DAVID SPROUL has had to take the rough with the smooth during his time heading up Deloitte in the UK.
Since becoming the Big Four firm’s senior partner and chief executive officer in 2011, financial performance at Deloitte’s UK has been good. Revenues have risen to £2.5bn from £2.3bn, fee income is up in all its main service lines – audit, tax and consulting – while insolvency practitioners working on behalf of the firm have taken on some of the most high-profile administrations of the past year.
On the flip side, Sproul has had to contend with a barrage of negative headlines – ranging from a spat with Lloyds Banking Group over the running of a call centre dealing with payment protection insurance complaints, to defending audit work carried out at Autonomy following allegations of accounting misrepresentations at the UK technology company prior to its acquisition by Hewlett Packard.
Deloitte has categorically denied any knowledge of alleged accounting deficiencies at Autonomy. However, the allegation that rankles most is that it committed misconduct when advising the owners of MG Rover in 2000 over two transactions.
The firm and its corporate finance partner Maghsoud Einollahi were recently found guilty of misconduct in an independent tribunal held in July after the FRC alleged that Deloitte and Einollahi failed to adequately consider the public interest and mitigate risks of conflicts when handling the sale of the now defunct car maker.
Slapped with a record-breaking £14m fine from the FRC – the first to be handed out since the watchdog made its sanctions more punitive – Sproul could be expected to rail against the size of the punishment.
While the firm has now challenged the decision – and the size of the fine – the financial sanction is not the paramount concern. “The fine environment has changed. We’re not really focused on the fine,” Sproul tells Accountancy Age, though he does suggest that the FRC’s decision to levy sanctions based market share or revenue could “create a difficult environment for accountants to give advice” by creating an uneven playing field.
More contentious, as far as Sproul is concerned, is the ruling itself; something he and the firm hotly disputes, and has since appealed.
“We strongly believe that we did a good job, had real regard to the public interest in what we did and that the advice we gave was in the best interest of the company, employees and the public,” he says. “Of course if you go into the detail, all of us can look back 12 years and find things we could have done differently. We accept that.”
What riles Sproul is that the accusation strikes to the very core of what he believes Deloitte stands for. “It goes to the values of the firm and that just isn’t the firm. To be portrayed that way, as having a partner and a firm acting in a way that was deliberately dishonest, just isn’t the firm I lead and work for.”
To single out Deloitte would be unfair – its peers in the Big Four and the wider profession have had a rough old time since the 2008 banking collapse; some of it justified, some not. Hammered for giving the banks a clean bill of health prior to their subsequent implosion, and subjected to the ever impressive invective of Margaret Hodge, chair of the Public Accounts Committee, over tax advice given to large corporates with minimal tax bills, the profession’s core service lines of audit and tax have not been cast in the best light of late.
Sproul dismisses Hodge and the PAC as “playing to the gallery and creating a headline rather than going to the substance” but accepts that there are legitimate concerns about the role of the profession in society.
“The whole point is about having a licence to operate in society and we recognise that we have got to respond to that. The question about acting appropriately and with integrity in the public interest is something we are absolutely aligned on and clear on,” he says. “Our partnership agreement explicitly has the duties of the partners to operate in the public interest.”
Audit up for grabs
Tax, though, is a side show when compared to the tectonic shifts taking place in the audit market. In a bid to break the Big Four’s dominance of the FTSE 350 audit market and instil greater rivalry among firms, the Competition Commission has recommended that Britain’s largest listed companies put their audits out to tender every five years.
A less draconian approach has been advocated – and implemented – by the FRC, which requires audits to be tendered every ten years on a comply or explain basis. The profession, and many large corporates, have rallied around the FRC’s guidance, claiming the competition watchdog’s proposals are too costly, onerous and will fail to encourage competition.
Regardless of whether the FRC or Competition Commission rules win out, an environment of more frequent tendering is inevitable. Indeed, the likes of HSBC, Hargreaves Lansdown, Land Securities and Schroders have all recently changed, or tendered, their audits and Sproul expects the new mood towards audit will have “a material impact” on the firm.
Already the largest FTSE 350 auditor by number of clients, Sproul sees the upheaval as an opportunity to extend Deloitte’s market share.
“There’s something like 45 FTSE 100 audit tenders will come out within the next three years. The ability to win more significant audits is something that is very important to us,” he says. But with so many more contracts up for grabs firms will need to selective over which clients they bid for.
