Incorporated: 1897 as Marwick, Mitchell & Company
Sales: $1.8 billion
SICs: 8721 Accounting, Auditing & Bookkeeping
KPMG Worldwide is a global federation of accounting firms that together comprise the world’s largest accounting partnership. KPMG Peat Marwick, the company’s American subsidiary, is the fourth-largest American accounting firm. Founded in New York in the late 19th century, the company made a strategic international alliance early on in its history and grew rapidly to become one of the eight premier accounting firms in the United States. Peat Marwick’s steady expansion overseas was capped by its alliance with a firm of almost equal size based in the Netherlands.
KPMG got its start in 1897, just a few years after the first American accounting firm had been set up. The company was formed by James Marwick and Roger Mitchell, who had both immigrated to the new world from Scotland. They set up their new partnership, called Marwick, Mitchell & Company, in New York City. Eight years after its founding, Marwick, Mitchell & Company launched a banking practice, focusing its efforts on one industry for the first time. This effort proved so successful that the firm later went on to offer tailored services to companies in the insurance industry, the thrift field, and to mutual fund brokers.
In 1911 Marwick, Mitchell & Company merged with a British accounting firm headed by Sir William B. Peat. The new transatlantic company was called Peat, Marwick, Mitchell & Company. Through the merger, Marwick, Mitchell & Company strengthened its operations in Europe, while Peat gained greater access to the rapidly growing North American market. This configuration of the company remained in effect for the next three-quarters of a century.
During that time, Peat Marwick grew steadily, becoming one of the eight major public accounting firms in the United States. In the late 1960s and early 1970s, Peat Marwick’s business and revenues began to grow dramatically, along with those of the rest of its profession. This boom in demand for accounting services came as a result of increasingly complex tax laws, securities laws, and industry regulations. Between 1973 and 1976, for example, the Securities and Exchange Commission (S.E.C.) added 16 new disclosure requirements for publicly held companies. With the ever-increasing mandated need for accounting services, Peat Marwick’s revenues grew steadily as demand outstripped supply.
In addition to the welter of new federal regulations, accounting industry standards became more exacting. The Accounting Principles Board and the Financial Accounting Standards Board issued a wide variety of directives to members of the industry in response to complaints that the accounting industry was not fulfilling its watchdog role in corporate American stringently enough. Like the rest of its peers in the industry, Peat Marwick suffered a number of suits charging it with failing to prevent or expose financial malfeasance. In 1970 the company settled a suit filed in 1965 in connection with its audit of the Thor Power Tool Company from 1960 to 1964. Together, Thor and Peat Marwick agreed to pay stockholders $475,000 to settle the case.
In 1971 a similar suit produced a landmark court decision on an auditor’s responsibilities, as the courts and the government groped their way toward a more thorough understanding of the nature of an accountant’s obligations. After the president of the Yale Express trucking company was convicted of mail fraud for making false financial statements, which Peat Marwick had certified, the firm was sued by the company’s stockholders. A judge ruled that Peat Marwick was eligible to be sued for stock fraud and common-law deceit because the company had discovered false financial statements from 1963 that it did not disclose until May, 1965. After the court ruled that Peat Marwick had had a duty to disclose the information immediately, the accountants paid $650,000 to settle the suit.
Peat Marwick faced an even larger legal difficulty in 1972, when the S.E.C. included several of its employees, among them the partner in charge of the firm’s Washington, D.C., office, as well as a number of lawyers, in charges of violations of federal securities laws in connection with stock offerings of a company called the National Student Marketing Corporation. In 1970 this company’s stock had collapsed, costing investors well over $100 million. The government’s inclusion of lawyers and accountants in its indictments marked a landmark attempt to expand the apportionment of blame in a case of financial wrongdoing. Previously, charges by the S.E.C. had generally been limited to people actually employed by offending companies.
Peat Marwick was charged with failing to insist that the company’s financial statements be revised in accordance with reservations about the company’s financial health that Peat Marwick had identified. In addition, the firm was charged with failing to publicize the company’s financial improprieties to its stockholders, and with failing to notify the S.E.C. of them.
In the spring of 1972, the steady drumbeat of lawsuits in connection with Peat Marwick’s work continued, as, indeed, all the members of its industry found themselves plagued by legal actions. In May the Raytheon Company sued the accounting firm over its audits of the Visual Electronics Corporation from 1968 to 1970, charging that its work failed to show how bad the company’s financial straits were. Further legal complications came in October, 1973, when the S.E.C. charged Peat Marwick in connection with its audit of Talley Industries, Inc. By this point in time, though, Peat Marwick had become the largest public accounting firm in the nation. The company had grown by providing services to corporations and also by winning government contracts. In 1972, for instance, it won a Department of Transportation contract to analyze the department’s planning techniques.
