Friday, September 30, 2005

KPMG Just Keeps Getting into Trouble

I read the Financial Times today as I took the subway into the office, and I was surprised to see that KPMG is again in trouble with the goverment. I feel bad for the folks at KPMG. It's a strong firm that does great work. The vast majority of the staff at KPMG is extremely talented. These continued problems must be tough on the average associate there.

Well, KPMG's latest travails involve the auditors. According to the Financial Times, the Public Company Accounting Oversight Board (PCAOB) has taken issue with 76 of KPMG's public company audits, 19 of which have been flagged as extremely problematic. Few details have been released by the US government or KPMG.

What really drives me nuts about the continued legal problems of KPMG is the impact it has on employees and partners unrelated to the audits being investigated. Of the thousands of employees at KPMG, only a small fraction are involved in the work being investigated. But, the damage to KPMG's reputation affects all of them. The same thing happened at Andersen, where the impropriety of a only a few brought down the entire firm. Such bold investigation and prosecution is inappropriate in the accounting industry at present. The industry is far too fragile.

Fragile? I know; how can I call four firms with a combined market cap of over $60 billion fragile?

Think about it - the demise of Andersen led to an increased consolidation in the accounting industry, as the vast majority of Andersen's employees and clients wound up at the remaining Big Four. Concerns arose quickly about the virtual monopoly the Big Four has in the public company accounting space. Fears intensified as KPMG's indictment seemed inches away (for more, check out http://www.big4.com/newsletter/DowntoBig3.htm). If the Big Four were to become the Big Three, the resultant lack of choices for public companies would make auditor indpendence even harder to enforce.

The aggressive pursuit and prosecution of the Big Four needs to change. I am not suggesting that the Big Four be given too much lattitude in the way they conduct audits. Of course, that would be absurd. The protection of shareholders is paramount. But, the government needs to change its approach. The overzealous pursuit of Big Four impropriety could lead to what public company CFOs fear most - a Big Three.

Prior to this ordeal, KPMG settled with the US government - to the tune of $456 million - to avoid prosecution for abusive tax shelters that the firm sold to high net worth individuals from 1996 to 2002. KPMG is on a "probation" of sorts for 18 months while an independent overseer validates that the firm has changed its practices.

Any thougts on this?

Tom Johansmeyer

7 comments:

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Ryan said...

Why should KPMG be given more leeway? The fear that the Big Four will become the Big Three is almost negligible compared to the fear that we can no longer trust the work that our firms are putting out.

In spite of all the mess that has occurred because of the various scandals in recent years, firms like KPMG continue to try and find ways to worm their way through the system. Indeed, I wouldn't be surprised to find that E&Y, PwC, and Deloitte are doing the same things.

Big companies like these thrive on corruption. Given the opportunity any exploitable corruption like this will grow until it weakens the company as a whole. I say do not slacken the regulations against these firms. If anything, these regulations should be made more severe, otherwise we will continue to have incidents like the current one with KPMG, and the reputation of accounting as a whole will be thrown aside and regarded as unreliable.

Seriously, what kind of punishment is three years "probation" and a $1,000,000 fine in relation to the atrocities KPMG has committed?

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Anonymous said...

KPMG is our company's auditor in Holland. We also had mixed experiences with this firm. I definitely cannot claim that the service is unprofessional since it is part of the big 4 for a reason. However, we do notice that -and perhaps this is derived from their big 4 status- it has serious trouble with communicating with firms as equals.

One of the earliest experiences I had with KPMG was not as an accountant but rather as an accountancy graduate. Looking for a job in Holland, I sent one of their recruiters called Wendy van Voskuilen an email. Her response was so cocky and arrogant that I simply dropped them from my list of desired employers. Absolutely terrible.

Cocky and arrogant is also the way that I perceive them now in the capacity of our company’s auditors. So what’s wrong with being cocky and arrogant? For starters, it makes communication very difficult and intimidating and we all know that excellent communication is at the basis of good work. Without proper communication, mistakes happen and these mistakes are at the core of ‘problematic audits.’

Peter

troars said...

KPMG seems to be getting bloated, a good friend works for them in NYC and recently a large contingent from the company went upstate NY for fun and trophy hunting. Guns and booze on time off in today's climate is very poor judgement, we think.