Big Four post strongest performance since Enron as advisory business booms

The Big Four accounting firms have recorded their strongest financial performance since the collapse of Enron, as corporate clients rushed to transform their businesses during the pandemic.

KPMG is due to report annual revenues of $32.1bn on Thursday, a 10 per cent increase on 2020. In aggregate, the leading pack, which also includes Deloitte, EY and PwC, will have racked up $167.3bn in turnover for the financial year ended 2021, a 7 per cent increase.

It is the strongest collective result since the Enron scandal led to the collapse of Arthur Andersen in 2002 and reduced the Big Five to the Big Four.

It comes despite continued criticism of the structure and performance of the firms, especially in audit, including scrutiny of EY’s failure to identify fraud at Wirecard.

Demand for professional advisers has surged as companies seek to reshape their businesses in response to the pandemic and investors’ increasing focus on environmental, social and governance issues.

A dealmaking boom propelled growth at KPMG’s advisory arm, its largest division, with sales rising 17 per cent to $13.7bn as clients spent heavily on advice for mergers and acquisitions, new technology and cybersecurity.

The growth of ESG consulting and demand for assurance over companies’ disclosures of their impact on the client represent a significant growth opportunity for the industry.

The Big Four are positioning themselves as advisers to companies on how to win trust from stakeholders such as employees and the communities in which they operate — despite their own involvement in scandals around the world.

KPMG has committed $1.5bn over three years to investment in ESG, including the development of expertise it can sell to corporate clients, though it has not provided a detailed breakdown of how the money will be spent. 

The Big Four’s dominance of the heavily regulated audit market gives them a “unique and special licence” to win work in assuring companies’ ESG disclosures, said Jim Peterson, author of a book on the firms.

But he said they would face tougher competition to become supreme in the ESG consulting market where they are “arm-wrestling with everyone else who thinks they can capitalise” on demand for advice. 

In line with its Big Four rivals, KPMG reported the sharpest increase in revenues in its Asia-Pacific operations, the smallest of its three regions. Sales there rose 13 per cent to nearly $6bn.

The dominant accounting firms are targeting swift growth in the region, particularly in China, where KPMG plans to increase its staff numbers by more than half to 20,000 within three years and PwC intends to hire 20,000 additional staff over five years.

Similar to its peers, growth at KPMG was most sluggish in the Americas, where sales rose 6 per cent to $11.9bn.

Total sales increased 10 per cent in the 12 months to the end of September as it rebounded from a slight contraction in its previous financial year.

The firm, which has 236,000 partners and employees across 145 countries, remains the smallest of the Big Four firms, which are structured as networks of legally separate partnerships around the world and do not disclose their global profits.

Sales in KPMG’s tax and legal services business jumped 8 per cent to $7bn while audit revenues rose 4 per cent to $11.5bn after dipping 1 per cent last year.

Like its rivals, KPMG has said it is investing in audit quality after a series of scandals. It is facing lawsuits and is under several investigations over its audits in the UK, including at collapsed government outsourcer Carillion. 

The UK accounting regulator has also alleged that KPMG gave its quality inspectors false or misleading information. The British government has threatened to ban the firm from winning public contracts after an industry tribunal said in October that KPMG had advanced an untruthful defence at hearings into misconduct for which it was fined £13m.

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