Mike Rake doesn’t exactly hog the headlines. In the history of KPMG published earlier this year, he writes the introduction, but barely merits a mention in the text. In the ongoing debate about auditor liability, it is PricewaterhouseCoopers partner and former ICAEW president Peter Wyman who has led the debate. Yet it was Rake and Wyman’s visit to DTI minister Jacqui Smith last autumn that led the government to signal it was willing to consider reform.
But in terms of seniority, no other UK accountant can rival Rake. He may not head the largest UK firm, but he is the only UK accountant to chair a member of the Big Four internationally. And with responsibility for more than 100,000 staff and partners, 715 worldwide offices and revenues that exceed £6.6bn – equivalent to British Airways’ turnover – Rake’s influence belies his somewhat understated profile.
All this perfectly positions him to sway the debates currently bedevilling the profession: most specifically, the ongoing saga of whether auditors should be allowed to limit their liability. Here, geography helps too. KPMG’s Salisbury Square offices in London are literally a stone’s throw from those of the Office of Fair Trading. And Rake and his fellow partners might struggle to resist lobbing the odd brickbat over the fence should the OFT’s hit-and-run investigation into the UK audit market not go the profession’s way.
That inquiry was due to be wound up last week. But it might be a little while before we know whether OFT officials have told ministers that allowing auditors a liability cap will not throw up any competition concerns.
Nevertheless, there is no doubt in Rake’s mind that reform is the only way to go – and that it would only make the audit market more competitive, not less.
‘On the liability side, what we are trying to put forward is not in our self-interest,’ he says, arguing that without reform a Big Four could become a Big Three. ‘We have four firms with basically no capital being held on a jointly and several basis liable for 95% of the world’s companies. That proposition cannot survive.’
Rake says the situation is affecting the quality of people employed by the big firms. ‘Frankly we are not able to retain the right people in the structure we have,’ he insists. And pointing to ‘tremendous support from business and government’, he says that OFT support for reform coupled with ministerial commitment to reform would not mean the end of accountability for accountants. ‘You can still lose everything whatever your liability,’ he says. ‘You die reputationally.’
Rake is not na’ve enough to pretend that accountancy does not have to bear its share of responsibility for the state in which it finds itself. ‘Like it or not, business got carried away with itself,’ he says. ‘Some of the failures have been so terrifying that it’s going to take time to work through that. It all led to a lack of trust.’
But, he says the collapse of another firm would force the Big Four to question whether they should be in the audit market. ‘Unlimited liability is a myth,’ he says. ‘Most accountancy firms have no capital. Most of the capital that they have is a captive insurance vehicle.’
Rake says that as a result KPMG, like other firms, wouldn’t have the means to meet a major claim. And he is unhappy that ‘a firm could go down without being found guilty of anything’.
But the view is not all bleak. And while many would claim that compliance has replaced innovation, Rake can see the need for further reform.
‘We need to move to international financial reporting standards,’ he says. ‘We need convergence around the principles of corporate governance and regulation that everyone buys into. We have to get trust back and accept regulation. We just have to deal with it and get on with doing good quality work.’
He hopes that the European Commission’s eighth directive – probably the biggest cause of headaches for partners right now – will help accountancy get back to basics. ‘The biggest opportunity is the eighth directive,’ he says. ‘If we can get that sensible, then we have something that we can go to the US with. And then the rest of the world would just follow.’
Rake is not alone in wanting to see IAS39 approved and adopted for 2005 so that accountancy can move and begin true global convergence. (‘Not getting the project in for 2005 would be a disaster,’ he says unequivocally.) And he believes it is for the US Federation of Accountants and the International Accounting Standards Board to make headway. ‘Then the US authorities would be much more accepting of equivalence,’ he says.
Indeed, Rake wants to see much more global coordination around ‘sensible rules and equivalence’. He adds: ‘It would be great to think of an agreed code of corporate governance supported by (securities regulator) IOSCO and IFAC.’ Agreement about the fundamental role of auditors – plus an end to the spate of big scandals – and the result, says Rake, would be a ‘return of confidence to capital markets’.
Key to that of course – and at the heart of the OFT review – is more competition in the audit market. ‘I’d like to see a situation where at least one other firm has moved up so that we have got five or six credible accounting firms dealing with global public companies.’
However, growing the market won’t happen overnight, though, and it will take time before a mid-tier firm becomes a true global player. To grow, the mid-tier needs to continue to serve the middle market well and its members need to hang on to their clients, without exposing themselves to high litigation costs. ‘That’s what we all did – we grew with the clients. There was no magic potion with someone at Goldman Sachs saying, “go and create a global accounting firm”.’
