KPMG restructures leadership team after audit failures
16 May 2019
KPMG UK is to make significant changes to its executive governance structure, including setting up a new audit executive committee and reshaping its executive leadership team following a string of audit failures
16 May 2019
The restructure will see the Big Four firm put greater emphasis on audit quality, performance management and governance of the firm’s audit practice, but stops short of full separation of audit services and non-audit related services.
The new structure comes into effect from 1 June 2019. KPMG said the audit governance changes had a primary focus on driving quality.
In last year’s audit quality inspections, the Financial Reporting Council (FRC) singled out KPMG’s audit work for increased scrutiny, after identifying an ‘unacceptable deterioration in quality’, with half of the firm’s FTSE 350 audits judged in need of improvements and strong criticism of the level of management challenge, lack of professional scepticism, and inconsistencies in audit practice.
It has also been subject to a number of multimillion pound penalties over audit failures, and faces an ongoing FRC investigation into its audit of Carillion, the failed FTSE outsourcer, as well as an FRC driven review of the firm’s audit functions and performance.
KPMG’s new audit executive committee will assume executive responsibility for the audit business’s performance management, risk management and controls. It will be led by Jon Holt, who will become the firm’s head of audit. His role as head of financial services will be taken by Karim Haji.
Michelle Hinchliffe, who has been KPMG’s head of audit since 2016, will join the firm’s UK board in the newly created role of chair of audit.
In this role, as well as chairing the audit business, Hinchliffe will lead the firm’s work and stakeholder engagement on the future of the audit profession. She will also become deputy chair of the board audit oversight committee, which is responsible for the governance of the firm’s audit practice.
KPMG said these changes do not mark the separation of its audit practice from the rest of the firm, but will deliver on many of the recommendations proposed by the Competition and Markets Authority (CMA) and the BEIS select committee in their recent reports on the profession.
The restructure marks the culmination of an 18-month review of the firm’s governance and structure, and has been a pivotal issue for Bill Michael, chairman and senior partner at KPMG in the UK, since his appointment as senior partner and chairman in October 2017, when he was elected at a turbulent time for the firm, replacing Simon Collins, who was head of KPMG from 2012-17.
At the time of his appointment, Michael told Accountancy Daily that ‘our ultimate goal as a profession is built around trust, we are re-evaluating what our purpose is and everything goes back to trust.’ He also admitted that the firm had lost direction with too many acquisitions and diversification, without focusing on the firm’s core business areas.
In the last 18 months, KPMG also ended a number of joint ventures, including its technology partnership with McLaren, and closed its Small Business Accounting service. At the same time, it has strengthened its legal services offering.
Commenting on the reorganisation of the leadership team, Bill Michael, 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.
‘The sole aim and focus of our chair of audit, our new audit executive and our audit oversight committee is to drive audit quality, via strong leadership, good governance, rigorous controls, independent decision-making and separate performance management from the rest of the firm.’
KPMG is ranked 4th in the Accountancy Top 75 Firms 2019 survey rankings, with annual fee income of £2.33bn for year end 2018 [2017: £2,17bn] up 8% year on year, and reported £356m in pre-tax profit up 18.3% [2017: £301m].
Executive leadership team
As a result of the changes to how audit services are managed, there will also be shake-up of the firm’s main executive leadership team, the ExCo (executive committee). The new set-up will consist of an executive board and a clients and markets executive, supported by operations, risk and audit executive committees.
This means a shake-up of the leadership positions at the Big Four firm with a number of KPMG’s international market specialists being appointed to the UK board.
To support the new structure, the Big Four firm is strengthening the leadership team with the appointment of Tim Jones, currently KPMG’s global head of management consulting, as the newly created role of chief operating officer (COO) for the UK firm. He will also chair the operations executive.
Scott Parker will take on the new role of head of clients and markets, and will be responsible for driving growth and performance across KPMG’s non-audit business. He is currently head of international and market development at KPMG.
Philip Davidson, KPMG UK’s managing partner, will retire from the UK partnership in September.
Mary O’Connor, KPMG’s chief risk officer, will chair the firm’s risk executive committee, which oversees the firm’s governance, risk management, legal affairs and regulatory compliance.
Chris Hearld, the firm’s north region chairman, will be appointed to the role of head of regions, overseeing the firm’s regional presence across the UK. He succeeds Iain Moffatt, who is retiring from the partnership in the summer.
KPMG said Melanie Richards, the firm’s deputy chair, will work closely with Michael and the new executive board to shape and drive the firm’s strategy.
Michael said: ‘We are committed to establishing a more transparent operating model that effectively demonstrates the conduct and execution of our public interest responsibilities.
‘We have already introduced new performance management rules for our auditors, within which audit quality is the primary objective and were the first to implement a ban on providing non-audit services to FTSE 350 companies we audit.’
Pat Sweet, Sara White