When Bill Michael was elected chairman of KPMG UK in 2017 on a promise of restoring stability to both its finances and brand, he knew it would be a gruelling task.
The Big Four accounting and advisory firm had experienced several years of financial decline under his predecessor, Simon Collins, who had been ridiculed for his expensive, blue-sky initiatives. Its culture had become marred by internal politics and bureaucracy. Worst of all, the quality of its audits – the core of its business – had been questioned, with increasing calls in parliament for a new probe into its work for failed bank HBOS.
“Bill was voted in as a wartime leader because of what we all knew would be a big battle to turn things around,” said one KPMG partner. “The problem is no one realised quite how big the war would turn out to be.”
Publicity
What followed was a barrage of more negative publicity. Less than six months into Mr Michael's tenure the collapse of Carillion, the construction group which KPMG audited for 19 years, set the tone for two years of enhanced scrutiny of both the firm and the wider audit profession from government, regulators and the press.
A failure to keep profits and remuneration in line with KPMG’s competitors has exacerbated internal tensions, resulting in floods of leaks about bad behaviour by some partners and the firm’s restructuring plans, while a string of accounting blow-ups has brought more pressure from the audit watchdog.
Mr Michael is now fighting a war on three fronts: boosting KPMG UK’s bottom line, battling the suggestion that parts of it have a “toxic” culture and improving the quality of its audits.
The fast-talking Australian remains upbeat. “I’m enjoying this job, I’m in it for the long haul,” he said in an interview with the Financial Times, denying rumours that he could choose to step down before his first term ends in 2021. “I know steering KPMG back to positive territory will be a big challenge, I’m under no illusions about that.”
But with more shocks on the horizon as KPMG faces both a lawsuit and a likely hefty regulatory fine over its audits of Carillion, as well as expected government intervention to overhaul how the biggest audit firms operate, the relentless public inspection of KPMG shows no sign of abating.
KPMG conducted 99 investigations into complaints by whistleblowers about ethical and conduct violations in 2019. It made some of its 623 partners attend four workshops on “psychological safety” and introduced 113 “ethics champions” in its UK offices on the back of “safety and trust” sessions with almost 600 junior employees.
Mr Michael said the aim of this unprecedented focus on conduct was to stamp out the “corrosive” mentality that making large amounts of money trumps good behaviour. “That mentality has existed for years across the whole market but it’s not what I support,” he said. “Financial success is an outcome of doing great work the right way. I’m not going to tolerate bad behaviour.”
KPMG was hit last year by accusations that its senior ranks ignored complaints of bullying against Sanjay Thakkar, head of deal advisory. Mr Thakkar was effectively cleared by an internal investigation into a complaint that he was verbally aggressive and swore at colleagues, prompting two of KPMG’s most senior female partners to quit in protest.
Employees
Several current and former KPMG employees said that they felt complaints raised about Mr Thakkar were not taken seriously or dealt with appropriately. Several feared the 50-year-old was protected because he brought in a large amount of revenues. KPMG declined to comment on those allegations and the specifics of the investigation into Mr Thakkar’s conduct.
A few months later Tim Howarth, former head of financial consulting, was brought before an internal disciplinary panel and ousted after an incident involving messages he sent on WhatsApp, the full details of which have been kept private. Mr Howarth said he was appealing against the decision in August but has not since provided a comment on his case.
Since then, a number of other influential partners including Harps Sidhu, former head of capital markets consulting, have left the firm. Two people close to the matter said KPMG had also received complaints about Mr Sidhu, including one incident in which he ignored a junior female member of his team when she complained about being sexually harassed by a client. Mr Sidhu did not respond to a request for comment.
The string of senior departures prompted suggestions of a “toxic” culture at some divisions of KPMG. It also increased scrutiny of Mr Michael who was close to both Mr Thakkar and Mr Howarth, the latter having run his campaign for chairman.
“Until very recently, it hasn’t mattered how you treat people as long as you’re bringing in the revenue,” said a former member of its financial consulting unit. A series of complainants who spoke to the FT have described parts of the firm’s culture as “alpha”, and said there was an “us and them” feeling between the partnership, which is 81 per cent male, and the rest of the firm, which is about 50 per cent female.
