Having weathered the storm of economic downturn, PwC chairman Ian Powell tells Nick Levine that he is hoping for calmer waters in his second term
The current economic climate is not the easiest time during which to lead one of the Big Four accounting firms. Against a backdrop of audit reform, litigation, and a high-profile debate on tax avoidance, Ian Powell, chairman and senior partner of PwC UK, is steering a steady ship towards calmer waters.
At PwC’s plush Embankment Place office, which is currently undergoing a £100m refurbishment, Powell cuts a relaxed figure. He has recently started his second stint as chairman of the country’s largest professional services company, confident in the support of the firm. “Last year’s election was not contested. It was just me as the candidate for the second term. I still treated it as if it was a contested election and went on the hustings.”
The theme for Powell’s first term was one of continuing investment during the recession. “We decided that we would hold our nerve. The intention was that we would come out of [it] stronger than we had gone into it, and stronger than any of our competitors.” This investment has manifested itself through property and business acquisitions, and the recruitment of over 1,200 graduates and around 100 school leavers a year into apprenticeship positions.
Powell’s strategy appears to have worked. He is of the view that this has positioned the firm well to take advantage of new opportunities in the marketplace. Since his appointment as chairman in 2008, PwC has posted increased turnover year-on-year, with the latest figures showing revenue up 3 % to £2.65bn for the year to June 2013 and profits up to £740m from £727m in 2012. Distributable profits per partner were up 4% to £705,000, and 2008 profits per partner were £797,000, which suggests profit levels have remained steady in challenging times.
Powell sees the main challenges of his second term, which expires on 30 June 2016, as leaving the company stronger than it was when his tenure began, and for the firm to be “doing the right thing”. He says: “My job is to leave it in better shape for the generations and partners into the future. It matters to PwC the way that we go about business, our position in the marketplace, and to make sure the investments we make are sustainable for the long run.”
It really matters to PwC the way that we go about business... and to make sure the investments we make are sustainable for the long run
He sees doing the right thing as one of PwC’s core principles, and articulates it as the company needing to engage with society, as well as serving the needs of the business community. An example is the firm’s investment and support in the Brigade Bistro, a social enterprise providing employment and training opportunities for homeless people. The building in which the restaurant is housed is an old fire station that the PwC Foundation took the lease on. Powell eats there every week.
The company’s 2013 accounts are yet to be published when we meet (although they are out shortly afterwards). Powell indicates that audit services continue to be at the heart of the PwC brand but that revenue growth will come on the advisory side of the business. “You are going to see more rapid growth in the consulting and deals side of the business [rather than in] the more traditional services that we offer.”
He does not necessarily think that this trend will be reflected among the rest of the Big Four, and that instead each firm will carve out its market niche based on the needs of its clients. “Some firms have gone more into the property market or the claims handling market. We did not see that as being core to our brand so we did not do it. Some firms are more biased towards consulting than we are. We are trying to keep the organisation in balance so that you are more sustainable in the long run. I think you will see each of the Big Four going in a slightly different direction. Ultimately the Big Four service offerings are driven by the demands and location of their clients.”
Powell has a clear view of the challenge facing the firm. “The real issue is how fast you can invest to make sure that you meet those client needs and that you have the strongest footprint,” he says.
Powell has no plans to follow KPMG’s lead in establishing a sector-specific office for the nascent but fast-growing technology start-up sector, although he stresses the importance of serving the needs of growth sectors. “We would not go that route as we think that the benefit for our clients is that you get the best of the whole of PwC,” he explains. “I would argue that we focus on that sector and provide services, but those clients want the full service range of PwC. They do not want to be treated as something just in a specialist niche area. We think that there is a huge benefit from operating on a one-firm basis.”
One of the changes Powell sees in the industry is the increased use of technology and streamlining of business processes. This is an area in which PwC has invested. “We are transforming all of the back-office functions of the firm,” he says. “We have invested £350m in our audit processes to make sure they stay at the leading edge,” he says. This investment has also been influenced by the firm’s international development, which means a similar level of spending on technology is taking place in overseas markets.
The biggest bugbear for the Big Four over the past year has been the audit reform proposals by the Competition Commission in the UK, and the European Commission overseas.
Powell does not think that the European Commission’s proposal to split audit and non-audit services will ever come to fruition, believing that it is untenable. “The main reason for this is that there are many services that are essential to maintaining the quality of an audit that you need access to, but that you wouldn’t either invest in or sustain purely for audit purposes.” He cites the example of a substantial financial services audit, and elaborates by suggesting that in such a scenario you would need access to a derivatives expert who would not be provided with enough pure audit work to “sustain themselves” within the business.
Powell also believes that enforced splitting of non-audit services from the business will not occur due to the EU debate underestimating the strength of audit committees. “Major UK companies are [now] very clear on the independence issues of which services they can buy from their auditors and which services they won’t buy from them. The market has self-selected what is appropriate.” He backs this up by indicating that PwC has turned down work due to a lack of perceived independence, as well as a lack of actual independence. In addition, he adds that there are a number of safeguards in place such as full disclosure of audit and non-audit fees in company accounts.
