Grant Thornton fee income down 1.8% to £490m
7 Dec 2018
Mid-tier firm Grant Thornton has reported a 1.8% drop in profits as fee income takes a hit due to continuing restructuring and hive-off of a failed IT infrastructure project, reports Sara White
7 Dec 2018
Fee income for 2018 dropped to £490.8m, down nearly £10m on 2017 where the firm had fallen below the £500m barrier with a shock 8% drop in profits [2016: £533.8m].
The mid-tier firm, currently ranked number five in the UK market, is also coming under pressure as its nearest competitor BDO has signalled plans to finalise a merger with Moore Stephens in early 2019, which would catapult the firm over Grant Thornton in terms of fee income.
Profit was also down nearly 9% to £63.1m from £69.3m in 2017, which had an immediate impact on partner profitability, but also coincided with the first year that the firm had paid out under its enterprise share model.
Average distributable profit per partner was £373,000, once again taking a hit despite the firm-wide restructuring activity. This marked an 8% fall from £407,000 in 2017 when the firm had actually shown signs of recovery after a poor payout level in 2016 at £344,000. Net assets (excluding amounts due to members) at the year-end were £25.6m, a £17.5m improvement from the previous year (£8.1m).
Operating expenses reduced despite the inclusion of a £2.1m impairment relating to the Geniac Platform. Underlying operating profit margin, after adjusting for the one-off impairment charge relating to Geniac, is marginally lower at 15.8% (2017: 16.0%).
Geniac is a technology platform to support back office functions for small businesses but Grant Thornton confirmed it ‘was not attracting new clients at a sufficient rate… the firm took the difficult decision to cease its investment in Geniac, with a £2.1m impairment in 2017/18.
Provisions were down slightly at £36,264,000 (2018) compared to £37,008,000 (2017).
A Grant Thornton spokesperson told Accountancy: ‘Results are below expectation on the back of a difficult year; advisory was down because of the number of contracts that rolled off from last year and the one-off impairment with Geniac. There was some good growth in advisory and with the realignment of the firm, we will see the benefits moving forward.’
In terms of service lines, audit and tax remained virtually static with audit at £157m compared to £155m in 2017, and tax slightly up at £109m (£107m: 2017).
The worst hit area was advisory services which was down £13m at £225m ( £238m: 2017).
The carrying value of goodwill arising from the RSM Robson Rhodes LLP acquisition (in 2007) remained at £9.6m as at 30 June 2018. The carrying value of goodwill on less significant acquisitions as at 30 June 2018 is £3.5m.
The results follow a difficult year for Grant Thornton, with the resignation of Sacha Romanovich on 30 November as CEO. Her successor Dave Dunckley took up his new post on 1 December and will meet with the senior leadership team and partners week beginning 10 December.
Dunckley said: ‘These 2017/18 results are below our expectations and whilst there were many positives, we know we can drive improvement moving forward.
‘In May, Grant Thornton restructured to be the only firm in the UK organised by the markets and clients it serves. This has allowed our people and business to have a laser focus on the needs of our clients. The benefits of this are already being felt in our business which sets us up well for the future.’
There are no definite announcements yet about the new focus under Dunckley’s leadership, but a fundamental part of this will be the ‘recalibration of how the firm goes to market’ following the decision to focus on three core areas:
- large and complex clients – large employers and businesses of scale and complexity;
- mid-market clients – medium sized businesses; and
- public services clients, including public sector, not for profit and wider civil society organisations.
‘I am confident that with a relentless focus on our three markets and a purpose which is underpinned by a strong culture, we will add value to clients, create opportunities for our people, deliver high quality work and achieve sustainable growth,’ Dunckley said.
The current strategic leadership team is made up of six partners and it will be within the purview of Dunckley to review this membership.
Current members of the strategic leadership team are Mark Byers, Malcolm Gomersall, Sarah Howard, Simon Jones, Dave Munton and Jonathan Riley. In addition, Robert Hannah has rejoined the board following his resignation on 30 April 2018. Karl Eddy resigned on 30 November 2018.
There are currently eight members of the partnership oversight board.
Grant Thornton also confirmed that it would continue its policy of opting out of FTSE 350 audit tenders, citing the high costs of tendering at around £250,000 for a single audit proposition, when the firm knows ‘it will come a glorious second and it is only making up the numbers’.
‘It is demotivating for the people in the firm and resource intensive,’ the GT spokesperson said, adding that they did not plan to re-enter the market until there were substantive changes to the current audit market.
Grant Thornton has come under scrutiny over the Patisserie Valerie audit following accounting issues at the listed firm. In August 2018 was given a £4m fine over a long-standing audit probe into Nichols plc and the University of Salford in relation to lack of independence in audits by the FRC dating from 2010.
On the plus side the last financial year has seen an increase in the percentage of female partners from 16% to 22% by 2020 with a long-term aim to achieve one in four women partners by 2022. Meantime 20 new partners have been appointed in the last year bringing the total to 188.
The firm reduced the reported pay gap to 18 to 20% and said that the adjusted pay gap remains in a range of minus 1% to plus 1%.
The percentage of flexible workers increased from 14% to 20%.
Dunckley has immediately come into the new role realising that he needs to get staff onside and has announced that the three-year enterprise share model will be revised so that payments are made on a two-yearly basis. This is paid in addition to salaries and bonuses, and all staff are in the scheme.
Report by Sara White