in June this year that they would be coming on board, a decision subject to the approval of the Swiss Federal Audit Oversight Board.

At a stroke this created Europe's largest integrated accountancy firm - 1,100 partners, 17,000 staff, 57 offices and a turnover in excess of EUR3.5bn (£2.4bn). The new firm will be a member of KPMG International, though not a trading partnership itself; client work will still be carried out through national practices, which in effect become the operating subsidiaries of the larger firm.

No Big Four stampede

But while the co-chairmen of the firm, John Griffith-Jones in the UK and Prof Rolf Nonnenmacher from Germany, have been extolling the virtues of their brave new world, there has not been a stampede from the other Big Four firms - PricewaterhouseCoopers, Deloitte and Ernst & Young - to follow suit. So is KPMG boldly going where other firms fear to tread, or will it steal a march on its competitors and become the dominant accounting force on the continent?

'I think it is the most exciting thing we have ever done,' says Griffith-Jones. 'My serious hope is that this will give us a competitive advantage and it will be a little bit more difficult to copy than some of the other things we do,' he adds.

Certainly, if the other firms are looking at a single European partnership, they are playing their cards close to their chest. When KPMG announced its intention to form a new firm based on a merger between the UK and German practices, it was swiftly followed by Deloitte's announcement that its UK and Swiss practices were to combine. Much was written at the time about a shake-up in the industry and observers waited with baited breath for the next announcement.

But instead there was virtual silence. It became clear that Deloitte's UK/Swiss tie-up was a one-off, while PwC and Ernst & Young would only say that they remained committed to their existing strategies - Ernst & Young in particular emphasised the importance of the emerging economies as part of its North Europe, Middle East, India and Africa regional structure.

But Griffith-Jones is not convinced that KPMG will be alone for long. 'They (the other Big Four firms) are talking about it a lot. I think they have been amazed that we have been able to achieve the nitty-gritty negotiation breakthrough that you need to make it happen,' he suggests, adding: 'One thing is certain - if it works for us, they will follow.'

Logistical issues

That the others will follow remains to be seen. But there are undoubtedly questions that need to be answered in the minds of the other firms before they make a similar euro-leap.

Arguably the most important is how the move will affect clients. Then there are the logistical issues: how will it work in practice, how will partners be rewarded, how will decisions be made, how will it affect staff, both professional and non-professional? How will liability be handled, could an audit failure in one country precipitate the collapse of the whole firm? And of course, there are the regulatory issues and the attitude of the regulators - who does the firm answer to?

On this last question, Griffith-Jones is quite clear - the operating subsidiaries in each country will remain under the watchful eye of their relevant regulators, and the licences to audit held with the national institutes. What did the regulators themselves make of the move? The UK's Financial Reporting Council, and its counterpart in Germany, were informed of the firms' intention to merge before the announcement was made.

Paul George, the FRC's director of auditing, says: 'The firm took the opportunity to brief us in advance of events so it wasn't a surprise to us.'

The move does, however, raise the issue of whether there will be a need, in the future if not now, for a European-wide regulator. As Griffith-Jones says: 'The regulators are of course national-based and I think this has raised some questions with them as to whether they should be more integrated themselves. Potentially you could have a European regulator, but then the regulators would have to go back to their political masters and say, "Do you mind giving up sovereignty over regulation?".'

George says that the regulators in the UK and Germany have had 'early discussions around the extent to which we should be working together to avoid any unnecessary duplication.'

George also raises the interesting point that the model could be used as an example by other non-Big Four firms as a way of building critical mass to compete with the larger firms.

Liability creep

This is a point accepted by Jeremy Newman, managing partner of BDO Stoy Hayward in the UK, and indeed Baker Tilly has adopted an LLP structure in the UK that leaves the door open to European mergers. Perceptions of a stronger international presence could be seen as a positive benefit, according to Newman. He says: 'If we were to go down that route, it would force the market to look at us differently.'

