KPMG played a key role in cleaning up the remnants of the crisis, and managing partner Shaun Murphy took over in the midst of that recovery. Here, he discusses its past and present challenges – including Trump and Brexit
By Tom Lyons May 21, 2017
An olive green military truck is parked outside KPMG’s headquarters on Stokes Place in Dublin 2. A group of women file out of the building and onto the truck. As part of its corporate social responsibility plan, the Big Four accountancy firm is paying for a 1916 city tour, and the women are availing of it.
A few call out to Shaun Murphy, the managing partner of KPMG, who is posing bashfully for photographs for this interview. He laughs and politely declines an offer to join them on the tour. We head back inside to the top floor of one of KPMG’s red-bricked towers surrounding a small square just off the Luas line on Harcourt Street.
Modern art lines the walls, reflecting the newly-revamped interior of the building. Three years ago, KPMG had considered leaving the building it had called home for three decades, before deciding to sign a new lease until 2026.
“We decided it just made sense to stay,” Murphy says. “People like being based so close to St Stephen’s Green.”
Murphy was elected managing partner of KPMG in December 2012 before taking on the top job on May 1, 2013. His predecessor, Terence O’Rourke, had been in situ from the last days of the bubble in December 2006 into the worst of the Irish financial crisis. Murphy took over when the Irish economy was finally beginning to recover. We meet to discuss that recovery, and what Brexit, Trump and populism mean for Irish business. KPMG has the inside track on Irish business, and Murphy is at the centre of the firm.
KPMG played a key role in cleaning up the debris of the crisis. When Murphy took over, it was already working secretly on what was codenamed Project Dawn: the liquidation of IBRC, the former Anglo Irish Bank and Irish Nationwide, on the behalf of the state.
Some €23 billion-worth of loans and assets had to be sold along with dealing with a raft of tricky issues from litigation involving the family of Sean Quinn to rows over historical interest rate overcharging.
“They were interesting times,” Murphy deadpans. “Kieran Wallace and Eamonn Richardson had just been appointed special liquidators in the February before I took over. That was certainly an enormous project, an enormous responsibility to be honest for us, but also a really exciting and interesting project.”
KPMG had up to 250 people at a time working on the dramatic liquidation of a bank that had become synonymous, rightly or wrongly, with Ireland’s downfall.
“At the height of it, we were effectively running a bank, dealing with the litigation, dealing with the wind-down, dealing with the Central Bank and the regulator.”
It was flat-out. KPMG prepared the entire bank for sale in 13 main tranches. At the time, the liquidation was considered a risky move by the state, as Ireland was yet to exit the EU/IMF bailout. It was unclear whether international funds would be prepared to snap up the loan books of two failed banks. At the start, the Department of Finance expected between 10 and 15 per cent of the loan book to sell. In the end, the liquidators sold everything.
Today, KPMG expects to report a surplus from the liquidation. Did it sell too cheaply, or did it get its pricing right?
“You can go back now and look at what happened, and you see some criticism emerging about how people sold assets at a particular point,” Murphy says. “There was no market at the time so maybe the expectation was, well, these assets, IBRC assets, would all pretty much go into Nama [if a buyer could not be found].”
The IBRC sale helped to create a wider interest for Irish assets, prompting the government to expedite Nama’s disposal strategy.
“Everybody was hugely surprised by it. It brought a lot of capital into Ireland. That whole process of successfully selling, getting foreign capital into Ireland, changed the marketplace, I think,” Murphy says.
“Obviously, there were lots of players and constituencies involved in that, but I think in terms of what the team did for IBRC, very ably led by the two special liquidators, it really did have a significant positive effect in terms of the economy.
“It is kind of easy to look [back critically] here in 2017 and forget that in 2013, we weren’t in tremendous shape. It was a very successful management of a very difficult and complex position.”
Over the 47 months of the liquidation, KPMG charged €128.1 million in fees, less €5 million in charges repaid to the state. The amount of fees paid has attracted negative political comment. Did Murphy think they were justified?
“I do. If you look at the effectiveness of the project, the value that’s delivered, if you look at the stakeholders in terms of the comments from the Department of Finance or from the Minister [for Finance, which have been positive about the liquidation] that puts it into context,” he says.
“I think it is, it is good value. It’s a very big number. There’s no question about that, over a four-year period, but it is proportionate to running and then winding down a bank, getting all the loan sales through and delivering value on those for the state.
“But I understand why large numbers draw a level of attention certainly and they draw a little bit of unfavourable remarks.”
KPMG makes a big contribution to the Irish economy. It employs 2,500 people in the Republic and the North. Last year, it reported fees of €353 million, making it the largest accountancy firm in the state. Out of the Big 4 firms, Murphy saysKPMG has 40 per cent of the tax market, 35 per cent of advisory work, and 25 per cent of audit.
It is also one of the biggest employers of young people, taking on 300 graduates a year. Murphy says KPMG’s focus was on growing a diverse and sustainable business.
