KPMG to restructure its UK audit business

With the Big Four routinely coming in for criticism from the UK’s auditing watchdog, KPMG has taken action to offset further calls for the break-up of its accounting and consulting wings. The firm is working to restructure its auditing sector, creating a new audit executive committee and overhauling its executive leadership team.

The largest auditing and consulting firms of the UK have endured a torrid last 24 months. Since the collapse of outsourcing giant Carillion, talk of a Big Four ‘break-up’ has been steadily reaching a crescendo, and earlier in the spring, a Parliamentary report endorsed the separation of the Big Four’s accounting and advisory wings.

Allegations of conflicting interests and suspicion regarding firms which both monitor the financial health of firms and provide them with business advice has spread to such an extent that PwC, Deloitte, EY or KPMG have event started to lose high-profile clients. The cloud of controversy hanging over the world’s four largest professional services firms saw Goldman Sachs announce it would look beyond them when appointing its new UK auditor – eventually plumping for mid-tier firm Mazars – for the first time in the history of the company’s UK wing.

KPMG has arguably been the hardest hit by the Big Four’s rapidly declining reputation for auditing, having been singled out on multiple occasions by the UK’s accounting watchdog. Recently this saw the UK wing of international professional services giant stung with a £6 million fine, and "severely reprimanded", following an examination by the Financial Reporting Council (FRC) of its 2008 and 2009 audits of Syndicate 218. The FRC found that KPMG made "insufficient inquiries" about the process that Syndicate 218 used to review insurance claims, meaning there was “insufficient evidence to provide an unqualified audit opinion."

Seemingly determined to go down swinging – as the FRC prepares to be superseded by a stronger statutory regulator – the watchdog followed this up by calling for KPMG to be fined at least £12.5 million for misconduct in its work for Bank of New York Mellon. The FRC stated at a hearing in May that the record penalty would be justified because of the size of the US bank’s operations and the “truly exceptional” seriousness of the abuses it found. KPMG and one of its employees admitted to acting improperly last year, though the firm’s lawyers on Tuesday attacked the FRC’s proposed penalty as “extravagant” and “gargantuan.”

Audit reshuffle

Amid this continued turbulence, KPMG has taken matters into its own hands, in a move which will likely be seen as a pre-emptive action to quell further talk of a break-up of its consulting and auditing arms. KPMG announced plans to restructure its UK auditing business, creating a new audit executive committee and reshaping its executive leadership team. According to the Big Four member, the changes deliver on many of the recommendations of the CMA and a parliamentary committee that has called for a “full structural break-up” of the Big Four.

Bill Michael, Chairman and Senior Partner at KPMG UK said, “We’re serious about making changes to restore trust in audit. We understand concerns that the profession’s operating models have become too opaque and we are taking action to tackle these.”

However, a CMA spokesperson has already told the press that the changes “do not address all of our concerns.” The representative added that the recommendations the CMA presented to the Government are designed to tackle “deep-seated and serious competition concerns in the audit market”, and that with conflicts of interest persisting, the changes would fail to change the fact “the UK is relying on four firms to review its biggest companies.”

City University Professor and noted tax justice campaigner Richard Murphy reportedly shares the CMA’s concerns. Speaking to Accountancy Age, he stated that the Big Four were still addressing audit independence “the wrong way,” adding that “there is no way that any number of so-called Chinese walls will restore any credibility to the Big Four on this issue.”