Saturday 18 January 2020

KPMG boss fears audit rules more than Nationwide fallout

The public might worry themselves silly about auditors and the banking crisis - but KPMG chief executive Shaun Murphy tells Sarah McCabe that he has other fish to fry

Illustration: Don Berkeley.
Illustration: Don Berkeley.

If only these walls could talk. The things they must have seen - careers made, mergers discussed, billion-euro deals signed. Broken banks' accounts scoured over, PR disasters picked apart. The walls in question are KPMG's, and their secrets now rest with Shaun Murphy.

Elected a year ago by his colleagues to the top job at Ireland's most controversial audit firm, the 47-year-old Dubliner took over the reigns from predecessor Terence O'Rourke with little fanfare. The 2,000-strong firm was back in recovery mode after a difficult period in which it made front-page headlines day-after-day, rarely portrayed in a favourable light.

As the auditor for now-
defunct Irish Nationwide Building Society, KPMG was firmly in the spotlight when INBS collapsed and was ultimately subsumed, alongside Anglo, into IBRC. The fallout raged for years - its involvement with INBS still draws national attention... but more on that later.

Just like every other company, the firm also took a serious hit from the recession. Large swathes of business fell away as the economy slowed and companies stopped doing deals. For KPMG, 2009 was the worst year, and it made people redundant, which had never happened before.

But KPMG weathered the storm reasonably intact. Staff numbers are now back to pre-recession levels. Revenues are "probably still a little bit off what they were," says Murphy.

Take a walk around the campus of its headquarters on leafy Hatch Street in Dublin 2, just yards away from Copper Face Jacks and a rake of the country's biggest nightclubs, and it certainly feels like the funk is long gone. In fact there's quite a sniff of tiger to the place. It is Ireland's largest graduate employer, sucking up 275 fresh faced university graduates ever year, so the grounds abound with well-dressed 20-somethings flirting on their lunch breaks. Reception feels like a little airport terminal, a never-ending stream of business coming and going through its modest doors.

In the summer, all of this is set to the sounds of either music, laughter or construction, as the Iveagh Gardens next door plays host to foodie fest Taste of Dublin or the Vodafone Comedy Festival. Both events are always packed to the gills with KPMG-ers.

The man at the top works in a little, nondescript office on the fifth floor. Only the tastefully chosen artwork lining its walls suggests that the room is the office of someone important. One is particularly striking, a large, abstract depiction of a woman's face painted in rust and gold. "She's only here because my kids hated her," says Murphy with a smile. He has four children at home in the pretty north Dublin seaside suburb Clontarf.

Soft-spoken Murphy has been a practising accountant for virtually his entire career. He joined KPMG in 1991, following the tried and tested route of a Bachelor of Commerce degree at University College Dublin followed by a training contract with one of the Big Four which in ireland means KPMG, Ernst and Young, Pricewaterhouse Cooper and Deloitte. Unlike so many young accountants, he opted to stick around rather than move into industry. He rose up through the ranks in the firm's tax department, eventually making partner and then head of tax.

His appointment last May heralded a complete management change, as it always does when a new managing partner is selected. About 10 people moved roles, with the former management team returning to their day jobs as practitioners.

Even managing partner is not a full-time role; Murphy still spends about 50pc of his time in his capacity as head of tax, meeting clients and working with the tax team.

It is relatively unusual for someone from a tax background to make it to the top of a firm like KPMG, where audit partners traditionally go the furthest.

"When I started my career, tax would never have been a headline issue," he says. Now tax 'inversions' by US companies in Ireland have President Obama's attention. But Murphy thinks scrutiny of Ireland's tax regime peaked and faded long ago, and was at its most fierce when the Troika came to town.

The other 50pc of his time is taken up with managerial tasks - looking at costs, human resource issues, handling media queries. With the mention of media queries the tempting subject of INBS rears its head once again, but he is tight lipped. Murphy can say little about it because of live court proceedings, as the company has just been joined into a civil suit concerning the former building society.

So I try another tack. Has the reputational damage caused in the wake of INBS seriously impacted the firm's bottom line? KPMG held the audit contracts for AIB and PTSB during the boom, as well as INBS. It holds neither - nor the audit contract for any big domestic bank - today.

The answer is a resounding no. "We are very comfortable with the position that we took as auditors in relation to all of our banking clients," he says. "I don't think the firm's image, in the banking sector, within the community of those who make decisions on the appointment of auditors, needs any rehabilitation. We're very clear that the quality of the work undertaken by our teams was at a high level, that they achieved and dealt with the things that an auditor is asked to do."

The company hasn't altered its approach to auditing in the last few years, he says. "We have obviously stood back and asked ourselves the question - not in the context of anything specific but as part of an ongoing process - we ask ourselves constantly how we can improve our processes, improving quality, improving robustness.