Culture
A former female KPMG partner said: “The issue is there are a few bad apples combined with a culture that is too focused on keeping big-billers happy, which means good people turn a blind eye to stupid things.”
Complaints have been heightened by allegations of a “hard-drinking” culture at KPMG’s private members’ club in Mayfair, where its partners can entertain clients.
Mr Michael has held “Aussie wine tasting nights” at the venue and is regularly seen on the premises, several people said.
One board-level partner said: “There’s a hard-partying crew that has in the past surrounded Bill.” The partner said Mr Michael had for many years organised an annual Christmas pub crawl for a small group of influential partners who were “mostly male with a few exceptions” and that had continued under his tenure as chairman. In the past, the event included “a list of pubs from Canary Wharf to Mayfair sent by Bill to a WhatsApp group a few days before”, the partner said.
A second person close to the firm said it had been toned down to drinks in just one pub in recent years. KPMG declined to comment.
Mr Michael will close the Number Twenty members’ club at the end of January. He told its 6,000 members last month: “I’m sure you’ll understand that as our profession faces increased scrutiny, it is only right that we listen and respond to calls for change.”
Exacerbating the challenge for Mr Michael is the state of KPMG UK’s finances. One recruiter said: “Conduct issues are not unique to KPMG among the Big Four, but sliding profitability means partners are less likely to be protected by their billings, and juniors who are not getting promoted are more open about being unhappy, meaning more leaks and more negative headlines.”
Profits dropped to £309 million (€363 million ) in 2019, one of the worst performances of the past decade. Average partner pay fell £52,000 to £549,000, far below partner earnings at its much smaller rival BDO and less than the average £715,000 that KPMG partners made five years ago.
The decline was in part because of £45 million invested in improving audit quality, the bulk of which went on hiring 700 experienced auditors, as well as shrinking margins in its consulting business and more recruitment in its back office.
Partnership
The drop came despite cost-cutting initiatives, such as Project Zebra and a cull of its partnership by about 10 per cent.
“We’re still a growing and profitable business, but we’re transforming the firm and to do that we’ve had to make some difficult decisions and take a hit to partner pay,” Mr Michael said.
Many improvements at KPMG are aimed at conducting better audits. The firm is particularly exposed to a fall in audit fees compared with its peers PwC, Deloitte and EY, all of which have relatively larger consulting practices.
“Audit has been a ticking time bomb and KPMG has been overly exposed,” said a former KPMG partner. “The firm has over-reached, taking on more and more larger clients while quality has been dropping.”
The inquiry into the collapse of Carillion – during which one MP said he “would not hire KPMG to audit the contents of my fridge” – was a damning reputational setback. It was followed by fines exceeding £20 million in the past two years for poor audits, more than at any other audit firm.
The Carillion debacle also resulted in pressure on the government to intervene in the audit market, which could force firms to separate audit and consulting. The split will remove the potential for conflicts of interest but will mean audit departments can no longer rely on consulting fees to bolster pay.
KPMG was sanctioned for an "unacceptable deterioration" in the quality of its audits by the UK's accounting watchdog, the Financial Reporting Council, in 2018. The FRC hired Sally Dewar, head of consulting at Allen & Overy, to conduct a full review of standards and culture in KPMG's audit practice, the first time that it has intervened to assess the governance, controls and culture of an accounting firm.
Services
In response, Mr Michael has banned the firm from providing non-audit services for the FTSE 350 companies it audits, operationally separated its audit practice by moving 800 consultants into the unit and launched a new audit board that will have control over auditor remuneration and governance of the practice.
The FRC said in its annual review of audit quality that KPMG’s results had improved this year but it would remain subject to increased scrutiny “until KPMG has demonstrated sustained improvement”.
Mr Michael’s belief that KPMG’s future hinges on returning audit to the core of its brand risks alienating its other more profitable units but he argued the “higher purpose” of KPMG should be restoring trust in audits of public companies.
“I don’t think the Big Four ‘all things to all people’ model is sustainable to maintain trust in public interest work in the way it has been in the past,” he said. “The landscape we are operating in has changed fundamentally.”
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Copyright The Financial Times Limited 2020
