The Monday Interview

October 23, 2011 10:29 pm

An accountant betting on Asia

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KPMG boss is forthright in the face of regulatory pressure

Holding court in a hotel at London’s Heathrow airport, Michael Andrew is boasting about how easy it is to get from his desk to the runway back home in Hong Kong. “I basically walk out of the office and they guarantee me to be sitting on the plane in 45 minutes,” he says.

The new chairman of KPMG International is not trying to rub salt into the wounds of harried air travellers in the UK and US. Rather, the 55-year-old Australian is explaining why he recently became the first head of a major global accounting network to be based in Asia.

The transport links out of Hong Kong – rapid rail access to the airport, the array of direct international flights – are an obvious draw. Business leaders continually troop though the city-state, he adds: “Every person I need to meet has to come through on their roadshows.”

But above all, Mr Andrew wants to demonstrate how important the likes of China, India and Russia are to the future of KPMG, whose most recent annual sales of $20.6bn made it the smallest of the “Big Four” accountants.

The bosses of KPMG’s three bigger rivals – PwC, Deloitte and Ernst & Young – are all based in New York or London: “We are trying to say we are a much more globally balanced firm.”

In an industry known for its homogeneity, this is a memorable piece of branding, albeit one that disguises the fact that accountants of all hues have been piling into emerging markets for years in search of zippier growth.

The choice certainly reflects Mr Andrew’s career. In the early 1990s, the tax specialist helped establish KPMG in eastern Europe and wrote its first strategy for Asia-Pacific. “I don’t think Asia was on anyone’s radar screens at that point in time,” he says,

He then chaired KPMG in Australia and Asia-Pacific before getting the nod to lead it globally in May, succeeding Timothy Flynn, an American.

However, days before Mr Andrew took up his new role at the start of this month, the wisdom of being based in China looked less solid. For all the economic opportunities to the east, threats to KPMG are massing in the west.

Late last month, it emerged that the European Commission was readying remarkably tough rules to make auditors more independent of their clients. Brussels is prodding auditors after they failed to give investors advance warning of the banking sector collapse that began in 2007.

Most strikingly, it has been flirting with a ban on auditors doing extra consulting work for clients in areas such as tax at the same time as vetting their accounts. It could even force big networks to split into separate audit and advisory arms.

The CV

Born: June 16 1956, Maryborough, Australia
Education: Law and commerce, Melbourne University
Career: Six years at ICI before joining KPMG
1992-1994 Partner in charge of the KPMG international tax centre and executive of the global tax steering group, responsible for opening offices in eastern Europe
1995-1997 Becomes KPMG’s Asia-Pacific tax chairman
1997-2001 Managing partner of KPMG Australia’s tax practice
2001-2007 Deputy chair of KPMG Australia
2007-2011 Chairman of KPMG in Australia
2008-2011 Chair of the governance committee of the board
2009-2010 Member of the compensation and nomination committee
2011 Appointed chairman of KPMG International
Golf, breeding racehorses

In the UK, meanwhile, competition regulators are investigating the dominance of the audit market by the Big Four. Regulation is tightening in the US too.

Describing the European Commission’s stance as a “total surprise”, Mr Andrews insists KPMG will keep its audit and consulting arms together, even if that means abandoning work. Unsurprisingly, he favours milder changes, such as getting regulators and auditors to talk more.

He denies that the Big Four are paying for an arrogant refusal to make concessions to regulators: “I don’t think there is an arrogance. I think we are very open to discussions around change.”

Yet his support for even minor reforms can seem grudging. He says disclosure in audit reports and opinions could be improved but is picky about what extra information is needed: “We just don’t want some boilerplate full of disclaimers.”

Likewise any mea culpa about the financial crisis – whose casualties included the KPMG-audited New Century Financial, Countrywide Financial and HBOS – is limited to the observation that KPMG, like others, could potentially have done more to alert people to dangerous levels of borrowing.

Mr Andrew’s hobby of racehorse breeding suggests he is more unbuttoned than the stereotypical accountant, even though three of his horses are called Discretion, Tactfully and Chatham House – the latter a reference to the famously off-the-record UK forum. But Mr Andrews himself is certainly willing to make punchy comments.

He plays down the risk of one of the Big Four collapsing in the manner of Andersen, Enron’s auditor. This scenario worries some regulators because of the risk it might pose to market confidence.

Hong Kong's famous skyline

Foreign retailers are flocking to Hong Kong to snare mainland shoppers

Post-Andersen, KPMG came particularly close to disaster when it became embroiled in a tax evasion scandal in the US that led to it paying a $456m fine and related penalties and accepting a deferred prosecution deal in 2005.

However, Mr Andrew thinks it unlikely that a major regulator would risk a collapse by going a step further and suspending one of the Big Four in the event of any gross misconduct. “It would be difficult to understand how a regulator would actually allow that to occur.”

There has been talk that China could eventually ease the anxieties around audit market concentration by building up a fifth global player with roots in the Chinese economy. Mr Andrew broadly agrees.

However, recent fraud allegations against Chinese companies listed overseas have muddied the reputation of Chinese accounting and he believes it might be too early for China to seek an international champion.

“China is on a journey. This will take them a long time to fully comprehend what the requirements are of global capital markets and global investors and global regulators,” he says.

In the meantime, KPMG is one of the audit firms caught up in a stand-off between the US and China over the latter’s refusal to allow US regulators to inspect the work of auditors in China.

Asked whether the two sides were likely to reach a resolution soon, Mr Andrew’s long sigh suggests little hope. “I think it is a work in progress,” he ventures.

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