Rake believes that, while desirable, imposing a cap on auditor liability is not the end of the reform road. Proportionate liability must replace joint and several liability, he believes. ‘If KPMG makes a mistake we have to pay for that mistake. We cannot afford to insure 25% of the world’s public companies.’
If it comes off, Rake, like his peers at PricewaterhouseCoopers, Deloitte and Ernst & Young, will be delighted. But as a veteran of several high-profile setbacks he won’t be counting his chickens just yet.
Rake took over as KPMG’s UK senior partner in 1998, just as the firm’s attempt to merge with Ernst & Young untangled. Within months Price Waterhouse and Coopers & Lybrand had become one. Two and a half years ago he almost bagged Andersen’s UK arm, only to see Deloitte snatch the firm at the eleventh hour. Perhaps only Rake himself knows whether this was bad luck or shrewd judgement on his part.
Still, he has a deep well of experience to draw upon. He had a spell in the firm’s continental practice and spent a decade as a partner in the Middle East prior to his elevation, making him an inevitable choice to become international chairman when former US chief Steve Butler stood down somewhat unexpectedly in 2002.
These days it’s not just audit on his mind. Tax is becoming a major occupation for KPMG and other big firms. The government’s apparent rebranding of tax avoidance from a legitimate financial planning tool to unadulterated avarice is making many within the profession uncomfortable. ‘Suddenly tax has become very difficult,’ he says. ‘There is a whole lot that is grey and when does grey become black? Is it black because the chancellor thinks that it’s black?’
He acknowledges that some schemes marketed by firms ‘went further than they should have done’, though he argues: ‘I’m pretty confident we have done very little that would make me embarrassed.’
And he is unapologetic about his belief that tax planning is a good thing: ‘From time immemorial, people have had to take advantage of loopholes or mistakes. Big Four firms have to get involved in sophisticated multinational tax planning. That’s good for the economy.’
And in Rake’s view attitudes to tax planning are set at the very top. ‘Every finance minister in every country is trying to create a tax environment that makes their own country attractive to multinationals.’
If governments are engaging in tax planning, runs the subtext, why shouldn’t we? Like many of his other negotiating tactics, it’s an argument based on compelling plausibility.
Whether it convinces the government remains to be seen. But a statement expected any time now on audit liability by Jacqui Smith might provide the best indication of his powers of persuasion.
RAKE ON THE FIRM
In last year’s annual report, Mike Rake was gushing about the KPMG family. ‘Nothing is more important to KPMG and our worldwide network of 100,000 people than a culture that supports … professionalism and inspires trust,’ he wrote. ‘KPMG and its member firms will continue to invest in our people – supporting their professional and personal development’.
It’s not surprising that Rake places such emphasis on his people, particularly in the UK. Each of the firm’s 562 partners (of whom 88% are male and have an average age of 44) generates an average of £1.8m in fees. Each of its 6,121 professional staff contributes towards an average turnover of £160,000.
While its fees per professional staff total is the best in the UK, suggesting a lean and tightly run machine, its fees per partner ratio is the lowest of the Big Four, implying that partners could do more.
Indeed Rake might well ask how significant a part this played in the 1% decline in KPMG’s UK revenues to £1,018m for the year to September 2003.
In the UK, the firm faces two major challenges on the partner and staff front: recruiting the best and retaining the right people. In this regard it is not just up against the other Big Four firms, but also against the larger investment banks and some of the world’s biggest companies – here and abroad.
Rake says the firm’s recruitment efforts (like its rivals, KPMG is hiring aggressively right now) have not been hit by the events that led to the collapse of Andersen and the lingering whiff of scandal that has hung in the corporate air since. ‘On the graduate side we’ve seen no problems,’ he says. ‘People have seen audit and financial management issues as very important.’
But there have been consequences elsewhere. ‘When a good young partner gets an offer from a client now they are more tempted to go as result of the pressure created by potential liabilities and from a reputational point of view.
‘Life isn’t easy if you are an audit partner right now in the US.’
The UK firm saw double-digit growth last year in corporate finance while in the six months to March its risk advisory practice grew by 20% in local currency terms. As well as looking to grow professional and support staff headcount, KPMG is planning an increase in partner numbers this year.
And as he looks to hire, Rake is confident that this generation of accountants is no less ethical than previous ones. ‘Our people work hard and are ethical,’ he says. ‘The main problem I see is naivety.’