In 1974 the Peat Marwick partner charged by the S.E.C. in connection with the National Student Marketing collapse, along with another former Peat Marwick employee, were indicted by a grand jury on federal charges of making false and misleading statements, as the government pressed its attempt to hold accountants liable for the actions of their clients. This marked only the third such prosecution of an accountant for a Big Eight firm. At the time, a Peat Marwick public statement protested that “we believe the allegation of criminality of these two professionals is unjustified, unsupported and unprecedented,” as the Wall Street Journal reported.
The trial of the two auditors opened in October, 1974, with the entire accounting industry watching to see whether the government would be successful in extending enforcement of securities laws to accountants. Peat Marwick was charged with allowing National Student Marketing to use an inappropriate accounting method, as well as with hiding the fact that certain sales had been written off as non-existent in a proxy statement. In November, 1974, the two Peat Marwick accountants were convicted of stock fraud in the case.
In response to this unexpected blow, and a general consensus that the financial industry was moving toward greater accountability, Peat Marwick took steps in 1975 to shore up the controls on its accounting practice. “We have a little bit of an image problem, and we’d better start doing something about it,” Peat Marwick’s senior partner told the Wall Street Journal. The firm was concerned that its recent bad publicity was causing local government units, highly sensitive to public opinion, to seek other firms for their auditing business.
Hoping to clear its name, Peat Marwick engaged another Big Eight accounting firm, Arthur Young & Company, to audit its quality control procedures and make the results available to its clients and staff. In taking this step, Peat Marwick became the first public accounting firm to inaugurate a peer review process. The audit was scheduled to begin in June, in place of an earlier planned process that would have been conducted by the American Institute of Certified Public Accountants. Peat Marwick abandoned its plan for this review because it wished to make the results of the audit public.
Despite this move toward greater rigor in examining its accounting practices, Peat Marwick received the most severe rebuke ever dealt to a major accounting firm by the S.E.C. in July, 1975. The government completed a lengthy inquiry into the firm’s operations and harshly criticized its auditing practices in connection with five clients, all of which had suffered severe financial reverses. Along with the National Student Marketing Corporation and Talley Industries, Inc., these included the Penn Central Company and Stirling Homex Corporation, both in bankruptcy, and the Republic National Life Insurance Company. In censoring Peat Marwick, the government banned the firm from taking on any more publicly held clients for the next six months. Peat Marwick agreed to the settlement in an effort to clear up controversies with the S.E.C. and countered in its own defense that the problem cases made up an extremely small part of its client base of 25,000 companies, handled by nearly 100 U.S. offices. The company agreed to further review of its audit practices by the S.E.C., and to outside reviews in the next two years.
In November, 1975, Peat Marwick released the study of its operations by Arthur Young & Company in an effort to bolster its battered reputation for reliability. The report, which cost the company more than half a million dollars, was favorable in its account of the company’s activities. In April, 1976, the company revised its audit manual to include more use of internal auditors.
Despite this effort to redress weaknesses in it operations, Peat Marwick was named in yet another lawsuit in October, 1976, in connection with the bankruptcy of a New York based-company called the Investors Funding Corporation. In May, 1977, the review of Peat Marwick’s procedures mandated by the S.E.C. reported that the company’s “prescribed policies, procedures, and practices are comprehensive, effectively communicated, and appropriate,” as the Wall Street Journal reported. Overall, the report was qualified in its assessment, pointing out a number of areas for improvement.
Just two months after this report, Peat Marwick won a major new governmental client when it was selected to audit New York City, a job that brought with it an annual fee of nearly $1 million. In addition to its other big clients, the firm numbered the General Electric Company, whose audit required 429 employees in 38 different offices.
In 1978 Peat Marwick formed Peat Marwick International to oversee the firm’s activities outside the United States. With this change, the company set up a multi-national umbrella partnership of different firms in locations around the world. By doing this, Peat Marwick hoped to prepare itself for further globalization of the world economy and financial markets by combining a single firm image with well-respected and established local accounting organizations.
In 1979 Peat Marwick reported record revenues from its worldwide operations, which yielded $673.8 million in revenues over a twelve-month period, an increase of 15 percent from the previous year. As Peat Marwick entered the 1980s with this strong financial performance behind it, the company began to face a maturing market for its services and growing competition from the other Big Eight firms. In addition, under pressure from the federal government, the accounting industry was forced to abandon its self-enforced prohibition on advertising. This resulted in a far more hotly contested market for accounting services.
In 1981 the company moved to counter this competition by automating the audit process. As a first step in this process, Peat Marwick developed a program called SeaCas, an abbreviation for Systems Evaluation Approach-Computerized Audit Support. Three years later, the company switched to the Apple Macintosh for all its future computer applications. Also in 1984, Peat Marwick purchased another accounting firm, W. O Daley & Company, based in Orlando, Florida. With this move, the company added eight new partners to its worldwide tally of 1,284.
