I recently read two articles (here and here) about KPMG and a $100m Capital fund it created. Long story short, KPMG is trying to find a way to diversify its operations in the UK and expand its business by investing in new technology start-ups. The article on Bloomberg was negative to something like that due to potential conflicts of interest. I don’t see how this can be a surprise since all of the Big 4 audit firms mention in their latest annual reports that they seek to offer more non-assurance services in addition to their auditing tax strongholds.
Diversification Beyond Their Core Markets
It’s not something new either. Accenture was the creation of Arthur Andersen. Apart from that, the big four audit firms employ approximately 650,000 people worldwide. The markets are changing, and the competition in the audit markets becomes more robust (resulting in lower margins for the audits). So it does make sense that big private companies like these four companies are trying to grow and expand beyond what one might call a saturated and competitive audit market. As we mentioned in a recent article, one of the ways a business can grow when it faces just this, is to expand nto new markets.
It’s like the banks have not diversified their operations beyond the normal lending operations. Most banks nowadays offer fund administration services, insurances and other services or products directly related to banking operations. They have also invested in other irrelevant (and not all profitable) things (see RBS or Lloyds in the UK).
Conflict of Interest?
A key question, however, is indeed whether a conflict of interest exists. A problem will arise when an audit firm audits a company it has invested with. Still, as the KPMG Senior Partner mentions in this interview, KPMG could provide advisory services. And this conflict management becomes even more complex as the firms eye higher-margin non-assurance auditing services.
One might argue that KPMG is so big that while the investment might exist, the engagement team might still be independent. KPMG could put safeguards into place to offer non-statutory audit services. However, the problem arises when KPMG audits a competitor of a start-up that KPMG has invested with. I would say that it’s an exciting move, and it might initiate a debate in the future. The timing is interesting, with the Competition Commission in the UK deciding on mandatory audit tenders every five years.