KPMG travails indicative of wider malaise

by Richard Crump

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24 Aug 2012

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Big Four

WARNINGS ISSUED by KPMG that it could cut its UK workforce are indicative of a wider malaise affecting the profession.

Staff at KPMG were told yesterday that up to 3% of its UK headcount of about 11,300 could be at risk unless economic conditions improve.

The potential cuts, which equate to more than 300 positions, come as part of a review of the firm's structure.

Although KPMG is the only Big Four firm to have announced the risk of job cuts – PwC, Deloitte and Ernst & Young all told Accountancy Age they have no formal redundancy plans in place – its rivals are all struggling under similar conditions.

A combination of limited merger and acquisition and IPO activity among corporate clients as well as extreme price competition for audit work has contributed to a downturn in operating profits among the Big Four.

According to the latest Accountancy Age Top 50 +50, PwC, Deloitte and KPMG all recorded a fall in operating profit over the past year – E&Y failed to provide figures. PwC posted operating profit of £656m, down from £680m; Deloitte's profit fell to £535m for the year ending 31 May 2011, from £593m in 2010, while KPMG declined to £418m from £432m.

However, Deloitte, which reports ahead of its Big Four rivals, reported that profits rose to £568m for the year ending 31 May 2012. Yet this remains well below the £664m profit the firm produced in 2008.

All of KPMG's rivals have come out with statements that they continue to recruit at graduate level, and all four firms remain profitable businesses. But conditions have deteriorated.

"We're not immune from the economic conditions, so we have taken opportunities to reassign people to different parts of our business or, on occasion, offer voluntary terms in areas of the business where we may have less growth or demand in the long term," PwC said in a statement.

Economic conditions have led to finance directors pushing hard on audit terms – leading to anecdotal instances of 40% reduction in fees on renewals – while M&A and IPO activity has stagnated.

A report issued by KPMG's global business revealed that M&A activity involving UK corporates mirrored the rather muted picture seen across the globe.

There were a total of 51 deals in the first half of 2012 involving UK companies acquiring targets in high-growth economies – down from 72 in the second half of 2011 and 66 in in the first half of 2011. Similarly, there were only 16 deals involving a high-growth corporate acquiring a company in the UK, a steady fall from 25 in the second half of 2011.

"While there may be a perception that the stagnation of the M&A market is solely a mature market issue, this is a clear demonstration that the ongoing slowdown is really starting to affect the high growth markets too," said David Simpson, global head of M&A at KPMG.

"Both the volume and value of corporate transactions are down across the board, and overseas markets that were previously seen as highly attractive investment destinations for developed economies have lost some of their shine.

"It would be wrong to interpret these findings as a sign that the UK is dis-investing in high-growth markets or even falling out of love with particular territories. Rather, the low number of deals involving UK firms is simply symptomatic of the depressed market generally."

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