“When there were one or two tenders a year, most of the firms would have thrown everything at it. If we are going to have over the next few years a period of ten or fifteen tenders a year, it’s just impossible,” explains Sproul.
“There is a cost to this transition that has to be managed. We will not be bidding for every audit that is out there. It’s not right for us, and it’s not right for our clients.”
PwC estimates that, taken together, the FRC and Competition Commission changes will add around £100m to the annual costs associated with tendering. The pay-off for firms, believes Sproul, is that audit prices – under pressure for some time, leading firms to cut costs to the possible detriment of quality – will receive a much-needed boost.
Though Sproul doesn’t expect a “massive inflation” in fees, he says they will start to strengthen as audit committees take their quality responsibilities more and more seriously. “Audit committees have been taking this process very seriously…they are focusing very much on audit quality and getting right into the detail,” he says.
Sproul thinks the profession is making the right steps towards improving audit quality through the introduction of a long-form auditors’ report, and says the firm is supportive of the FRC’s efforts in this area. Indeed, the firm used its recent audit of Vodafone’s accounts to trial an extended audit report ahead of the rules.
“When you look at the positive feedback around that in terms of what we were able to say around the major risks and the processes we went through, it created a much stronger dialogue between the audit committee and the investors,” he says.
Stand out from the crowd
Regardless of the upheaval besetting the profession, and the wider economic malaise, the firm grew revenues 8% over the past year. According to full-year results for the year ended 31 May 2013, audit fee income increased by 12% to£742m, while the biggest annual growth came in its consulting division, up 14% to £596m.
According to Sproul, the growth in consulting reflects the new optimism pervading British business, particularly among “private sector companies investing in future growth”.
“We really have seen a very strong performance by private companies and mid-market companies. That has been part of the success, particularly in our offices outside London, working with those growth enterprises,” he explains, while hailing the firm’s ability to invest in the right areas.
“We have invested a great deal around digital capability, cyber and security and in emerging markets,” Sproul says. “As we look at where the economy is going now, you do see more investment around M&A. We are looking at the pace at which we gear up our M&A capability”.
In something of a departure from the aims of his predecessor, John Connolly, who claimed in 2003 that the firm could overhaul PwC as the UK’s largest accountancy firm, Sproul doesn’t see the firm’s development as a “game about who’s the biggest, or can grow the quickest”.
“We haven’t got a big scale ambition that we must be bigger and bigger just for the sake of it,” Sproul says. Instead, he sees an opportunity for “one firm to stand out from all the others”.
“We are defined by the impact we have on the success of reputation of our clients and focus around that,” he explains. “It’s not rocket science to say we put clients at the core of what we do. But you have to be very disciplined and deliberate in what that really means in terms of how we do that.”
As a proclaimed ‘people business’, a dearth of women in the top partner roles remains a thorny issue. Despite pronouncements from all the Big Four, women are still woefully underrepresented in the top jobs.
The firm is made a commitment that 25% of its partners will be female by 2020, and already has increased its number of female executives and board members. The challenge, Sproul says, is managing the expectations of clients.
“We have a client set who have an expectation of being serviced in a certain way and we have a group of employees – female and male – who want to deliver services in a different way. It’s about getting clients to understand that we can deliver services without being here 24/7,” he explains.
“We have to demonstrate that if someone is working part time or on a flexible arrangements that we still deliver.”
For instance, one of the firm’s senior female tax partners takes two months out of the office in the summer to work from home and spend time with her children. “It’s all about her clients. She worked with them to make them understand that it didn’t leave a gap. Clients are flexible as well. You can do things in a flexible way,” Sproul says.
“There is a point in their career that if they don’t believe they can be successful in a flexible way they will make the choice to go somewhere else.”
As Sproul enters the second half of his first term as senior partner, he wants the firm to focus more on “playing a bigger part internationally” in terms of supporting clients’ export-led growth.
“We need to deliver the same level of quality and breadth of capability in all the international markets our clients are operating in,” he says.
And he is adamant that he wants to stand for re-election at the end of 2014.
“When I was elected I made it clear I wanted to do two terms, but the partners must have a choice. The board must have an opportunity to look at other candidates and benchmark me against them.”
Internal auditors are earn more than external consulting auditors, analysis by salary-bench marking site Emolument.com has found
BDO has announced two key international appointments as the firm continues to expand in its private client business across the BDO global network
Online accountancy firm, My Accountant Friend (MAF), has opened its latest office in Birmingham and recruited new partner, Richard Ingledew
KPMG has announced the appointment of Sarah Willows as chief financial officer and head of operations