But Newman's concerns with such a move, which he describes overall as 'a very interesting concept' lie in the negative impact of liability creep and how, in practice, the woes of one national practice could be prevented from damaging the reputation, if not the financial viability, of the rest of the firm. While Griffith-Jones may argue that a single partnership can ensure greater control over the quality of work, Newman reminds us that the once-mighty Andersen was the most centrally controlled of the international networks before it collapsed in a pile of wrecked reputation.

David Herbinet, UK head of public interest markets at Mazars, one of the most integrated global accountancy networks, reiterates the concerns over reputational risk. He says: 'You can't put national boundaries around reputation.' Herbinet adds that the Mazars approach is to ensure that the firm's risk management processes are as strong as they can be, a prevention rather than cure approach. David Evans, Mazars UK senior partner, adds that their own integrated model, where partners of national practices are also partners in the international firm, gives them a greater ability to put in place more robust risk management structures and strategies.

But should this be an issue of concern for KPMG clients? Clients have, according to Griffith-Jones, been broadly supportive of the move, so long as the firm didn't take its eye off the ball. 'They are leaving us to get on with it, they are supportive in principle, providing they get a better service,' he says.

For the clients, it all comes down to service, according to Griffith-Jones. He says: 'We have a bigger resource pool from which to choose the right team for any one individual instance. It is like playing football with a squad twice the size. KPMG always had that big pool but we never had such control over it.' He also argues that, when it comes to investing in people or new methodologies 'we will be able to take bigger bets'. He cites as an example the need to provide particular expertise, say, in financial services - the firm will now only need to make one investment rather than several across the subsidiary firms.

Of course, this could have been achieved under the old regime, but a system of bi-lateral agreements between national practices creates 'stickiness in the system', making the system slower than it need be. As Griffith-Jones says: 'It's not that the system wasn't perfectly adequate, it's just that you might have thought that horses were adequate until you meet motor cars.'

The firm is also reacting to a change in the European marketplace. It points to the unprecedented growth in the flow of capital through the European markets, which in turn, it claims, has increased the need for a 'strong and robust' firm, one that has the authority to speak out with a single voice on audit, advisory and tax issues.

'We don't pretend to represent all of Europe,' says Griffith-Jones, 'but what we do have is some pretty considerable influence with regulators, politicians, opinion-formers.'

Recruitment incentive

On the staff front, KPMG believes the new firm will be able to offer greater career opportunities in the international arena, and there is no doubt this aspect is being pushed as a recruitment incentive, boldly claiming it will be able to provide 'an unrivalled training ground to develop the European business leaders of the future'. But again, it would have been possible to make this claim under the old system - indeed this has, for a long time, been one of the attractions of working for a Big Four firm, or for that matter any firm that is a member of an international network.

So how will the partners be rewarded? Pooling of partner profits was always going to be a vexed issue, so how will it work in the new firm? 'Smoothly,' according to Griffith-Jones. 'In the UK we pool profits between 550 partners and distribute them as we see fair, and the Germans do the same thing, so why can't it work for 1,100? It doesn't mean that everyone will get the same, we will do it on a pragmatic basis.'

The firm itself will be run at an operational level by an executive of eight partners, drawn from a board of 20 that will reflect the constituent make-up of the firm itself. The UK's chief executive Colin Cook is the European chief operating officer, and he is joined by an Anglo-German mix - Joachim Schindler as head of audit, Sue Bonney as head of tax, Steve Hollis (head of markets), Rachel Campbell (head of people), Bernd Schmid (head of advisory), Bernd Erle (head of risk management) and the Netherland's Jaap van Everdingen, head of finance and infrastructure.

So the infrastructure is in place to welcome more firms into the fold, but will KPMG's ambitions stop at the European frontiers? 'In about 20 years' time I could definitely see it being global,' Griffith-Jones says. BDO's Newman says he too could see global firms in the future, but points to the risks and difficulties of bringing together firms from more than 100 countries. For his part, Griffith-Jones acknowledges the huge cultural and legal hurdles of creating a global partnership, but asks: 'If it works in Europe, why not? Every other industry in the world has globalised, how can we be so different?' A case of Europe today, tomorrow the world?