“At the moment, a third of our business is audit, a third is tax, and a third is what we call advisory, corporate finance, restructuring, consulting etc,” he says.
Advisory, he says, is the fastest growing segment proportionately of KPMG. He says employee numbers are up by about a third since he took over, with revenue rising by this proportion too.
“We’ve established over that period some fabulous credentials both in our advisory practice and in some really great audit wins, like DCC is a tremendous win, Independent News & Media . . . what we want to be is the firm in the Irish marketplace where our clients and future clients will say ‘They’re the people to go to if you want something. If it’s complex, if it’s a difficult issue, go to KPMG . . . and go to particular people within KPMG.”
Murphy says getting and retaining talent is how KPMG is able to fulfil that mission.
“The two most important things we do any year? One is our graduate recruitment programme. And the next . . . and obviously we’ve lots of promotions during the year . . . but the really important thing is the people we decide to bring through as partners on an annual basis.
“If somebody becomes a partner, that’s a 20-year decision. It’s really important to get that right. You want to get the right raw material in from college. We are a training firm. We want to develop people who are experts, but who are commercial in their approach.”
He says it is not just about knowing the rules, but also about how to apply them practically to help their clients.
KPMG has helped steer thousands of Irish companies through the financial crisis, overseen the restructure of others, while seeing some fail. Does Murphy fear that Brexit will lead to a new wave of Irish companies going under?
“If you take a distribution business operating on a 2 per cent net margin, if it has to engage with additional costs and tariffs and it can’t recover them in the price, well, that’s very, very difficult,” Murphy says.
He says he fears some small and medium-sized businesses with low margins could go under as a result of Brexit. Irish business, he says, at a macro level has come out of the crash in stronger shape.
“I would have an optimism about the resilience, adaptability and agility of entrepreneurship that exists in Irish business,” he says.
How hard has Brexit hit the firms KPMG is advising?
“The reduction in the value of sterling has very significantly impacted businesses, particularly businesses in the lower margin area,” Murphy says, adding that the food sector has already been been “substantially impacted” by weak sterling.
“There’s so much uncertainty that some businesses are not really engaging fully, or taking a view that it’s such a major restructuring if it’s a hard Brexit that they can’t really plan for that eventuality at this point. They are living, probably, in a degree of hope that it won’t be a hard Brexit.
“Financial services aside, it’s hard to see how Brexit is some kind of net positive. It really isn’t. It looks like a net negative. You can hear all the statistics, but if costs go up, that’s not good for anybody.”
Does he get the sense that Brexit will lead to big job numbers coming to Ireland? “We’re seeing some interest by non-financial services clients in understanding their supply chain for example,” he says. “But at this stage, it’s probably not as advanced as financial services [where most interest in locating to Ireland is coming from].”
Minister for Enterprise Mary Mitchell O’Connor voiced her concerns last year that there was a perception that the Central Bank was “closed for business”, and was not doing enough to secure financial service Brexit jobs. Does Murphy agree with her?
“The minister’s a good source. There is no question that businesses in the financial services area have felt, I think, a little more welcome in other jurisdictions and as a consequence have gone there.
“Now, the Central Bank always has to deal within the remit that it’s given and I’m quite sure that it’s dealing within its remit, but I am conscious of that criticism which, as you quoted from the minister . . . and it’s disappointing, obviously, to see when we have such a fine financial services industry in Ireland, when we have good people in regulation to see industry make choices to go to other places, like Brussels or to Luxembourg or to Frankfurt.
“But I do still think that we will win a number of mandates, but I don’t think it’ll be at a level that’s going to have a dramatic impact from an Irish economy perspective.
“It may be the case that it’ll cluster and grow, those that do. But to date it’s been probably a little bit on the disappointing side.”
The accountancy sector in Ireland has been criticised overseas by politicians who claim multinationals based here are too aggressive on the tax front.
Apple – not a tax client of KPMG in Ireland – in particular has drawn the ire of both the European Commission and the US. Have things gone too far?
“I won’t talk about [Apple] because it’s fact-specific,” Murphy says. “But firstly I think there’s a societal context and a discussion taking place for not far off ten years around tax morality . . . paying a fair amount of tax, whatever that means.
“Ultimately tax is levied per reference to the law. You have to have a situation where there’s a certainty or as much certainty as possible for business in terms of the law. But I think businesses are also very mindful of their reputations,” Murphy says.
“For business to be successful, you need stability, certainty. You don’t need political upheaval. So, you’ve got a situation today, I think, where in lots of areas, there’s income inequality, people feel there’s wealth inequality”
Businesses, he said, needed to be aware of discontent in society, and getting the balance right with taxes was part of this.
“We’ve seen it in France, we’ve seen it in other elections, if people feel disconnected from society – and I think we’ve seen it in Ireland as well – you get a level of discontent that leads to much more friction in terms of politics, in terms of government, in terms of less stability, etc,” he says.
