Annual Review 2018 - Business performance | KPMG | UK
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Business
performance

A message from our Managing Partner

Philip Davidson, Managing Partner Download video transcript

We’re investing in our people, in technology and in our services. And we’re not investing alone. Our strategy is a global strategy.

Philip Davidson, Managing Partner

A message from our CFO & Head of Operations

Sarah Willows, CFO & Head of Operations Download video transcript

We grew across all our capabilities and coverage areas. We invested in our core business and in areas with high growth potential.

Sarah Willows, CFO & Head of Operations

This year’s results have been driven by strong performance across all of our business areas, leading to our fastest annual growth rate in a decade. We’ll continue to use this growth to invest in our people, in digital transformation and in better serving our clients in future.

Revenue grew by 8% in 2018, taking our overall revenues to £2.3 billion.

After taking account of investments and one-off costs, underlying profit increased by 18% to £356 million. This excludes the profit of £106 million arising on the disposal of 15 Canada Square.

All of our business areas have been part of this growth story.

Deal Advisory grew net sales by 14%, on the back of strong performances from our Mergers & Acquisitions and Integration & Separation teams.

Tax, Pensions and Legal Services recorded net sales growth of 7%, with strong growth trajectories across our international, indirect tax, pension and legal business areas.

Consulting grew net sales by 5% this year. Our Connected Consulting model, which brings together the expertise of our consultants with technology and managed service platforms, will help us target further growth next year.

Audit recorded net sales growth of 8%, reflecting the investment made in our practice. Audit quality remains the key focus for 2019.

We have managed costs across the business and our investment in technology in KPMG Business Services (KBS) is already delivering greater efficiencies. We also recognised provisions for regulatory matters and resolved legacy investment issues.

The sale and leaseback of the Canada Square office has contributed to our strong balance sheet, with the profits generated being used to de-risk our pension scheme and to create a significant investment fund for future growth.

Although we foresee risks in the coming year, particularly from political uncertainty surrounding the UK leaving the European Union, we’re confident that the market remains strong and that through the steps we’ve taken, we are well-placed to realise the opportunities ahead.

How we’ve performed

Growth in net sales

8%

Partner promotions

12

Graduate recruits

619

KPMG UK’s market share
of the FTSE100*

29%

Audit

This year has presented significant challenges, both for our firm and our profession. While we have a great deal to be proud of, we know there are things that we must do better. We’re disappointed that the FRC found our overall audit quality score decreased by four percentage points and that the steps we took in previous years haven’t resulted in the necessary improvements to audit quality at the pace we’d hoped.

Despite this, our audit practice has grown by 8%. We’ve won and retained the audits of world-leading organisations. This is testament to the more than 4,000 dedicated individuals within KPMG’s UK audit practice, and their fierce commitment to driving up audit quality.

After taking up her role as Head of Audit in October 2017, Michelle Hinchliffe began a programme to transform our approach to audit. It’s important to note that the audit work appraised by the FRC for its 2018 Audit Quality Review took place principally in respect of 2016 year ends, prior to commencement of this work. But we cannot and will not be satisfied with these results: our scores must and will improve.

This has also been a landmark year for investing in our people. Our recruitment strategy takes into account the changing skills that the audit of the future will require, with a growing focus on technology. One of the ways we’re investing in the technological capabilities of our experienced auditors is through the launch of the first Masters in Audit Data Science. This year has also seen us forge a partnership with the charity Auticon to bring in talented people on the autistic spectrum, particularly to work in our data science teams.

Along with embracing different skills, we’re introducing different ways of working. For example, our Return to Audit programme allows people who’ve left the profession to return in a flexible manner.

Our new training programme focuses on audit quality with everyone attending sessions on resilience, professional scepticism, challenge of management, using our new technology and consistent application of audit processes. This is a fundamental change to the way we train our auditors and demonstrates a significant investment in our audit process, learning and personal development.

Our profession is also at an inflection point. We face a number of challenges across a range of issues, and societal expectations of us are changing. It is vital that we demonstrate to the wider public why shareholders and Audit Committees place their trust in us. And in turn, work to ensure our audit opinions remain relevant to the investors and shareholders we serve. We’re committed to playing a pivotal role in finding positive and pragmatic solutions that will rebuild trust in our profession.

* Market share based on current number of companies audited.

