KPMG announces drop in profits, but shows signs of positive audit investments

KPMG announces drop in profits, but shows signs of positive audit investments

The Big Four firm has announced a drop in profits amid rumours that as many as 65 partners could quite the firm.

Big Four firm KPMG has announced a 14% drop in profits and a slow-down in revenue growth as it prepares for increased regulatory scrutiny that will likely lead to greater separation of its business.

The decline in profits, which fell to £307m from £356m in the 12 months leading up to September 30, comes after two years of reputational setbacks and a spell of partner exits from the firm. Partner pay fell by an average of £52,000 to £549,000 for the 623 UK partners, and there are rumours that as many as 65 partners could exit the firm in the near future.

KPMG is the smallest of the Big Four firms in terms of revenue, coming in at number four in Accountancy Age’s Top 50+50 2019 list, but it’s average partner pay is now below that of BDO’s, who are in fifth place and had an average pay of £602,000 in 2019.

KPMG made the decision to stop providing consulting and tax advice to all large listed companies that it audits, and this is likely to have been in some way responsible for the profit drop. The firm has also made £45m of investments in an effort to improve audit quality, and has also been fined £20m by regulators.

The resulting reputational damage is also likely to have had an impact on the firm’s success in the last year, as KPMG has faced strong criticism from politicians and regulators, along with the other Big Four firms.

KPMG’s UK Chairman Bill Michael put the fall in profits down to the firms efforts to create a “sustainable business.”

As quoted in the Financial Times, he said: “The story of our year has been about stripping out costs and investing, which we needed to do to create a sustainable business, but not everyone will always like the changes. The profession is changing forever and we’re trying to be fit for purpose for the future.”

In October 2019, KPMG launched ‘Project Zebra’, setting itself the goal of cutting £100m in costs. This has involved making a third of its secretaries redundant, restricting employees’ work phones, and closing it private member’s club in Mayfair.

Positive investments at KPMG

While the cuts and profit drop paint a negative outlook for the firm, KPMG believes the cuts it has been making are pragmatic ones and is allowing KPMG to make investments in other areas of its business.

The firm’s £45m investment in audit quality included hiring 700 qualified auditors, recruiting 1,900 graduates and investing £23m in training at its newly launched ‘KPMG audit university’.

Speaking in October, a KPMG spokesperson said: “Overall our audit quality transformation programme will see more than £200m invested in people and technology by the end of 2020.

“In addition, we are resetting our cost base across the firm. We expect to remove circa £100m of cost as a result. As you would expect, as we undertake a project involving this magnitude of investment, we have analysed every aspect of our firm to look for efficiencies.

“It is normal for that to result in a range of potential measures for consideration. It would not be appropriate to comment further on the detail.”

Further changes at KPMG have included the creation of a separate board for its audit business with a separate remuneration policy. The firm also sold its pension’s division this month.

If further regulatory changes are imposed on the audit industry, we could well see other firms following KPMG’s lead of cost-cutting to afford audit improvements. With the election of a new government, it is unclear if the appetite for audit reform remains, and the industry is now waiting for the next steps to be announced.

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