“So I think tax morality and that whole question of how far can people go, should they have gone etc, mixed with those other societal factors, I think it’s all part of one issue around equality perception.”
Should all taxes in Europe move towards the same levels?
“Harmonisation of taxes is, in my view, not a good idea,” Murphy says. He believes large wealthy economies like Germany have different advantages to countries on the periphery such as Ireland.
“People in France and Germany who believe in more tax harmonisation, they do need to think about the other parts of Europe where tax competition through reasonable tax policy should be allowed to prevail.”
Murphy says the election of Donald Trump as president of the United States is another factor weighing on US investors in Ireland.
“We’re certainly seeing with regard to US investment overseas, there are indications that it’s kind of stalled.
“Decision-making is paused, not necessarily cancelled. FDI is not going to run away, right, but for future investment, it could have an impact,” he says.
Murphy says it iss still unclear whether Trump will succeed in reducing US corporation taxes to 15 per cent, but this is undoubtedly another uncertain factor.
“If you’re a decision-maker in the US wondering whether to put another billion or two of investment into Ireland, unless you absolutely need to do it now, you may well be waiting.”
KPMG, along with Ireland’s other Big Four accounting firms, was hauled before the bank inquiry into Ireland’s financial collapse.
Murphy’s predecessor, Terence O’Rourke, attended the inquiry to defend the firm as auditors to AIB, which required a €21 billion bailout, and Irish Nationwide, which cost €5.4 billion.
Has KPMG – and the accountancy profession – learned lessons from the bust?
“Ultimately the profession has not been found wanting in terms of the application of auditing standards and the quality of the work done,” he says.
“We have a classic expectations cap in terms of what is an auditor’s role in relation to business.”
Murphy says that boards and management make the decisions that run banks or businesses – not their auditors.
“There are lessons to be learned, though, when we put that to one side and look at how the profession evolved.
“I think there have been some changes in the standards which people would have adhered to. Some changes in the interactions with the Central Bank. So I think lessons have been learned.
“I think the profession has [learned in terms of] emphasising the importance of scepticism, continuing scepticism, and to challenge the manner in which some things are done,” he says.
“There is an understanding of the importance of continuing to assess and reassess the approach. It’s in everyone’s interests, both clients’ and ourselves, to continue to emphasise high-quality audits. And to try and ensure that they are absolutely of the highest quality.”
Looking forward, what does Murphy see as new areas of growth for KPMG?
“We’re not producing solutions in a sort of a laboratory environment,” Murphy says. “It’s probably an evolution if you look at different parts of the business.”
Audit, he says, is becoming increasingly complex because of accounting standards, rules and regulations. Transfer pricing, he says, is another area he expects to grow. In terms of advisory work, Murphy says chief executives expect more transformation.
“Technology is going to lead to major changes in how we deliver service. For banks, certainly. We’re all sitting here and we’re all going to probably overestimate the impact of technology in the short term, and probably massively underestimate the impact in the long term.
“The usual things, like artificial intelligence, machine learning, all these things . . . there’s a lot of discussion and talk, I’m not sure they’re at the level of a lot of practical application yet, but companies are investing in them, but there’s a lot still to go.”
In audit, Murphy flags data analytics as being an area where technology could help KPMG. Automation would also wipe out the need for some repetitive accountancy work, allowing accountants to focus on higher-end work and service.
Each year, KPMG attracts 300 graduates, who might be tempted to join multinationals, international investment banks or other rivals.
Murphy says that KPMG has a footprint in Irish enterprise built up over decades of working with firms such as Ryanair, Icon and Fyffes. This gives graduates joining KPMG, he feels, a unique exposure to Irish business.
“You get a huge perspective on business through coming in to do an accountancy qualification with us. You get access to some really senior people in the business at a relatively junior point in your career.”
KPMG, he says, has a network of alumni working at the top of Irish business. “I think ultimately you have potential to progress further in your career with the background of a KPMG training, and the tremendous connections that people have built up here.”
Murphy completed a Bachelor of Commerce degree in UCD before being recruited as a graduate to join KPMG.
Murphy’s mother was a nurse, while his father was a quantity surveyor with Dún Laoghaire-based builder Cooney Jennings.
“I subsequently realised they were a client of KPMG,” says Murphy.
“My expectation when I joined the firm would have been that I would do three years of my training contract and then I would go and do something else.
“I found the work was really enjoyable. The work has changed over the years, and I’ve had different roles to do. It’s been pretty interesting, so it’s gone by pretty quickly.
“What I’ve found satisfying in terms of my professional work is you’ve relationships with your clients that tend to be reasonably deep. If they’re going to work, that’s how they tend to be. Bringing the solution to the client of a difficult issue, there’s satisfaction in that.
“And one of the things I’ve noticed since becoming managing partner is your satisfaction tends to take a lot longer to come . . . the thing you’re dealing with doesn’t have any immediate impact necessarily, it tends to be longer term.”
This article was originally published in The Sunday Business Post on 21 May 2017 and is reproduced here with their kind permission.