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Financial Services
Accountancy firms celebrate bumper year
From the Financial Times of Tue, 23 Dec 2014 17:42:56 GMT

Professional services companies took centre stage in two of this year’s biggest stories: widespread corporate tax scrutiny and a high-profile accounting scandal at UK retailer Tesco. But none of this hurt accountancy firms’ ability to make money. They continued to expand in 2014, encroaching on the territory of consultants, law firms and banks.

KPMG, the smallest of the “big four” accountancy firms and the last to report its annual results, said last week that its UK practice increased revenues by 5 per cent to £1.91bn in the 12 months to September 30. It was the same rate of growth of PwC, whose revenues were up 5 per cent to £2.81bn in the year to June 30.

EY experienced the fastest growth of any of the four, with its UK arm boosting revenues 8.6 per cent per cent to £1.87bn in the same period. Deloitte experienced its slowest growth in four years, with UK revenue increasing 1.4 per cent to £2.55bn in the fiscal year to June 30.

Deloitte was the only one of the four for whom the average partner pay decreased on the previous year, although its UK partners still took home more than the other three firms. Average profit earned by each partner was £750,000 at Deloitte (-3 per cent on the previous year); £727,000 at EY (+11.7 per cent); £722,000 at PwC (+2 per cent); and £715,000 at KPMG (+0.3 per cent).

PwC was rarely out of the news. After Tesco was plunged into turmoil when it said in September it had overstated its first-half profits by £250m, the spotlight fell on PwC, the retailer’s auditor since 1983. It had given the supermarket a clean bill of health despite highlighting in its latest annual report that recognition of commercial income — where the profit overstatement cropped up — was a particular area of focus.

This week the Financial Reporting Council, the UK accountancy watchdog, announced an investigation into PwC’s audit of Tesco and that of another of its FTSE 100 audit clients, Barclays. The case covers how PwC reported to the UK regulator on Barclays’ segregation of client assets.

Tax avoidance was a political hot potato in 2014. As multinationals such as Starbucks, Google and Amazon came under political fire for alleged tax avoidance, focus turned to the accountancy firms that help with their tax planning. Steve Varley, chairman of EY UK, whose clients include Google and Apple, said it would not bow to political pressure and change its tax advice. Meanwhile, at a parliamentary hearing this month, MPs accused PwC of “selling tax avoidance on an industrial scale”.

It wasn’t all bad news. After years of entrenched oligopoly, the rate of tendering for audit markets picked up as companies changed auditor because of new reforms requiring that they tender their audits at least every 10 years, and change them every 20 years.

Simon Collins, UK chairman and senior partner at KPMG, said: “2014 was the year of biggest change in our business model for decades.”

EY won the hotly-contested mandate to audit Royal Bank of Scotland, overtaking Deloitte in market share by number of FTSE 100 audits, behind PwC in top position and KPMG in second place. It was a boon for EY, which has been investing heavily in its audit practice in the past few years, particularly for financial services.

Iain Richards, head of governance and responsible investment at the fund manager Threadneedle, said: “On the positive side, we’ve seen some innovative moves take place in enhanced audit reporting. KPMG stood out by a mile.”

KPMG pioneered the “long form” audit report, notably with its audit of Rolls-Royce, moving away from the standard boilerplate reporting that is widely criticised by investors as being binary and heavily standardised. KPMG also signed a deal with McLaren to apply the same predictive analytics and technology to its audit and consulting clients that McLaren does to its Formula One team.

Although audit remains at the heart of the big four brand, their tentacles continued to expand in 2014 into capital markets, consultancy and cyber security — the growing cyber threat for corporates helping the big four’s moneymaking opportunity.

KPMG, PwC and EY expanded into legal services and were all awarded this year an Alternative Business Licence by the Solicitors’ Regulation Authority. Only Deloitte hasn’t set its sights on the potential fee income from law work that an ABS licence could entail, because of perceived conflicts of interest.



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