Upcoming audit reforms sees some Big Four firms “jumping before they’re pushed” to get “better prices for functions” to support with future restructuring, according to Franki Hackett, head of audit and ethics at Engine B.
“They know they’re going to be forced to split off the audit function from other things at some point and it’s better to have that money to support you through the process of significant restructuring, than it is to be forced to get rid of it at the point of which the law requires,” she says.
KPMG UK announced on Thursday it had sold its UK restructuring practice to Interpath Advisory, a newly formed company backed by HIG Europe, an alternative investment firm. The deal is valued at approximately £400m, according to a report by Sky News.
In a statement, KPMG UK said that an increasing number of conflicts of interest had become too complex and was “likely limiting” the growth of the firm’s restructuring business. The sale will see 550 employees including 22 partners currently employed in KPMG’s UK restructuring practice transfer to the new firm.
“As businesses across the UK pivot to new ways of working; the pace of digital transformation quickens and we focus on the transformation of our own business, this agreement will allow us to accelerate investment in our core services, enabling us to take advantage of the significant market opportunities that lie ahead,” said Mary O’Connor, interim CEO of KPMG UK, in a statement.
In December 2019, the Big Four firm announced it had sold its pension advisory practice to Isio, a newly formed company backed by private equity firm Exponent.
In February, Deloitte announced it too had sold its restructuring arm of its business to Teneo. More than 250 people, including 27 partners, will transfer to the new practice.
Both KPMG UK and Deloitte denied the sales of its services were in direct relation to operational separation.
In February, the Financial Reporting Council (FRC) published updated principles and announced operational separation could move to the next stage of implementation.
However, critics are still skeptical on whether the separation will reach its aim of improving the culture and quality of audit.
“Market competitiveness is still big problem,” says Hackett. “The Big Four are the only people at the moment capable of performing audits of FTSE 250 and 300 companies, because of the volume of information and data.”
The Big Four seem to be “dictating the terms” of audit separation, according to Atul Shah, professor of accounting and finance at City University.
“The nature of audit is fundamentally about challenge and inspection and consultancy is about advice and support,” he says. “They are two very different roles and different cultures. When you merge the two, and this has happened, auditors consistently fail to exercise audit skepticism. One of the reasons they fail to do that is because they are used to being nice to the client.”