The South Australian Government won’t ban KPMG from bidding for lucrative contracts.
But it’s hard to tell where KPMG employees start and SA government employees ends. The two entities are so firmly enmeshed.
KPMG Australia is engulfed in a major corporate crisis over the misuse of confidential client information and the severe maltreatment of an internal whistleblower. There have been leadership resignations, the sacking of senior executives, and intense parliamentary scrutiny.
There are strong rumours that KPMG Australia may cut loose 1000 employees.
The economy relies especially heavily on the exactitude and probity of the ‘Big Four’ – Deloitte, PwC, EY, and KPMG – as they are the only institutions big enough to audit multinational corporations and government agencies.
The 2011–12 ASIC audit inspection report found that in 18 per cent of sampled key audit areas, Deloitte, EY, KPMG and PwC had failed to obtain “reasonable assurance” that the financial report as a whole was accurate and free of misstatements.
By the time ASIC released its Audit inspection program report for 2016–17, that number had blown out to 25 per cent.
At the same time, large accounting firms were scaling down their auditing functions to focus more on their profitable advisory-based consultancies, such as those services supplied by the SA Government.
Across Australia, professional services are the fastest growth areas in accounting. The top 100 companies posted a total revenue of $11.25 billion in the 2019 financial year. That’s up ten per cent on the previous year.
The Big Four accounting firms accounted for almost 70 per cent or $7.8 billion of that revenue, thanks to the rivers of cash rolling in from their professional service divisions.
Finance journalist Richard Brooks wrote in his book, Bean Counters: The triumph of the accountants and how they broke capitalism, states the main focus of these giant accounting firms was not audits but on providing professional services such as financial and IT systems advice.
“It’s not really any longer an accountancy profession,” Brooks wrote. “It’s more a consultancy profession, or it would call itself professional services, with auditing just one of its business lines, and a minority one at that.”
In Adelaide, the sheer number of current and past tenders awarded to KPMG, makes one wonder whether KMPG works for the state government or vice a versa.
A number of these accounting firms are paid by the state government to provide financial advice and research. Yet much of this research is couched in terms the government of the day wants to hear.
Adelaide’s media is littered with reports of highly variable worth by accountancy firms. Most of these reports are PR and marketing exercises.
There is scant mention of exposing bias, fraud and tax evasion and the risks these pose to the economy. In fact, it’s hard to ascertain that they were produced by companies dedicated to accounting.
‘Eye of the tiger’
Let’s travel back in time to 1989. At a large hotel in Dallas, Texas, Jim Edwards, the new head of Arthur Andersen’s audit division, walked on stage to the sound of the Survivor’s song, ‘Eye of the Tiger’ blaring over the PA – followed by a tethered snarling, live tiger.
Edwards told his employees they, “require the eyes of a tiger, eyes that seize opportunities, eyes that are focused on the kill.”
Arthur Andersen was one of greatest (and most conservative) accounting firms in the world. But in the 1980s, it’s corporate culture changed. It morphed from a wise old owl in to a profit-hungry carnivore.
It shackled its fortunes to Enron, a high-flying energy trading company, which undervalued debt while reporting absurdly high profits.
Enron’s fall in 2001 took its primary auditing company, Arthur Andersen, with it. It was woefully negligent of its client’s true financial position.
Arthur Andersen was found guilty of obstruction of justice, as it had shredded Enron audit documents. Why didn’t the auditors hit the alarm button?
As the American writer Upton Sinclair wrote in the 1930s, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”
In the lead-up to the GFC in 2008, Lehman Brothers bank had borrowed eye-watering amounts of money to fund its investments in housing-related assets. When the American property market crashed, so did Lehman.
The bank had allegedly removed tens of billions of dollars of fixed income securities from its balance sheet to hide its dire financial situation.
EY had audited Lehman Brothers from 2001 until the bank’s bankruptcy in 2008. It had consistently given the ‘thumbs up’. EY’s audits were useless.
I do not suggest Australian accounting firms are conducting themselves like Arthur Andersen and EY, in those two cases. But when auditors and professional services contractors become ‘defacto employees’ and their commercial interests are inimical, objectivity and probity may suffer.
The parliamentary inquiry will listen to a number of solutions including introducing legislation to prevent an audit firm offering auditing and consulting services to the same client, imposing a limit on the number of years an auditor can audit a company, and the creation of a separate regulator.
It’s a matter of trust.
KPMG Australia unethical – fined by US watchdog
I wrote this back in September 2021. If you think recruiters and are unethical? Checkout this mob.
The Australian arm of one of the world’s biggest accounting firms, KPMG, was fined $613,000 by the US accounting watchdog, after a review found widespread cheating by staff on training tests over a four-year period.
The Public Company Accounting Oversight Board (PCAOB) revealed that more than 1,100 staff –including 250 auditors –at KPMG’s Australian offices shared answers to pass mandatory training courses on professional independence, auditing and accounting, including tests to maintain accounting licences.
Hang on. The auditors cheated? I’m feeling a bit Enron; a bit Arthur Andersen.
The fine comes amid serious concerns about the quality of Australian auditing standards and the independence of the “Big 4” accounting groups, which includes KPMG.
“From 2016 until early 2020, KPMG Australia violated PCAOB rules and quality control standards related to integrity and personnel management by failing to establish appropriate policies and procedures for administering and monitoring training tests, including tests designed to help the firm’s audit professionals satisfy the requirements for maintaining their accounting licenses,” the PCAOB ruling says.
In total, about 12 per cent of KPMG’s Australian staff members were involved in sharing answers to help colleagues pass the tests.
Two partners have ‘retired’ from the firm following the cheating scandal, while formal warnings were issued to another 16 partners over their involvement in the answer sharing.