Valuation of the Engineering and Professional Services Industry

Group 87 of the Standard Industrial Classification (SIC) code covers engineering, accounting, research, management, and related services. This SIC group covers a range of business services requiring educated professionals, including architectural and surveying services; research, development and testing

Industry Overview

The engineering and professional services industry supports a broad range of other industries. The industry provides design support for the industrial sector, provides outsourced services such as research and accounting, and supports the development of complex technology projects.

Spending has been limited on national infrastructure projects, limiting earnings growth for the engineers, surveyors, and other professionals that support such projects. Infrastructure spending is likely to increase, however, as projects become matters of necessity rather than convenience. The national water infrastructure requires repair and expansion, for example, and spending on transportation projects is already on the rise under a new federal highway act.

New home construction, after a significant boom in recent years, is starting decline, which may impact architects, surveyors, and other professionals. Repair and redesign work is still in demand, particularly in the wake of last year's destructive hurricane season.

Engineering

The engineering sector provides design and development services to a wide range of industrial sectors. The sector supports the development of ships, aircraft, machine tools, and a variety of electrical and mechanical equipment.

While industrial production has been on the rise in response to an improving economy, the cost of raw materials has also been on the rise. The rising cost of fuel and material resources may have a limiting effect on the capital available from the industrial sector, but engineering companies that serve the oil and gas sector stand to benefit from increased production in that arena. Some engineering and design demand is also likely to be created by the need to develop more efficient production systems that require fewer resources to operate.

Demand for new commercial airliners was strong in 2005. Airline companies are responding with the design and development of exciting new models, such as Boeing's 787 Dreamliner. The engineering sector is likely to enjoy ongoing demand from the commercial aircraft industry.

The defense sector supports a significant portion of the engineering industry. Modern warfare requires the integration of complex machinery, advanced electronics, and telecommunications and logistics systems. Potential increases in defense spending are a good sign for the industry.

The US government has asked for a seven percent increase in the defense-spending budget for fiscal 2007. Both the Administration and Congress have shown interest in updating the Coast Guard, and the US Navy hopes to spend heavily on new ships beginning with the fiscal 2009 budget. Only six new ships were authorized in the current budget and the Department of Defense is only planning seven more under the proposed 2007 budget.

Continuing increases in defense spending are not guaranteed, however. The defense budget has already increased by 50 percent under the Bush administration. Budget pressures have prompted some members of Congress to seek tighter restrictions on defense spending.

Accounting, Bookkeeping, and Finance

The accounting sector provides financial advice and services. Major auditing firms have what amounts to a public franchise, since the law requires publicly traded companies to get independent audits. This industry segment is highly regulated, particularly after the major accounting scandals in 2001 and 2002.

The specter of accounting scandal still looms over the industry, as the recent trials of Enron executives keep accounting fraud in the public consciousness. Accounting firms today must go to great lengths to avoid any appearance of being criminally liable. The phenomenon isn't restricted to the United States, either. Kirn Woo Choong, the founder of Korean company Daewoo was recently found guilty of accounting fraud by a court in Seoul and Lars-Eric Petersson, former chief of insurer Skandia, was convicted of fraud by a Swedish court for authorizing $21.5 million in bonuses without board approval.

Keeping in line with domestic accounting and disclosure policies is difficult enough, but companies expanding into international operations are faced with additional accounting challenges. This is especially true for companies whose business involves dealing with money, such as mutual fund companies. Operating under the accounting rules of foreign companies usually means hiring or outsourcing additional specialists. While all members of the European Union, Germany and England have distinct regulations and France has its own accounting system. Even the regulators can have difficulty tracking the regulations - The European Commission recently awarded a study contract to accounting and consulting firm PricewaterhouseCoopers to examine the public private partnerships within the European Union.

Outlook

Increased industrial production, defense spending, and a possible increase in infrastructure projects all bode well for the engineering and professional services industry. The need for corporations to appear publicly accountable and above board continues to generate demand for the accounting sector. But the accounting firms themselves must also be cautious to meet regulations and avoid any possible hint of improper dealings. Corporate and financial expansion into foreign operations also creates the need for further research and consulting services.