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Schadenfreude: The Accountants and the Football Team

by John Taylor

It is a strange thing to draw a parallel between a major firm of accountants and the German football team.

When the German football team was eliminated from the World Cup nobody (obviously apart from German fans) seemed to sympathise or weep for their sad decline. In fact, fans from many countries seemed positively to revel in their misfortune. Both coach Joachim Low and star player Tony Kroos said that there had been a level of arrogance in the German camp and that this led to a complacent attitude that it would all turn out all right in the end.

Nobody cared, and the prevailing view seems to be – 'serves them right'.

So, we come to KPMG the major firm of accountants. They too are experiencing tough times and it's hard to find anyone who cares outside KPMG. So far, their troubles seem to consist of:

  • Being up to their necks in controversy as auditors of spectacularly failed construction giant Carillion – a position which is likely to involve them in embarrassing denials and much explanation in the UK
  • In the USA KPMG LLP, the New York-based U.S. partnership, is dealing with the indictment of former partners on charges they helped steal secret regulatory information
  • They are part of a major row following another failed audit – that of China Medical. There is now a high-profile legal contest over the production of Chinese audit working papers, an issue that has put Hong Kong and US regulators at loggerheads with China - and at one point threatened to leave US-listed Chinese firms unaudited and in danger of delisting. There may well now be proceedings on a contempt summons brought against 91 KPMG partners and former partners issued in November 2017 for refusal to comply with a Hong Kong High Court order to produce China Medical's audit working papers.
  • In Cape Town they have been involved in a case whereby they allegedly converted wedding expenses for the dreaded Gupta family into business expenses and there are whisperings of involvement in money laundering. The Independent Regulatory Board for Auditors (IRBA) in South Africa is investigating.
  • Again in South Africa the audit partners in charge of the audit of VBS bank failed to declare financial interests in the bank and the audit work has been questioned as the bank’s assets appear to be considerably lower than those in the financial statements signed off by KPMG
  • In the UK hundreds of current and former partners have been told they may face increased tax bills following a dispute between KPMG and HM Revenue and Customs over the eligibility of certain expenses for tax relief.

So how can all this be happening to one firm – is KPMG particularly bad? Do they employ nothing but inept and unethical accountants who sign off on anything providing they get paid? The answer, of course, is no. Each of the global accounting behemoths become embroiled at one time or another with some scandal or failure at some point somewhere in the world and this does not seem to detract from their ability to generate huge revenues.

The modern world of accountancy is a cutthroat business. There is constant pressure to reduce the audit fees and corresponding pressure to sell lucrative consultancy services, so nobody wants to annoy a client. Most auditors will move heaven and earth to avoid complicating accounts with audit report qualifications so upsetting the share price. This can lead to the cutting of corners, flexible interpretation of auditing and accounting standards and some cosy decision making between senior directors and audit partners who all hope that it will continue to be business as usual and that nothing will go horribly wrong to spoil the relationship and the smooth flow of money.

The problem KPMG faces is that if the brand becomes tainted they may start to haemorrhage clients – a position they have already reached in South Africa where all their government contracts have been withdrawn and they have been advised not to tender for any more. Their brand is a strong one, but it may still fail. For example, in the UK the outcome of the investigations into Carillion will, quite possibly, highlight poor auditing practice (although KPMG deny they performed poorly – well they would, wouldn't they?) which could lead to major clients deciding that they don't want their accounts signed off by KPMG as they have lost credibility.

Business commentators express little sympathy. They point to the perceived arrogance of the 'Big 4' accountancy firms, of which KPMG is one alongside PwC, Deloitte and Ernst, and the merry go round of major audits they share between them. They point to the way they dominate the standard setting bodies and their professional regulatory bodies so that, by and large, matters go their way. It has not been forgotten that, in the fall out from the 2007/8 banking crises the audit firms were never sanctioned and even made money in advisory fees and liquidations.

The 'Big 4' dominates the accountancy and auditing profession and scoop up huge amounts of government money in public sector contracts. They are enormous businesses – the declared income for KPMG worldwide for 2017 was US$ 26.4 BILLION – up from US$ 25.4bn the previous year. This is not a business which worries about minor skirmishes with regulators or governments around the world – it can afford to lose a few clients knowing that in a year or so other clients will turn up.

However, there is no such thing as an organisation being too big to fail and the EU has already indicated that it is gunning for the auditing monopoly of the 'Big 4'. Times are a'changin' and, in the highly competitive world of accountancy mega firms no weaknesses can be afforded. KPMG may well suffer for its failures and its apparent willingness to ignore or circumvent rules and it will, most likely, avoid the fate of Arthur Andersen – the global megafirm which failed following the massive frauds at Enron and Global Crossing.

The effect on KPMG may not be as traumatic as the effect of their ignominious exit was on the German football team but it will still hurt.

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