Two years later the company made a much larger alliance when it agreed to merge with Klynveld Main Goerdeler (KMG), a Dutch accounting firm. Combined, the two firms made up the world’s largest accounting firm. In its new configuration, Peat Marwick enhanced its ability to attract big U.S. companies with multinational operations as audit clients. After approval by Peat Marwick’s 2,733 partners and KMG’s 2,827 partners, the joined companies were to be known as Klynveld Peat Marwick Goerdeler, or KPMG, and were to be headquartered in Amsterdam. In September, 1986, Peat Marwick announced that it had opened negotiations to buy a public relations company and a consulting business, both with ties to the high-tech industry. In the wake of its proposed merger with KMG, this move was seen as a bid by the company to enhance its profile in the consulting field.
On January 1, 1987, the merger between Peat Marwick and KMG was officially completed, capping the largest merger in the history of the accounting business. The new firm instantly inherited worldwide revenues of $2.7 billion, with $1.7 billion contributed by Peat Marwick. In the United States, the operations of both KMG, with 79 U.S. offices, and Peat Marwick, with 91, were combined into one organization, which was to be known as Peat Marwick. This company would have duplicate organizations’in 50 cities, and some cutbacks were anticipated, although all partners were given a three-year guarantee of employment.
As the 1980s came to an end, the accounting business once again found itself in a period of transition. During the previous decade, booming business conditions had produced brisk growth for accounting firms, and Peat Marwick had expanded rapidly along with the rest of the industry. By the end of the decade, the firm’s client base had started to shrink as a result of changes in the financial world, such as the collapse of the savings and loan industry. Peat Marwick found itself the object of a sweeping inquiry into its audits of savings institutions by the Office of Thrift Supervision as a result of the firm’s involvement with the San Francisco Savings and Loan Association. In addition, the wave of bankruptcies that followed the frenzy for mergers and leveraged buyouts in the 1980s resulted in a reduction in need for accounting services, and also generated a large number of lawsuits for public accounting firms as a result of their participation in these activities.
These factors combined to flatten KPMG’s revenues in 1988 and 1989. In late 1990 the partnership elected a new chief executive, and KPMG began to implement changes to improve its profitability. In February, 1991, the company announced that 265 partners, or one in seven, would be removed from the firm in a streamlining effort. KPMG predicted that severance costs would amount to $52 million. Despite this drain on U.S. earnings, the company’s worldwide returns remained strong, as it posted annual revenues of $6 billion.
In March, 1992, Peat Marwick began to reorganize its operations under the aegis of a Future Directions Committee. Relying on input from the company’s Client Service Measurement Process, a survey of customer satisfaction inaugurated in 1989, the firm chose six lines of business: financial services; government; health care and life sciences; information and communications; manufacturing, retailing, and distribution; and special markets and designated services. In addition, Peat Marwick divided the country into ten separate geographical practice areas. The company then organized accountants, tax specialists, and consultants into industry-specific teams. Within this frame-work, Peat Marwick sought to develop specialists with certain areas of expertise who would entice new clients and bring high-paying tax and consulting jobs.
In September, 1993, as growth in the company’s targeted industries remained sluggish, Peat Marwick launched an advertising campaign for the first time. Focusing on the company’s international stature, the ads urged companies to “go global—but not without a map.” Whether or not this campaign significantly enhanced Peat Marwick’s American business, KPMG Worldwide appeared to be solidly entrenched in the top ranks of its industry, backed by a long history and a broad array of operations worldwide as it moved into the mid-1990s.
KPMG Peat Marwick (United States).
Andrews, Frederick, Wall Street Journal, “Peat Marwick Is the First Big CPA Firm to Submit to ’Quality Review’ by Peers,” June 17, 1974; “Fraud Trial of Peat Marwick Attracts Anxious Attention of Other Accountants,” October 29, 1974; “Two Auditors Are Convicted of Stock Fraud,” November 15, 1974.
Berton, Lee, “Peat Marwick and KMG Main Agree to Merge,” Wall Street Journal, September 4, 1986.
Cowan, Alison Leigh, “Regulators Investigate Peat on Its Auditing of S.&L.’s,” New York Times, May 23, 1991.
Minard, Lawrence and Brian McGlynn, “The U.S.’ Newest Glamour Job,” Forbes, September 1, 1977.
Stodghill, Ron, “Who Says Accountants Can’t Jump?,” Business Week, October 26, 1992.
Weiss, Stuart, “Peat Marwick Merges Its Way to the Top,” Business Week, September 15, 1986.