Growth in net sales

7%

Partner promotions

16

Graduate recruits

108

Growth in Legal Services

41%

Tax, Pensions & Legal

Our teams have been working more closely together than ever before in our Tax, Pensions and Legal Services practice, as we’ve focused in on providing our clients fully integrated offerings. This strategy allows us to support clients through bigger and more complex business challenges. The result has been 7% growth for the practice.

The tax landscape is changing quickly. Digitalisation of business is creating new international operating models that raise fundamental questions of where and how to tax value. At the same time, tax authorities are stepping up their expectations, demanding greater transparency. The introduction of real-time data sharing means more intense scrutiny is now the norm.

Our clients need our support more than ever to navigate this complex environment. Our role is to help them comply and communicate their tax strategies in a way that allows them to operate sustainably.

We’re using technological innovation to transform our own capabilities, using new tools and incorporating machine learning and automation. This ensures we’re moving in lockstep with our clients. But we also want to be challenging ourselves to ask questions about where tax is going next. So we brought together new ideas and new technology in our Future of Tax programme. It has driven us to think differently about tax, to look at the most crucial challenges and opportunities facing business leaders today, and to prepare for what they might face tomorrow.

For so many of our clients, attracting, motivating and retaining the best people is a business-critical objective. The integrated advice we’re able to provide on tax, pensions and legal services helps clients manage their local and global workforce. It supports them in complying with regulations, attracting senior executives and employees, and incentivising their people to succeed.

We’ve also expanded our Pensions team this year. This is a response to the strong market demand for our services, as pension scheme trustees and sponsors look to efficiently manage pension risk. We’re expanding our Legal Services offering too, creating a clearly-differentiated multidisciplinary business.

With this changing landscape, we’re mindful that as well as having responsibilities to our clients, we have a responsibility to society too. Trust in the integrity of our services is crucial, especially around our tax work. At a time when trust in institutions is frayed, we appreciate that tax is a key point of engagement between business and wider society.

In 2019 we’ll continue to build trust in the quality of our services, to drive further growth, and to support our people to achieve their very best.

Growth in net sales

14%

Partner promotions

11

Graduate recruits

58

Award win
Transaction Services Team of the Year - Yorkshire Rainmakers Awards 2018

Deal Advisory

From large multinational cross-border transactions and high-profile IPOs, to infrastructure funds and private equity deals, our Deal Advisory team has advised on some of the most significant transactions in the market in 2018.

Through the focus and talent of our people, we’ve managed to grow our net sales by a record £48m. This is an annual growth rate of 14% and has enabled us to promote over 300 people in our practice over the past 12 months.

The mergers and acquisitions (M&A) market is evolving at a remarkable pace, facing technological disruption, geopolitical shifts and entrenched low interest rates. In this era of change, our clients count on us to help them understand and take advantage of the trends affecting them and their ambitions.

This includes making the right investments in technology. Over the past months, we’ve combined forces internationally to develop data-driven insights which enable us to help clients make better decisions. We’ve developed tools which automate processes and analyse vast amounts of data more effectively and at “deal speed”.

Yet having the latest technology is not in itself enough. As we look to the future, we’re looking to hire more people who have data science as one of their key skill-sets. Our people are curious about the world around them but are also able to thrive in a global, multidisciplinary and fast-paced deal environment. In addition, we’re working jointly with three of our international firms to hire global M&A talent in technology, financial services and consumer markets.

We also want to ensure that Deal Advisory is a place where anyone can succeed. Learning and development is critical to this and our Focus 100 programme enables approximately 100 colleagues to accelerate their development over the course of the year. We continue to introduce innovative ways for flexible working to flourish for our clients and employees.

Underpinning everything we do is trust. Clients have to trust us to support them on deals that can define them for years to come. But the public at large has to be able to have trust in us as well.

We understand that we play a crucial role in the efficient deployment and use of capital. Our people also understand that the services we provide to clients have a real impact on jobs, pensions and local communities.

Looking to the future, we‘ll remain focused on staying nimble to both anticipate and respond to the disruption we see all around us. This means running our business in an agile way, embracing change and continuing to invest in technology. All of this will be underpinned by a relentless focus on trust.

Growth in net sales

5%

Partner promotions

13

Graduate recruits

366

Experienced hires

615

Consulting

In our Consulting business, we work shoulder-to-shoulder with clients on their most difficult problems, delivering high-quality insights that they can trust and which lead to measurable business outcomes.

This year we won valuable, challenging work. For the NHS, we’ll lead a five-year project, managing an executive leadership programme for thousands of leaders in the UK’s healthcare system. We’ll work with a major global bank to help them modernise the systems they use to nurture customer relationships (CRM).

