The FT reported this last night:
KPMG auditors misled regulators during inspections of their work on the audits of outsourcers Carillion and Regenersis, the accounting firm's UK boss said.
The Financial Reporting Council accused the Big Four firm and six of its former auditors of forging documents and misleading its inspectors as the UK accounting watchdog opened its case before an industry tribunal on Monday.
If true, and it would seem that KPMG is itself not challenging these claims although former employees are, then this is an admission of gross misconduct. Fabricating evidence after an event is hard to pass off as anything but fraudulent. No doubt the Tribunal hearing this issue will seek to determine whether this happened, but as noted KPMG is not defending the claim.
The real question this raises is what does this mean for a firm that was, for the sake of the record, forty years ago my employer? My suggestion is that the claim, so often made, that there were just ‘bad apples' in this firm and occasional lapses of quality is ceasing to make any sense now. KPMG has a long list of failings, and is at present not taking government contracts because of doubts about its ethics.
That last point is key. An audit firm is only as good as its ethics. The quality of its opinion making is all that matters, and ethical objectivity is key to that. If KPMG cannot be believed, and I cannot be alone in no longer believing it can be, then there is nothing left for it to do.
That is, I think, the point that has been reached now by KPMG. This firm has failed. No objective regulator could, in my opinion, any longer think it a fit and proper organisation to undertake audits. In that case its licence should be revoked.
Why isn't that happening? Only, I suggest, because everyone knows that when four becomes three the audit market ceases to exist, even if it is the smallest that might be failing.
But if that market has failed - and I think that apparent - then to pretend otherwise is to undermine everything about the audit process, which either matters, in which case action is needed, or it does not, when the requirement to audit should be abandoned.
I know of no one suggesting that the audit requirement should end.
In that case we need stronger audit, and only fundamental, state driven reform can supply that. This month the government is meant to publish its plans for audit reform after a major consultation process on the issue. I suspect they will fall way short of what is required. The result will be that capitalism will be in crisis, because without proper audit it ceases to operate as a functioning market and simply becomes a short term exploitative free for all.
With KPMG no longer fit for purpose, as its ban from government contracting already proves, the government has to act, unless it does not believe in functioning markets, of course. And one has to wonder whether that is the case now.
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I have long thought it overdue to place ‘white collar crime’ (fraud, for the most part) on a sentencing par with robbery. If you steal £10 million in an armoured van heist, expect twenty years plus in a pretty nasty place. Can’t see any reason for the difference! We would be amazed at the change in corporate behaviour.
And many here might agree with you, however, while those engaged in what we call robbery are often of a class where they’ll be unlikely to be part of the Old Boy clique which runs Britain, fraudsters often are and as such will be protected rather than punished. This clique appears to form around several of our most celebrated public schools. The first step in ending such behaviour then would be to close down these establishments. I gather Corbyn had this in mind, a major reason I voted for him.
Capitalism IS in crisis – I prefer to use the present tense – it seems we learnt nothing from Enron.
And as you say, the worst thing is that Government does nothing. It’s no good thinking that the market will punish KPMG because of its low standards when the market obviously finds those low standards useful.
So often it the is the cover up rather than the original “crime” that is the real killer. Once upon a time such a finding would have out a firm out of business. Forgery and deception of the regulator would have meant that no other Company Board would reappoint them. Now? I doubt it – KPMG is “no big to fail, too big to jail”.
Banking and audit are different businesses/organisations but there may be some lessons that Audit might learn…
First, very large banks have to hold extra capital – ie. being very big is costly. Can we do similar for Auditors to cut their size?
Second, “bonus clawbacks” for anyone in any moderately senior position should be the rule.
Third, we need to revisit the meaning of “partnership”. These days it is all LLPs – Limited Liability Partnerships and often “partners” are not even partners. “Back in the day” when I started work the firm I worked for had just gone public but all the bosses still had a “partnership mindset” – ie. it was THEIR money on the line and the were jolly well going to make sure that us youngsters were not going to lose it AND they were very choosy about appointing fellow partners as any one partner could sink the whole ship. We need partners to have more skin in the game.
Much to agree with
Auditors are not too big to fail, but perhaps they are too small to audit the monoliths of global capital. I doubt that a true “partnership mindest” would crack that nut; although it may lead auditors to reflect on whether they are really corporately ‘up to the task’. Indeed in the 21st century is any one sovereign state capable of managing the task; ony perhaps the US, and only ‘perhaps’?
This of course begs another question. How do you audit the monoliths of global capital, which owe no obligation to any state and may pass the parcel of location at both their convenience and leisure; with pockets deep enough to access to the ‘crème de la crème’ of legal, tax and accounting expertise, anywhere in the world; out of their small change.
Very good question
Half my academic life is now looking at that type of question
A new partner in a big 4 has to personally invest at least 250k in partnership capital. This goes up if the partner becomes more senior. How much more “skin” would you suggest?
They warn £750k per annum, quite often
That’s one hell of a return
I’d argue that the Big
EightSixFiveFour have grown too large, creating an oligopoly works against the public interest. They needs to be broken up to encourage greater competition, and audit work needs heavier and more effective regulation.Just as our political system will fall apart if politicians can routinely lie with no consequences, the economic system will fall apart if businesses can routinely make up their numbers with no consequences.
Agreed
The concentration of companies into ever-larger groups brought about a parallel concentration of audit work into what became the Big 4. KPMG should remember that it used to be The Big 5 until Arthur Andersen was wound up for audit failures and there’s no reason to imagine it couldn’t happen again. In the worlds of both commerce/industry and audit this has reduced competition and diluted the effectiveness of their markets, just as Adam Smith warned.
In addition, the adoption of Mark to Market concepts into Accounting Standards introduced elements of estimation into the valuation of assets and liabilities (although prior to that good auditing practice would always consider the adequacy of debt provisioning, asset valuations, replacement costs and other write-downs). Adoption of MTM led directly the collapse of both Enron and auditors Arthur Andersen. In the mid/late 1990s, I worked on the corporate turnaround of the German subsidiary of a UK group and was involved in the post-audit adjustments to the German company’s accounts for the group consolidated accounts in order to reflect future profits from ongoing contracts. The German company’s financial controller was horrified that anticipation of profits was acceptable in UK company accounts as it was strengst verboten under German company law at that time.
MTM has been a disaster