"But our audit methodology is based on a global KPMG approach, just like all the audit methodologies of the Big Four are based on a global approach."

It all comes down to what is expected from an auditor, he says, though he recognises that others think differently.

"I don't want to appear arrogant or unaware of that view - but there's quite a narrow statutory obligation on an auditor. I think the real debate needs to be around whether that should be expanded, and how much it can be expanded".

Equally scrutinised was the award of the special liquidation contract for the combined Anglo/INBS bad bank to KPMG partners Kieran Wallace and Eamonn Richardson. For the last few years, they have had the interesting job of selling off some seriously controversial assets, including vast swathes of mortgages. This contract wasn't tendered; the pair were asked directly by Government to perform it.

The nation's media collectively wrung their hands as Mr Wallace and Mr Richardson took the decision to sue Ernst and Young for their auditing of Anglo but decided not to sue their own company for its work at INBS. An independent law firm, Eugene F Collins, was later appointed to review that decision. The outcome is still pending.

Wallace and Richardson hold the position of special liquidators independently from KPMG, so again Murphy does not delve too deeply into the subject. He points out that the liquidation of IBRC has brought a huge amount of economic activity and money to Ireland.

What about concerns that some assets were sold too soon, and would be worth far more if the special liquidators had held onto them until now? Nama has been accused of the same thing.

Nama has also been a substantial source of business for KPMG in recent years. It paid out over €22.29m to the firm between 2010 and 2013, Finance Minister Michael Noonan revealed last November, for valuations, audits and other services in the management and disposal of Nama's massive loan book.

"I'm not a property expert - but perhaps the [IBRC liquidation process] has itself created the rising market," says Murphy.

It is the changing nature of audit regulation, rather than banking or property concerns, that has dominated his first 12 months in the job. He faces a totally different regulatory landscape to O'Rourke. EU legislation passed this spring will force Europe's listed companies and large financial services groups to rotate auditors every 10 years, with a 10-year extension if they put the services out to tender. Many are calling this an out-and-out attack on the Big Four.

These firms now face losing audit contracts they have held for decades, contracts regarded as sure things. KPMG Ireland's biggest clients, indigenous household names, will all be subjected to the new rules - names likes Ryanair, Bulmers maker C&C, Greencore and Paddy Power.

Are they worried about losing big clients as a result of the mandatory audit rotation rules? "Yes," he says frankly. "It is a big concern."

As audit contracts change hands more regularly, the company will also have to prepare more pitches than it is accustomed to. It will, he says, "cost a fortune". "There are estimates that run into the billions" in terms of total cost imposed by the rules, he says.

It should also make the fierce competition for contracts among the Big Four even more cut-throat. It sounds like a highly combative game. "It's an incredibly competitive market," says Murphy. "It is respectful, but absolutely competitive."

But "it's not all about large clients". KPMG has reams of small and medium companies, many of whom it has worked with since their start-up days.

KPMG has fewer clients on the financial services side, though it has several international banks such as HSBC Ireland on its books. Audits for the wildly successful funds industry and aircraft leasing sector are also a big source of business.

It is also not all about auditing. The firm also has a tax department, advisory business (including restructuring and insolvency, corporate finance and due diligence units) and a management and risk consultancy practice.

A large chunk of Murphy's day is taken up by talent management, looking after those 2,000 people.

It's a highly desirable place to work if the internet is anything to go by, with forums like rife with gossip and tips about the company's recruitment process.

The company came sixth in last year's Grad Ireland "100 leading graduate employers" ranking.

But staff turnover is still relatively high, "a little bit higher than we'd like - we want bright people to stay with us." Lots of business graduates use accounting firms as a place to train before moving into industry.

"We expect that. We're a training firm." It helps that KPMG lets most staff take holidays in lieu of pay for overtime, which allows grads with itchy feet time to travel while keeping their jobs.

All in all, "it's a nice place to work," he concludes.

Art buff who likes a decent French red

If I didn't live in Dublin, the place I would probably live in is... "Kerry, where my mother grew up."

An unforgettable place I've travelled to in the last year is... "Tokyo - fast paced and traditional living together."

The last good meal I ate was... "At Chapter One a couple of weeks ago, a rare evening alone with my wife."

My greatest indulgence is... "A good French red wine."

The one artist whose work I would collect if I could is... "Martin Gale."

The last music I downloaded was... "Leonard Cohen, 'Live in London'."

The books on my bedside table are... "'The Shift: The Future of Work is Already Here' by Lynda Grattan, 'The Shack' by WM Paul Young and 'Tony Ryan' by Richard Aldous."

In my downtime, I am..."One of the few people in the planet who has no interest in sport. My hobbies, set in the context of a busy household, are reading, cinema and music."

Sunday Indo Business

Also in Business