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End this conflict of Interest. Break up KPMG et al

End this conflict of Interest. Break up KPMG et al

When Arthur Andersen failed in 2002, the Big Five audit practices become the Big Four – KPMG, PwC, Ernst & Young and Deloitte. But these audit practices also had consultancy offerings, in audit parlance, “professional services” arms. Strict rules apply to conflicts of interest, and for very sound reasons. As a consequence, during 2002 it resulted in consultancy splitting from audit.

Last week the European Commissioner issued extensively preluded, discussed and debated plans to break up the Big Four forcing them to rename and restructure parts of their business and split consulting from audit.

Hoping against hope to avoid extra regulation or the worst scenario, break up, today’s auditors have been super keen to illustrate compliance and avoid conflicts of interest. Take KPMG’s outsourcing support services for instance, they correctly require extensive process, procedures, multiple sign-offs and documentation to “prove” that from the earliest opportunity KPMG validated that there was no conflict with the audit arm and that huge governance overhead continues through the life of any assignment. Despite this governance “departures from best practice” still occur, for example Peter Strömberg, Director and Head of the Supervisory Board of Public Accountants, last week reprimanded KPMG for their failure to report that KPMG Sweden had advised on a valuation without informing their Norwegian counterparts who acted as auditors.

But in practice it is always far easier and far cheaper to support an existing soft target audit client, for extending support into by using the professional services arm.

KPMG’s joint chairman of Europe, John Griffiths-Jones as a result of the new Brussels plan’s is on record as lamenting this proposed restriction. He is quoted as saying “these proposals will deny auditors access to expertise in our own advisory arm. Our ability to do good audits is absolutely, critically dependent on having total access to the advisory capabilities within our firm”. Too late Mr Griffiths-Jones, perhaps you should know your corporate history a bit better. Perhaps you should wake up to the fact that the world requires more independence and transparency and less cosy cliques that have let down the reputation of auditors and their professional service arms in the past.

It is less than a decade ago that this very same scenario was played out within KPMG, and its competitors, when the breakout of professional services was universally mandated. Originally for example, PwC wanted to rid itself of it consulting arm and so spawned a near still-born “Monday” in 2002, which was promptly given a complete set of organ transplants and once weaned entered the waiting arms of IBM Global services. Andersen Consulting had split from Arthur Andersen in 2001 to become Accenture. In 2001 Ernst Young sold its consultancy arm to Capgemini. Deloitte did not divest but has variously acquired parts of Arthur Andersen and BearingPoint (KPMG) in 2001 and 2009 respectively. But back to Mr Griffiths-Jones – he conveniently forgets that in August 2002, Atos Origin acquired KPMG Consulting in the UK and The Netherlands. The rest of KPMG’s geographies went on to become BearingPoint.

An aside, but let’s just stop a second and digest the historic UK irony here. KPMG Consulting, who advised end-clients on how to outsource, was spun off as a division because it was a conflict of interest to the parent auditor KPMG. It was sold to Atos Origin, who interestingly enough was and still is an outsourcing service provider. Clearly no conflict there then!

In less than a decade Mr Griffiths-Jones’ company has completely rebuilt this division including making multiple acquisitions and now he has the temerity to cry ‘foul’ that the EU Commission is like a lot of clients once again concerned about conflicts of interest!! We all know that corporate memories get shorter each generation, but this is “sham amnesia” at its best. KPMG undertook multiple acquisitions to catch up with the phenomenal organic growth of Deloittes in the outsourcing advisory area.

Have all the other Big Four also got KPMG’s selective amnesia over the reasons for jettisoning their professional services around ten years ago? Have they really forgotten the logic for their creation? Did they think the regulator would be less inclined to step in since the 2008’s crash? Were not auditors at the heart of this? Is it not the auditors collectively who failed to alert the world to the impending financial crisis?

KPMG and its competitors will of course fight to change the commissioner’s mind. And why wouldn’t they, as the Financial Times pointed out, the prize is huge and “the current tenure of a FTSE100 company’s auditor is (wait for it! …) … 48 years”. Nice work, if you can get it – so get it while you can.