Our clients tell us that we work differently. That begins with the way we look at their problems. The best outcomes for our clients begin when we empathise hard with them and see their environment through their eyes. We think deeply about their problem, not about the solution we want to deliver. With our Connected Consulting strategy, we then call on the right combination of expertise to work on the right solution. It’s a different way of working, and it’s driven us to become a more joined-up, more collaborative business.

Our strategy has paid off swiftly for us, driving growth by 5% in our Consulting practice. We were also named joint first, with the most rankings, in the Financial Times list of leading management consultants – voted for by clients and other consulting firms.

Such an emphatic endorsement from our clients means a lot to us. It means they trust in our obsessive focus on outcomes. They trust that our approach delivers results which powerfully impact their businesses.

Our business is attracting great talent all the time. This year, we welcomed 366 graduates and 615 experienced hires. We’re passionately inclusive about how we recruit, and we’re committed to ensuring that diversity is maintained at right through the business. We’re proud of our IT’s Her Future programme, which focuses on attracting and retaining women in technology roles at KPMG. Since the programme was launched three years ago, we’ve seen the proportion of our female technology professionals in Consulting increase by 10%, from 26%-36%.

In the year to come, we’ll focus on accelerating our growth, guided by our winning strategy. We’ll continue to invest in technology and innovation on a scale which gives us global reach. And we’ll keep doing things differently, working harder to get inside our clients’ problems.

How we’ve performed

The future of our profession

Our profession is underpinned by a fundamental need for trust and there is no question that the past twelve months have placed this trust under the microscope.

We’re under unprecedented scrutiny from multiple sources and we are focused on taking the necessary steps to rebuild trust in our firm.

Where policy makers or regulators are considering changes, we’re engaging with them openly. We’re also actively engaging investors, companies we audit and other clients. Where there are issues for the whole profession to address, we want to help lead the response. And where there are changes that we need to make ourselves, we will make them.

We believe this is the right thing to do – for our firm, our profession and for wider society.

The future of our profession will be built on trust. Our work plays a vital role in providing assurance and confidence in capital markets.

Trust is also the bedrock of our relationships with clients.

We’re clear that scrutiny on the audit profession – including on our own audit practice and work – is important and necessary.

It has been a challenging year. Financially, we’ve had our fastest annual growth rate in a decade. But it’s clear that we have a lot of work to do to rebuild the trust that has eroded in our profession – and we must go further to demonstrate why investors should continue to place their faith in us. This is a responsibility that we take very seriously at the highest level of our firm.

We have a clear plan to ensure that we consistently deliver the highest quality audits.

First, we’re taking action to address conflicts – actual or perceived – in delivering our audit services.

We’re actively working towards discontinuing the provision of non-audit services (other than those closely related to the audit) to the FTSE350 companies we audit. We’ve also been clear that this would be most impactful if implemented within a regulatory framework for all FTSE350 companies.

Second, we’re moving to ensure that our audits meet the highest of standards. Our Audit Quality Transformation Programme is making an impact and, importantly, we’re also introducing separate governance and performance management of our audit function while ensuring that our specialist auditors are incentivised and rewarded solely on the basis of audit quality.

Action is also being taken to increase the transparency of audit by working towards the adoption by all FTSE350 companies of ‘graduated findings’ within audit reports. ‘Graduated findings’ provide additional information beyond that required by Auditing Standards and involve the auditor giving a view on management decisions on all key audit matters, in addition to providing a year-on-year comparison of how balanced accounting estimates and judgements are. We were the first firm to include graduated findings in our reports and we’re now working towards the adoption of graduated findings by all FTSE350 companies.

These actions are important steps towards rebuilding trust in our audit practice.

There are also issues for our profession to address, and we want to help lead the response.

Confidence in audit quality is the single most important issue that our profession is facing right now. But it’s also essential to recognise that the responsibility for the delivery of high quality, informative financial statements depends on multiple participants: company management, Audit Committees, standards setters, regulators and auditors. Where there are opportunities to bring greater clarity of purpose and effectiveness to the regulatory landscape, we will be forthcoming in our views.

This is a great profession but it is being rightly challenged. It’s incumbent on us to ensure that we answer the questions being asked of us, re-imagine what we do and how we do it for a new generation of businesses and clients, and better demonstrate the value we can and do add to society.

Further reading

Access our submissions to Sir John Kingman’s review of the Financial Reporting Council and the Competition and Markets Authority’s market study into the statutory audit market.