On the Competition Commission
In relation to July’s Competition Commission review, Powell thinks that the proposals are mostly sensible. This view would appear to stem mainly from the rejection of the idea of mandatory rotation.
I think they are underestimating the cost and the potential disruption to business
That this has been rejected after a thorough investigation of the audit market suggests that there has been some recognition of how competitive the audit market is. However, one of the remedies that he does not agree with is the one that requires firms to retender assignments to existing clients every five years.
“I think they are underestimating the cost and the potential disruption to business,” he points out. “The general reaction of businesses has been that it is unnecessary and that it is an additional burden... that is not required.” He is also against this idea due to the Financial Reporting Council’s (FRC) “comply or explain” provision for audit tendering being largely successful thus far. “The truth is that comply or explain has led to something like 98% compliance so it is as good as regulators saying ‘we expect you to do this’. That was [only] introduced last year.”
A particular concern Powell has about enforced retendering is that the process is a costly exercise to both the auditors and the client. “There is [the potential] disruption of one auditor moving out and a new auditor moving in. If you have to do that every five years, the investment is massive.”
In spite of this, he thinks it is possible for a company and its auditor to get to know and understand one another well over five years. Indeed, he goes further and points out that failing to do so would make it very hard for firms to be in a position to sign off the accounts. But he believes a prolonged relationship between an audit firm and a global business leads to a better level of engagement. “Over a period of time there is a deeper understanding from the more exposure you get to a major global organisation. If it was a standalone entity, just based in the UK, that is on a completely different level to a major entity that operates right across the world.”
In the week leading up to this interview, PwC was awarded the HSBC audit, the most lucrative fee generator in the FTSE 100. Prior to this, PwC already audited the accounts of Barclays and Lloyds. When probed about whether it is healthy for one audit firm to have such dominance in a sector, Powell responds by relating to the sophisticated nature of buyers, indicating that there is enough competition in the marketplace.
He attributes PwC’s success in auditing more than half of the banking sector to the company’s investment in staff with the relevant skills. “I think that we have invested well in those businesses and I think that the complexity that is associated with major financial institutions means that you need a critical mass to invest so that you can audit them properly.”
Powell says that he would prefer it if there were more firms competing for major contracts in the marketplace. However, he is keen to stress that there is already intense competition among the Big Four, and that this is often overlooked due to the differences between choice and competition often being muddled: “All of these big tenders or any pieces of work, not just audit work, are fought for ferociously… The distinction between choice and competition is important. In any tender situation, if you have two [companies] which are tendering you will have competition.”
The PwC chairman’s take on high-profile law suit cases against the Big Four is that they are currently at relatively low levels, and that such actions should be expected in any major line of business. He says: “I do not think that the level of litigation at this point in time has significantly damaged the reputation of the profession compared with earlier times.” However, he is keen to point out that “every piece of litigation damages the reputation not just of the firm that is involved but the profession as a whole”.
On the tax debate
The other stain on the accounting profession within the current public discourse is that the Big Four stand accused of assisting large companies on mass-scale tax avoidance. While not illegal, the issue has been latched on to by the media and social commentators as being ethically unsound.
Powell refers to the debate as very interesting but says that ultimately the responsibility lies with the companies that are being advised. “We expect to advise our clients on the technical and legal issues of tax but also the moral issues. The decisions that are [made] are taken by our clients.” He also cites political factors as being a reason for international conglomerates being able to get away with paying low rates of tax in the UK.
“Every country wants to make itself attractive to bring in inward investment and jobs,” he says. “One of the tools to do that is effective tax rates. The UK is the same as other countries around the world in that as long as you have different tax rates in different countries you will get tax arbitrage. You are going to see major companies constructing themselves in a way to make sure that they have sufficient tax planning.”
Powell’s final word on the debate is that tax regimes around the world need to reflect the new nature of business, which is conducted digitally and electronically.
Having maintained PwC’s market position in a difficult environment, Powell says he would like to lead the company in at least a couple years of a boom. While this desire is unlikely to be satisfied, recent economic indicators suggest that he may at least be in for a smoother ride through to 2016.
A life in audit
Powell is an economics graduate who joined PwC as a graduate trainee in 1977. After becoming a partner in 1991, he worked in Manchester building a team which established a reputation for complex business turnarounds.
In 1998, he developed the Continental European Business Recovery Services (BRS) Advisory practice and in 2000 was appointed leader of the UK firm’s BRS business.
Powell joined the UK firm’s Executive Board in 2006 as head of advisory. He was elected chairman and senior partner of PwC UK in 2008 and has recently been re-elected for a second term. He is also a member of the five-person Network Leadership Team which leads the international Network of PwC firms, and leads the Central Cluster of the PwC Network, which spans 97 territories including Russia, Europe (including central and Eastern Europe), the Middle East, Africa and India.