Can KPMG Recover from its Recent Scandals?
The past years have not been easy for KPMG. The firm, a giant of the auditing industry alongside the “Big Four” accounting firms that include EY, PwC, and Deloitte, is facing multiple accusations of negligence, fraud, and conflicts of interest stretching back years. The most recent revelation comes from the UK’s Financial Reporting Council (FRC), which accuses a KPMG senior partner of lying in an investigation into the scandal over Silentnight’s insolvency.
The FRC stated that the partner had used an “untruthful defence” in a case involving the acquisition of Silentnight by equity firm HIG Capital in 2011. Following the revelation that KPMG had agitated for putting Silentnight into insolvency – which allowed HIG to acquire the firm “without the burden of its £100m pension scheme” – KPMG was fined £13 million on top of having to pay court costs. In the end, KPMG was found guilty of misconduct and conflicts of interest by having acted in the interests of HIG, which were “diametrically opposed” to those of its client Silentnight.
Silentnight is considered a new low point for the industry titan that pulled in $29.22 billion in revenue in 2020 and employed 227,000 people worldwide. KPMG was shown to have worked actively against a client’s vital interests, forced an outcome that might have turned out differently if the company’s agents had maintained their distance, and even refused to cooperate with regulators. Worse, the quagmire is a further dent on KPMG’s image, and follows hot on the heels of a plethora of recent equally headline-grabbing, accusations of misconduct.
Indeed, the last time KPMG came under fire for major conflicts of interest and negligence –four years ago but still fresh in the public’s mind thanks to a recently published book by Wall Street Journal reporters that broke the story – the firm was accused of participating in the series of events that led to the collapse of a multi-billion-dollar private equity fund, the Dubai-based Abraaj Group fund. Causing the loss of hundreds of millions of dollars, the scandal began in 2018 when Abraaj hired KPMG’s Middle East affiliate KPMG Lower Gulf (LG) to end allegations of mismanaging of its $1 billion healthcare fund. Soon thereafter, KPMG duly reported that the audit had not found evidence of wrongdoing.
Investors, however, expressed concerns that the KPMG review was rushed and superficial, and rightly so: in the wake of the would-be exoneration, a senior Abraaj executive noticed a number of concerning conflicts of interest, specifically that the son of an executive at KPMG LG worked at the fund, while another senior leader had worked at both KPMG and Abraaj. Worse still, KPMG was also auditing companies in which Abraaj held stakes.
With such intimate connections across the two enterprises, one may be more than tempted to believe that KPMG’s auditors closed both eyes to the blatant misappropriations allegedly going on at the fund. While Abraaj maintained a façade of successful investments, U.S. prosecutors argued that founder Arif Naqvi used the fund as a personal slush fund to finance his lavish lifestyle, siphoning off hundreds of millions in the process. To hide this, Naqvi had millions pumped from one account to another to fill the balance sheet gaps left behind by these illegal withdrawals. This happened right under KPMG’s nose, which subsequently gave the fund a clean bill of health.
The ripples caused by the fund’s unraveling and KPMG’s role in it are being felt to this very day, having birthed debates among policymakers on how to curb the Big Four’s power. It’s a pertinent debate, given that KPMG has also been in the hot seat for failing to detect false accounting in Hong Kong’s China Forestry as well as negligence in Malaysia’s monstrous 1MDB fund scandal. Add EY’s failings in the collapse of Germany’s Wirecard into the mix, and it becomes apparent that all these cases have the same issues in common pointing to systemic problems generalized across the Big Four.
In the UK, the FRC has long been pushing for greater powers to be able to limit the amount of large listed companies that can be audited by the Big Four in an attempt to boost competition in the auditing industry. London is due to publish a set of new audit reforms by the end of the year, including new stipulations that would make company directors directly and personally responsible for the accuracy of a firm’s financial statements.
While these news policies would be a big step towards breaking the Big Four’s monopoly, another possibly more urgent issue needs to be addressed as well. Many of the recent accounting scandals are the result of a blurring between auditing and consultancy activities, as was evidenced clearly in the Silentnight case. The reason for this is the fact that auditing firms have expanded beyond their traditional areas of expertise to include active business consulting as well – the main factor behind conflicts of interests and a weakness that invites negligence.
KPMG recently sold the consulting division involved in Silentnight, ironically to HIG Capital, the group that acquired the company after KPMG’s machinations. The move was partially a response to the FRC’s demand that the Big Four formally spin-off their audit and consulting businesses by 2024. Nonetheless, whether this is enough for KPMG to recover its former shine remains to be seen. After all, the titan of the auditing industry has itself provided enough ammunition against it through its string of actions bordering on malicious incompetence. If the auditor wants a chance at a new start, KPMG needs to transform itself, and fast.