Reputation down, revenues and profits up. Welcome to the pleasant world of KPMG. The firm is in the regulatory equivalent of special measures after the Financial Reporting Council found “an unacceptable deterioration” in audit quality in August but the 635 partners in the UK enjoyed a (very) acceptable improvement in remuneration. They collected £601,000 on average, a 16% rise, in line with the jump in underlying profits to £356m.
Hold on, you might say, isn’t this the outfit that gave a clean bill of health to the accounts of Carillion just before the roof fell in? Isn’t the FRC also having a hard look at KPMG’s audit of Conviviality, the Bargain Booze retailer that imploded at an even faster rate? Didn’t KPMG get clobbered recently with fines for its work on the accounts of Ted Baker and Quindell?
The answer to all those questions is yes. The only qualification is that the FRC doesn’t do clobbering. The fines in the latter two cases were £3m and £4.5m, which barely moves the financial dial. The record fine dished out by the FRC is £10m for PricewaterhouseCoopers (PwC) for its work on the accounts of BHS and its parent company – and even that was reduced to £6.5m for cooperating with inquiries. At a time of general head-scratching about auditing in the UK, one remedy seems obvious: in a profession where self-policing will always be necessary, fines should hurt.
KPMG, it should be said, has noticed something is up. It was the first firm to stop providing non-audit services to FTSE 350 audit clients to address perceived conflicts of interest. The chairman, Bill Michael, deserves credit for breaking ranks. The big four, as a united bunch, had previously been defending the indefensible.
Yet it is amazing that in a rotten year, as outsiders will see it, KPMG could announce its strongest growth in revenues for a decade. The problematic audit division wasn’t even an outlier – it grew at 8%. The easy explanation looks the correct one: within an oligopoly, everyone’s a winner. At the top end of the audit market, caps on market shares increasingly look like the answer to the lack of competition.
Stop the Bank bashing
Beating up the Bank of England is a popular sport but Andrew Sentance – and former governor Lord King, for that matter – ought to calm down a bit. The charge that the Bank is jeopardising its independence by being dragged into the Brexit debate is overblown.
Sentance made one fair point. The “worst case” scenario for a no-deal, no-transition Brexit set out by the Bank last week did indeed seem a touch apocalyptic. It included the assumption that the Bank would lift interest rates from 0.75% to 5.5% even if unemployment rose by 1 million and even if house prices fell by 30%. That scenario is highly unlikely: the Bank would probably hold down rates and “look through” any inflation crisis caused by a fall in sterling.
Should this gruesome version of “worst case” have been included in the Bank’s models, though? That’s the relevant question. Well, yes, it probably should have been. This was a mechanical exercise that was designed to imagine extreme events and test whether the financial system is prepared. It was not a forecast. As long as the extreme scenario was presented fairly – and it definitely was – there is not a serious problem here.
Further to go for Thomas Cook
Look at those Thomas Cook shares soar: up 51% on Wednesday as the chairman, Frank Meysman, bought £80,000-worth and big shareholder Invesco topped up its holding. Crisis over?
The good news is that a rights issue isn’t being discussed – Meysman and fellow non-exec Lesley Knox wouldn’t be allowed to trade otherwise. The bad news is that the share price, even after the bounce, is still a third lower than the level before last week’s profits warning.
If the tour operator can recover the rest of the lost ground, it might get out of the headlines, which is where it needs to be. There is more to do. Clarity on bank covenants would still help.
