Finance: The accounts are sound, so what next?

Following the failed merger with Ernst & Young, why are KPMG executives looking so happy? Roger Trapp suggests a reason

Given their firm's strong position in auditing, the people who run the accountancy firm KPMG must be used to dealing with bad news. So when presenting their annual report, they were able to shrug off the failed merger with rival firm Ernst & Young.

Certainly, their counterparts at Price Waterhouse and Coopers & Lybrand, who announced their intended nuptials a few weeks ahead of KPMG and Ernst & Young last year, claim not to have been shocked - on the grounds that the whole episode was an attempt to scupper their proposals - though Colin Sharman, KPMG's UK senior partner, and Mike Rake, chief operating officer, insist that if they had really been intent on spoiling, they would have kept up the pretence for much longer.

So, if it was not all a ruse, why were Mr Sharman and Mr Rake looking so sanguine in February?

It may have to do with the firm's annual report and accounts. Mr Rake described it as a "tremendous year", with strong revenue growth feeding through into a 24 per cent rise in profits per partner, to pounds 256,000.

But he also claimed that the merger process had taught the firm much about what it had to do. And, to judge by statements made by him and Mr Sharman - revealed to have earned a cool pounds 900,000 last year - that work has already begun.

Pointing out that the reasons for the merger - investment and global spread - still existed, Mr Sharman said that the firm had devised a two- pronged strategy for the all-important US market move up from the lower reaches of the Big Six to the top. The firm would continue its growth rate of more than 20 per cent a year and look at appropriate combinations, chiefly with specialist consulting operations.

The US market has changed since the E&Y proposals were announced. In particular, the once mighty Arthur Andersen organisation is locked in civil war, and the prospect of the accounting unit emerging with a significant sum to spend on regaining its once exalted position is clearly leading Mr Sharman to consider taking swift action.

It appears that he has won support for world-wide integration. Even Arthur Andersen, in the midst of its rancorous dispute with Andersen Consulting, is suggesting that it is not a single firm after all, but a combination of some 130 national firms. Mr Sharman has seized on this as evidence that KPMG has been unjustly singled out for its well-known federal structure.

Detailed proposals will be presented to the firm's executive committee this month. But Mr Sharman sees three elements in the plan for global integration: the management structure to be "more powerfully managed from the centre"; a common economic interest among member firms; and provision of the means for achieving that.

The investment issue - chiefly a result of the need to spend large sums on technology in emerging economies - could be dealt with by entering the debt markets. Pointing out that profit sharing world-wide is technically and sometimes legally difficult, Mr Sharman says that the key is to create a shared economic interest. This is the sort of entity that was being envisaged under the merger with E&Y, and PW and Coopers may be striving for something similar.

But, though Mr Sharman insists that the consulting arm of KPMG is keen to remain part of an integrated organisation, other firms are moving in the opposite direction. As well as Andersen, Deloitte & Touche, too, has recently reorganised its consulting business globally and, while maintaining the link with the accountants, has set up a separate profit pool, on the basis that accounting and consultancy are different sorts of business.

David Maister, the author and consultant, suggests that the multidisciplinary approach may be useful in building up a practice; once the organisation matures, mergers of this type are "managerially and politically very complex", and initial scepticism about mergers is generally well-placed.

Mr Sharman will hardly find Mr Maister's message consoling. The flotation of other consulting firms means that though partners deny it, the consulting part of Andersen could follow what seems to be the inevitable split with its sister organisation by going public - thereby making the partners very wealthy, and the business even more of a force to be reckoned with.