TAX DODGING, cosy auditor relationships and a plethora of high-profile insolvencies; the profession attracts negative headlines.
Ambiguities around tax planning and perceived audit failings have been thrown open to the court of public opinion, and the professions’ association with ‘defensive’ services – insolvencies, risk avoidance – is a consequence of its position as a barometer for the UK economy. The forecast remains gloomy for business – and as such, practices are viewed within that context.
Simon Collins, UK chairman and senior partner at KPMG, is concerned about the way the profession is viewed. As an example, he is “genuinely worried” about the political mud being flung at the profession for helping big corporates cut their tax bills.
Collins is adamant their needs to be a “more reasoned” debate around the issue, but concedes that the profession must restore its position as a “beacon of trust”.
“We all collectively let that slip through our fingers,” he tells Accountancy Age. This admission does not, however, extend to matters of audit. The Big Four have been accused of failing the companies they audit by championing the interests of management over that of shareholders, while their stranglehold of the market – they look after the accounts of more than 95% of the FTSE 350 – leads to higher prices, lower quality and less innovation.
The findings formed the basis of the Competition Commission’s extensive investigation into the FTSE 350 audit market. Among the remedies being considered, the commission has proposed enforcing mandatory auditor rotation and/or tendering. Collins says KPMG has “no fear” of tendering and is opposed to rotation. He also gives short shrift to the claims they are failing in their core function.
“They just got that wrong,” Collins says. “A lack of change [in auditor] doesn’t mean you are too close to the finance director. There are not many audit committee chairs that would tolerate cosiness between auditors and FDs.”
He adds that the commission’s decision to omit a comply or explain provision from the tendering process – a move championed by the Financial Reporting Council – misses the point. “Comply or explain shines a light on the audit committee. It is the membrane of governance between auditor and shareholder. Forcing them to tender would shed sunlight on their judgments.”
Whether the commission’s findings are fair or not, large company audits remain an issue of relevance for relatively few firms. But the wider perception of the profession is as harbingers of a bleak economic outlook. The retail administrations of Comet, HMV and Cobbetts – run by KPMG – make depressing reading in the business press, but are all grist to the mill for insolvency practitioners.
Nevertheless, Collins wants to see the profession, and KPMG particularly, identify how it is helping companies grow. And he believes, among KPMG’s clients at least, there is a slow, but steady, shift towards a growth agenda. This is evidenced by the advice the firm is providing – such as investigation of new markets, capital expenditure and transformation of systems that will facilitate growth.
“That can mean helping them with access to capital, introducing them to new markets or innovation around product. That’s something where I would like us to be demonstrably more forward-looking, proactive, aggressive,” Collins says.
Collins’ view, in part, is evidenced by the growth of KPMG’s management consulting division, which grew 12% in 2012, taking revenues from £255m to £286m. Risk consulting also made significant strides over the year, growing 11% to £250m from £226m.
Though Collins affirms that audit remains “an absolute mainstay of our business” and “serves as a kitemark for our brand” there is a wider question about what professional services means to clients.
“We should help navigate our clients through the economic cycle on a relationship basis. That’s anticipating downturns and risks and being there for them. It also means anticipating and identifying growth opportunities and facilitating them,” he says.
“I don’t see consulting as a fair weather or bad weather proposition, I see it as a through the cycle intimate relationship with our clients. Advisory services are core alongside audit and tax.”
Tied in with Collins’ growth agenda mantra is KPMG’s foray into Tech City, a media and technology hub clustered around central and east London. Through KPMG, the cluster of technology businesses based around Old Street roundabout now has its first permanent Big Four service provider.
KPMG’s team will provide advice for early-stage tech companies. In particular, it will provide advice on overseas markets, bring start-ups together to share ideas; and provide drop-in ‘clinics’ and consultancy advice.
“We are trying to invest in innovation. That means cultural change, having a younger team and an informal office environment to mate the advisory insights we can give with the innovation culture you get there,” says Collins. “There is no point in the likes of me wearing a tie and going to try and talk to a 19 year-old game programmer or entrepreneur.”
Championing start-ups is no mere altruism for the greater good of the UK economy. According to Collins, it is simply good business. “First choice I would love to be an early investor in Facebook, second choice would be to be an early advisor to Facebook or Google,” he says.
Collins shares the burgeoning optimism of his clients, though he accepts the firm has had a “challenging year”. Last year, UK profit fell 13% to £349m and the firm slashed 275 jobs – about 3% of its workforce – as part of a review across its entire business.
According to Collins, the firm has “no intention” of any further general cost reductions. “We set out to look at it once and move on. Our cost base was high and the wrong shape,” he says.
The “relatively modest” losses were skewed towards relatively senior employees, though not partners. The firm’s pyramid structure had started to get a “lumpy neck”, Collins explains. “We had too many senior people. We had to reduce our cost base and get the shape of business more appropriate.”
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 at the time of KPMG’s announcement that they had no formal redundancy plans in place – its rivals are all struggling under similar conditions.
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, and Collins points out that KPMG was more transparent than most about the decisions it had taken.
“You have to ask yourself a question about how transparent we have been. If you asked our peers honestly, they have let similar people go but in a more covert way,” Collins says.
A combination of limited merger & 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. But Collins senses things have started to improve. In February, KPMG picked up the audit of FTSE 100 insurer RSA and until recently had reason to cheer winning the audit of Schroders; though the firm had to step back from the audit over a conflict of interest.
Nevertheless, there are signs that more work is in the offing. “We have had a good time in market,” says Collins. “The NHS was a big consulting win and there is a lot more transactional work. We are getting our mojo and pride back.”
Collins recently accompanied David Cameron, along with more than 100 executives, to India on one of Britain’s largest trade delegations. Collins was keen to support the government in an effort to create a more constructive, joint effort between business and state. While still a tough place to do business, there are opportunities for advisers.
“There are a lot of tensions in the system, such as regulation and tax, between government, regulators and business,” he says. But India remains a “tremendously exciting economy” with real opportunities for professional service firms despite being “slow and clunky” at times.
“Any market that is growing as rapidly as India has to have opportunity for those who help with financial reporting, systems transformation, access to capital,” Collins says. “There is still quite a lot of deregulation to do in the professional services market in India. The Big Four at the moment are quite severely restricted in the services they can provide, that will be chipped away at. There is a rusty flywheel that is turning on that.”
Similarly, Collins says the profession cannot ignore the potential of China, though there are a number of disconnects when looking at the market.
“To not have China high on your strategic agenda for how you grow looks like a very dangerous thing to do. Conversely, massive expansion in China as a professional services firm can bring a lot of risk with it as well,” Collins says. “In 50 years’ time I am sure we would massively regret not investing in China now, in five years’ time we might regret over-investing too early and it’s a constant weighing up of those things.”
SIMON COLLINS CV
August 2012 – present: Senior partner and chairman, KPMG UK
April 2005 – August 2012: Global head of transactions and restructuring group and head of corporate finance practice, KPMG UK
1998: Joined KPMG UK corporate finance to establish its debt advisory business
1994: Managing director and head of global head of debt structuring and private placements at Natwest
1986: Qualifies as a chartered accountant at Price Waterhouse
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