Two of UK’s mid-tier accountancy firms BDO and Moore Stephens LL are set to merge, but the gap to Big Four dominance is likely to remain.

BDO UK is set to become the nation’s fifth largest accounting firm, overtaking Grant Thornton UK, after it revealed it was in advanced merger discussions with Moore Stephens UK.

While this move shows an appetite by mid-tier firms to increase scale and present competition in the statutory audit market, a significant gap of around £1.5bn still remains between BDO post-merger and the smallest of the Big Four firms KPMG.

In its most recent results, Moore Stephens reported £137.5m ($176.65m) in revenue and £24.1m profit. BDO UK reported £464.1m, meaning if the two combined without losing anyone by the wayside, the combined firm would have revenue just north of £600m.

However the pending deal only consists of Moore Stephens London, Birmingham, Reading, Bristol and Watford offices, out of its 37 offices.

As a result, once the deal is completed, BDO said it expects the combined firm – which will take the BDO brand – to post annual revenue of £590m.

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Why the merger

Commenting on the merger, Paul Eagland, Managing Partner at BDO UK, suggested the deal would help BDO compete for larger clients. He said: “In the last 12 months – in the wake of Carillion and the subsequent focus on competition in the audit market – the UK market now has a better appreciation of BDO’s capability and quality. This deal increases our credibility further and proves our commitment to competing in the top-end of the market.”

The Moore Stephens merger will certainly help BDO expand in the AIM market: Moore Stephens has 24 audit clients listed on the AIM market. If all these clients come across to BDO, this would give the newly merged firm 173 AIM audit clients, compared to second place KPMG’s 126.

However, Moore Stephens UK does not have any FTSE 350 clients, and the combined firm would remain far short of KPMG UK’s reported revenue of £2,172m for 2017.

Eagland added: “We’ve always said that size isn’t a proxy for quality. A driver of this merger is one of sustainable and profitable growth that benefits our clients, people and capital markets alike.”

Simon Gallagher, Managing Partner at Moore Stephens said: “To be entering final discussions to create the largest UK accountancy firm focused on entrepreneurially-spirited and fast-growing businesses is exciting – and critical for market competition. The proposed merger provides a platform for continued, sustainable growth, as well as offering something different to the market at this important time.”

Intense scrutiny of the Big Four

Since the collapse of construction company Carillion and several other high-profile fines against the UK Big Four firms – Deloitte, PwC, EY and KMPG – the pressure on the giants has been intensifying.

The Competition and Markets Authority is expected to publish its verdict before the end of December, which could see proposed measures like a cap on the statutory audit market-share and joint audits where two or more firms share an audit engagement.

Currently the Big Four hold 97% of the statutory audit market among the FTSE350 companies.

While the BDO and Moore Stephens news will help show the willingness of the mid-tier to break into the Big Four dominated market the size of the firm is still only a quarter that of the smallest of the Big Four and the audit market appears one where size and scale matter for some of the biggest corporates.