As the Guardian reports this morning:
Britain's accounting regulator has fined KPMG a record £21m for audits of Carillion, the builder that imploded in 2018 and prompted a root and branch review of auditing standards.
“The number, range, and seriousness of the deficiencies in the audits of Carillion during the period leading up to its failure was exceptional and undermined that credibility and the public trust in audit,” said Elizabeth Barrett, executive counsel for the Financial Reporting Council (FRC).
”This is reflected in the financial sanction imposed on KPMG LLP, the highest ever imposed by the FRC.”
I take no pleasure in reporting this. A direct predecessor of KPMG trained me as a chartered accountant. I left in 1983.
How do I feel now about the firm? I am bemused that they still have a licence to operate.
All the Big 4 firms of accountants have proved their ability to do some pretty shocking audit work in recent years, but none more so than KPMG, whose track record is appalling. The point has now been reached where it has to be asked whether that failing is systemic. The idea of there being a few bad apples should have been consigned to history long ago.
KPMG will, however, be allowed to survive. Fines will continue to be a cost for them of doing business. There are numerous reasons.
First, no one believes that there can be an audit market with only three major audit firms, so KPMG will be allowed to carry on.
Second, there remains a belief that there should be an audit market rather than a state regulated auditor (an expanded National Audit Office) because of the neoliberal view that markets and market operators always know best even when it is glaringly obvious that this is untrue.
Third, much of cause of recent audit failure has been the result of the deliberate ambiguity in both accounting and auditing rules. Accounting rules are decidedly flexible to permit audit clients to adopt a very wide range of accounting positions that might best show their financial activities to advantage. Auditors are legally only required to confirm that these rules have been complied with, which is what the term ‘true and fair' is now deemed to mean. This is a conspiracy designed to result in information of dubious quality that is nonetheless deemed acceptable. Of course failures will happen when such abusive systems are in operation.
The government seems to have no desire to take on these multiple abuses, and from my experience of talking to them on these issues in recent years, lacks the technical understanding to even comprehend the issues that now need to be addressed.
And so the failures will continue because no one wants to address the core problem, which is that U.K. accounting standards result in crap data that does not meet the needs of any stakeholder of any company and auditors are more than willing to play along with this as most of the time it pays them very well to do so.
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Thank you and well said, Richard.
Having come across them and the wannabes who want to make the Big 4 the Big 5 or so, including a few unhappy months at one of the wannabes, I share your sentiments. I worked with them as a banker and on regulatory and trade policy and was disgusted.
Richard states: “How do I feel now about the firm? I am bemused that they still have a licence to operate.”
KPMG, in particular, is well connected. Many alumni work at financial institutions and their regulators. Two Peats, pere et fils, worked as the late queen’s keeper of the privy purse. The FCA’s John Griffith-Jones is another. That may part explain Richard’s bemusement.
Isn’t the fundamental problem that auditors have forgotten that they are employed to ensure the shareholders are given a fair basis to value their assets. Instead, due to the bonus systems in remuneration, they are employed by directors to enhance their claims for bonuses. Perhaps the bonus system should be outlawed, it does appear to reduce the productivity of companies…
I seem to recall that is a widespread concern with UK economy….
Thank you, Mark.
In addition and this applies to regulators and client journalists, too, many audit firm staff may want to join the firms they are working at.
Had bad experiences of large audit firms with my favourite being told a point needed to be referred to their charity specialist (charged at a higher rate and turned out to be one of the team already present)
I have tended to select firms outside the top 4/5 as you tend to get a better service with more time with a partner as opposed to a manager.
Not convinced that NAO would be much better though as have had experience of them too (granted they may have improved since)
Not excusing KPMG but if execs are determined then no matter what controls are in place there will always be an opportunity to game them in a manner that isn’t readily identifiable. Still remember the look on internal auditor when I explained to him how easy it was to get round his much loved stock control system (and still get staff discount).
Ultimately I think crux of issue is really manner in which executives are remunerated with emphasis on short term profits rather than longer term rewards (e.g. bonuses not on contracts secured but on contracts fulfilled)
With NEDs being recruited from same pool as execs then this unlikely to change in the short term
‘The government seems to have no desire to take on these multiple abuses, and from my experience of talking to them on these issues in recent years, lacks the technical understanding to even comprehend the issues that now need to be addressed’
As with major infrastructure procurement, from HS2 down, and across many other areas the Civil Service has lost its ability, capacity and capability to perform the role of ‘intelligent client’. Indeed we find examples of this function being specifically outsourced to consultancies. In the process responsibility at the centre seems to evaporate.
Bonuses in accounting is just the same as bonuses in banking – all sense of morality and related self-control is lost – such is the dark power of money.
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