How long can KPMG last?by
Up against a £1bn lawsuit and constant audit scrutiny, the outlook for KPMG is not as strong as its annual results suggest. Richard Murphy questions whether the Big Four firm can remain viable in a market where professional credibility is everything?
I have to make a confession. A long way down on my CV there is mention of the fact that I trained as a chartered accountant with Peat Marwick Mitchell and Co in London.
That firm did, of course, go on to be part of KPMG – adding the middle two initials to its monogram. As such I have never been entirely free of association with the firm even though I left nearly 40 years ago.
Of late I have, however, wondered for how long this association might last? That's not because I have any intention of going anywhere soon, but I fear that KPMG might.
The numbers show KPMG is in good health
KPMG would appear to be in rude good health. Average partner profit in the most recently published accounts increased to £688,000 pounds a year, or £436m in total, with total turnover increasing to £2.35bn.
However, as all good accountants know, profit and turnover are not always the best guide to the wellbeing of a company, especially when the long term is being considered.
The depth of its pockets, or those of its insurers, also matter if there are claims on the horizon that it must deal with. Just as important are questions as to whether its business model remains viable however good it might look to be in the short term. Both these questions hang over KPMG.
Audit failure timeline
KPMG’s audit practise has seen a string of failures in recent years.
- 2018: The firm was criticised by the Financial Reporting Council (FRC) for its work on the Conviviality audit, for which it was eventually fined £3m in 2021.
- 2019: It was fined £5m for its conduct on the audit of the Britannia Building Society and in the same year a further £6m for audit failings of some Lloyds syndicates.
- 2020: The Big Four firm resigned as auditor of Ted Baker plc because of problems with its audit of stock, which was shown to be materially inaccurate.
- 2021: the fines increased. £13m was paid after an investigation into the firm’s conduct during the sale of Silentnight to a private equity firm. Such were the questions relating to probity that this investigation gave rise to that KPMG is not currently partaking in government contracts.
The Carillion audit scandal
And then there was Carillion, which failed in January 2018. The Official Receiver is now suing KPMG for more than £1bn as a result of what it suggests to be the failed audits of the accounts of this company in its last years of operation which were used to justify substantial overpayments of dividends.
As if that is not enough, KPMG has already admitted that it misled audit regulators by falsifying documentation about the Carilion audit.
The failures were not one-off events. In July 2021 the FRC suggested that only 61% of the audits undertaken by KPMG that it had reviewed were of acceptable quality. That looks uncomfortably like systemic failure.
That suggests that the problems that KPMG faces go deeper than the claims outstanding against it. In a culture where low quality audit work has persisted for so long the chance of significant change without radical changes in personnel seems unlikely, and these are hard within a partnership structure.
A risk to potential clients and recruits?
Worse still, is the systemic risk that the whole profession faces. PwC noted in an article in the Financial Times late last year that the recruitment of new audit staff at a graduate level was proving to be difficult due to the poor reputation of the profession as a whole.
I rather suspect this problem is more significant for KPMG than it is for the rest of the profession. This will have been most especially exacerbated by the recent FRC tribunal hearing where claims were brought against KPMG staff, including one only recently qualified.
When employment with such a firm carries the risk of serious and costly litigation so early in anyone’s career then the sacrifices required to qualify with such a firm must have diminishing appeal. That risk cannot have gone unnoticed amongst those now looking for employment.
Potential clients must view the firm with similar trepidation. What is the discount that KPMG must apply to get work, excepting the fact that there are so few competitors in the market? The government has already ceased to be a potential client because of concerns over the Silentnight affair. Who might be next?
Can KPMG survive loss of reputation?
My question in that case is a relatively simple one: how long can a firm survive loss of reputation on the scale that KPMG has and still remain viable in a market where professional credibility is everything?
No one can, of course, be sure as to the answer to this question. KPMG might, against what I think to be the available odds, turn itself around successfully and survive the string of debacles that it has created for itself. But if it fails to achieve that goal, what then?
The government’s proposed audit reforms have all presupposed the survival of the Big Four firms. Everything that it has suggested is, in fact, a rearrangement of the deck chairs around their existing professional practices.
If one were to disappear then everything the government has proposed falls by the wayside. There is almost no way in which the current audit market for large companies in the UK can survive the collapse of one of the Big Four and yet that possibility is now foreseeable.
Rumour currently has it that the government is not pursuing the audit reform agenda with any enthusiasm. It seems possible that legislation will not happen for a year or two as yet. Maybe that is of benefit.
If KPMG is on the rocks in another year or so the time for very much more radical reform to manage the consequences of its demise may need to be considered because it will be negligent in my opinion to not take this possibility into account given all of this happened to the firm to date.
It may not just be the future of KPMG that is at stake. Audit itself might be