Chairmen's statement

The debate is primarily being driven by the European Commission and follows the publication of radical proposals by Michel Barnier, the Internal Market Commissioner, designed to achieve greater competition in our industry.

But he is by no means a lone voice. With sovereign debt putting the banking system under renewed pressure and the threat of recession looming again, policymakers in many countries are thinking about what the future role of auditors should be. The Commission itself seems to be focused on two separate issues.

The first is competition — where it is argued that the perceived dominance held by the Big 4 accounting firms at the top end of the market should be broken. Ultimately we believe this is a question that should be addressed by the competition authorities. But, as others have realised, it is very hard to see how additional competitors can be created on a global scale without direct intervention that risks damaging the effectiveness of the existing firms.

For that reason this issue must be looked at with the greatest care. In our view there is just as great a chance of weakening four firms and the work they do, as there is of creating a strong fifth. That would not be a sensible outcome.

The second critical issue is how to go about achieving further and continuing improvements in audit quality — a debate that has its genesis right at the heart of the financial crisis of 2008.

We argue forcibly that we were not the cause of the crisis as some critics suggest; nor as a generality, given the limitations of today’s statutory audit, do we believe that auditors failed to do what was required of them. But we, like many others, did not see the significance of what was coming. To that extent, we know there are lessons to be learnt about the relevance as well as quality of audit and we have taken a lead in making sure they are learnt.

In the UK, for example, we have worked closely with the Financial Reporting Council and the Financial Services Authority to improve the dialogue between regulators and auditors with a view to improving the reporting of financial institutions and the associated audit.

We have also been very actively involved in some important discussions about the scope of the audit. Should risk models be audited? Should boards and auditors comment on forward-looking issues as well as historic performance, so that the whole report and accounts can be assured, and not just the numbers at the back? There are far-reaching reforms in these areas that are well worth pursuing. We are therefore disappointed that the Commission’s proposals do little to address the relevance of audit.

But we cannot escape the fact that, to some, the role of auditors has become
less clear.

There is also a feeling that the accounts have become too long and too complicated, thanks to prescriptive accounting rules and the sheer volume of disclosure requirements. If they are hard to decipher they become unfit for the purpose of offering what might be described as an old-fashioned ‘true and fair view’.

Yet we firmly believe there is a role for audit in the modern world. As such, creating a system that really works, now and in the future, is our very top priority.

It is therefore a matter of real concern to us that some of the most radical proposals being made around the issue of competition could, we believe, have an unintended, but very negative, impact on audit quality. They appear to rely on causing significant disruption to our industry and our existing clients without guaranteeing any corresponding improvement in quality.

So we have approached this debate from a very clear standpoint. We are not interested in special pleading. This is not an argument about the profitability of KPMG Europe LLP or about protecting the status quo.

Instead it is an argument about the functioning of the capital markets and about building better defences against future financial shocks in the modern world.

The transparency debate has particular relevance to us now with Europe entangled in a sovereign debt crisis that is once again putting the banking system under severe strain.

To paraphrase, truth is frequently the first casualty of a crisis and as auditors we are in the truth business. We play a vital role in creating stable markets by making sure investors have reliable numbers, in good times and in bad. You cannot pick and choose your moments to fulfil this role; consistency is the key. At times when investor confidence is so volatile, that makes our job a great deal more meaningful.

Quality ultimately is at the heart of our business. It is important to us in all of our services as it underpins our very reputation.

Despite these very difficult market conditions, we were determined to continue developing KPMG Europe LLP at pace during the year, albeit with minor revisions to our targets and budgets.

The combined organisation now includes the UK, Germany, Switzerland, Spain, the Netherlands, Belgium, Luxembourg, six CIS countries including Russia, Norway, Turkey and Gulf countries.

This spread of interests gives us a unique perspective on the health of companies, large and small, operating across our regions. We are seeing at close quarters how businesses in western European markets are paddling very fast just to stand still, while businesses in Turkey, the CIS and the Middle East continue to grow quickly. Demand for our services remains strong as our clients seek to mitigate risks and grasp opportunities.

The logic that first drove the creation of KPMG Europe LLP continues to hold good. As planned from the outset, we are offering our clients much sharper support and advice by pooling our expertise, our best people and our best services.

One great example of this is how we are now concentrating our resources around key global accounts, as Richard Bennison describes in greater detail in the Chief Operating Officer’s review.

We are very proud of how we are mobilising our teams across borders to offer cutting-edge Tax and Advisory services to key global clients, whilst continuing to look after our major Audit clients better than ever before.

But it is not just about big global accounts. We are also working together to develop programmes for our national market clients, as well as doing more than ever to support family-owned businesses. On a combined basis, almost half the work we do is for these vital national businesses. Collectively, they are very important to our future.

We have continued to build our Advisory practice, particularly in Management Consulting and Risk Consulting, through organic recruitment and targeted acquisitions.

We will look for further deals to round out our offering and to make sure our services remain relevant to our clients’ changing needs.

Our ambition to create an intensely client-centric organisation remains a top priority. But our success in doing so depends entirely on the skill, talent and sheer hard work of the people we employ. They are our most significant, indeed only, real asset.

We now employ over 32,800 people, including over 8,500 recruited during the year. That makes us an important source of employment and financial training across our respective economies.

Our focus on being the best we can be for our clients, our people and our communities remains as sharp as ever. We are doing all we can to help KPMG people live up to the attributes that clients say distinguish KPMG people in the market — expert, global mindset, forward thinking, value adding and passionate.

This development work continues to gain recognition — not just at a national level, but globally. For example, for the second year running KPMG were named second in the Universum index of the world’s most attractive employers, based on a survey of 160,000 career seekers with a business or engineering background at the top academic institutions in 12 leading economies, worldwide.

At a time when competition for the best talent remains intense, this is a superb endorsement.

We have an ambitious strategy for significant growth. Although that is somewhat clouded by the current economic and regulatory environment, we remain determined to expand our service lines in all the territories in which we operate.

In particular, we see opportunities for significant growth in Russia, Turkey and the Middle East and we are convinced that demand for our services in the priority sectors we have targeted will remain very strong.

Of course, along with many of our clients, we are finding it difficult to forecast short-term economic trends. But we remain cautiously optimistic and determined to develop our practice as fast as we can in the next 12 months, whatever economic conditions prevail.

Our thanks go to four Board members - Jeremy Anderson, Rachel Campbell, Malcolm Edge and Michael Gewehr - who stepped down from their Board positions in 2011, for all their hard work and dedication over the last few years.

Jeremy continues in his role as Global Head of Financial Services and Rachel has taken a new position as the Global Head of People.

However, we are delighted to welcome Tim Payne as the new Head of People and Graeme Ross into role as Head of Markets. A full list of current Board members can be found here.