Posted in Outsourcing Comments: 7 comments

 

7 Responses to End this conflict of Interest. Break up KPMG et al

  1. roger treborem says:

    Great column. How did the authorities allow this to resurface again. The conflict of interest is enormous and always has been.
    The scandal is using the audit practice as a channel for guaranteed business. An audit reveals insufficient security, governance and an immature risk management approach – here’s a quote. Such works are normally without competitive quotes and authorised by the CFO who should know better. I have seen a 14 month risk management review that took a further 12 months to implement in my previous employer, a now majority government owned bank. The cost … £4.65m of fees!!! Did it help? The evidence is written in history – it was the corporate investment arm where the work was done, and it in turn did for us!
    Auditors account to nobody – at last I can support an EU lead initiative!

  2. Roger of Aldershot says:

    Whilst KPMG did pick up one or two decent outsourcing advisory staff when the acquired Equaterra, with its Morgan Chambers heritage, they and the others mentioned are not that good at resolving conflicts of interest.

    I have yet to find an auditor/ consultancy / deliverer of sourced services that can demonstrate solid walls between the different practices.

    Yes they can demonstrate the different hierarchies but not their actual practice.

    What led me to leave a leading management consultancy where I headed up the outsourcing consultancy practice was their entry into the provision of outsourced IT services – they perceived no clash of interests!!!

    Still, outside the public sector, there are not too many sourcing advisory or delivery contracts that will last the 43 years average for auditing.

    Auditing has “to hear” or “to listen” in its Latin roots.

    Perhaps if Burnt Oak and the government (via its probing of auditing practices long term relationships with their clients) and the EU keep up the pressure, the voices may not be in vain and structurally separate practices will emerge.

    Or even, perish the thought, that the internal relationships in such organisations are subjected to scrutiny by an external audit firm!!!!

  3. Karl Flinders says:

    I recently spoke to a contact of mine at a major IT service provider. I was talking to him about perceived conflicts of interest in relation to KPMG giving sourcing advice.

    He spoke about Equaterra’s annual report that looks at how good suppliers are in the eyes of their customers. This involves the suppliers sharing information about their customer engagements with Equaterra. It is a good piece of research.

    But my contact told me that he would think twice about sharing information now that Equaterra is part of KPMG. He says there are areas where they compete. For instance in the overall management of outsourcing contracts.

    What do people think? I would be surprised if KPMG used the intelligence to gain advantage. If it did it once its sourcing consultancy reputation would be seriously damaged.

  4. Stuart Crane says:

    It’s all very handy to blame auditors for the failing of companies, but what responsibility do you place on the directors of the companies to ensure their companies do not fail and to protect shareholder value?

    I have experience of directors of PLCs keeping information from audit teams, lying about potential litigations and settlements all to ensure there are no bad press days for their company “on their watch”.

    And if you are going to throw mud, perhaps look closer at PwC. By far the most aggressive of the big four in their stance on tax treatments, seemingly re-writing tax rules to suit their clients. And I also know of a household name PLC that asked its auditors to resign because they wanted to qualify the company’s annual audit report, only for PwC to take to take the role on and issue the report without any qualification.

    If you want well run companies, transparency and a stronger more stable economy, expect more from the extremely well remunerated directors charged with running our big companies, and don’t seek to weaken those tasked with policing the unethical.

  5. Les Hannell says:

    You are right conflicts of interests abound in advising audit clients. I used to work for one of the “offenders” you mention. We had to stop a project midway when an audit partner “discovered” that we were outsourcing the back office of a audit client on a sole source basis to a service provider that we also audit!
    By stopping the outsourcing project midway the client refused to pay. We lost £80K (net)the client went competitive and the original service provider lost the new bid. Happy families!!!!

  6. Nick says:

    Provocative! The interesting thing is who will buy KPMG’s consulting arm…..or for that matter the others………

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