How KPMG and friends earn BIG bucks for failing the world

EDINBURGH — KPMG starred in the ultimate "nothing succeeds like failure" story, says The Guardian newspaper. "Although – more than any other firm – it had missed the devaluation of subprime mortgages that led to a world banking collapse, before long it was brought in by the European Central Bank for a 'major role in the asset quality review process' of most of the banks that now needed to be 'stress-tested'." How is it that KPMG and the other Big Four auditors have been getting away with enabling financial irregularities on an industrial scale? The Guardian has investigated, coming up with reasons why KPMG partners and their friends at Big Four firms continue to rake in juicy incomes and get away with facilitating financial scandals. This is part two of a series summarising the key findings. – Jackie Cameron.By Thulasizwe Sithole.Big Four accounting groups have been getting away with turning a blind eye to dodgy business behaviour while generating juicy fees for audits in what The Guardian newspaper calls the big global financial scandal nobody is talking about..In an in-depth feature, the newspaper highlights that KPMG, Ernst & Young, PwC and Deloitte:.___STEADY_PAYWALL___.Operate as a cartel, with no significant variation in pricing; andHave persuaded governments that they are too big to fail and must be protected.."The long reach of the bean counters extends into the heart of governments. In Britain, the big four's consultants counsel ministers and officials on everything from healthcare to nuclear power," writes Richard Brooks.."Although their advice is always labelled 'independent', it invariably suits a raft of corporate clients with direct interests in it. And, unsurprisingly, most of the consultants' prescriptions – such as marketisation of public services – entail yet more demand for their services in the years ahead," he continues.."Mix in the routine recruitment of senior public officials through a revolving door out of government, and the big four have become a solvent dissolving the boundary between public and private interests.".The major accountancy firms avoid the level of public scrutiny that their importance warrants, points out Brooks for The Guardian.."Major scandals in which they are implicated invariably come with more colourful villains for the media to spotlight. When, for example, the Paradise Papers hit the headlines in November 2017, the big news was that racing driver Lewis Hamilton had avoided VAT on buying a private jet.."The more important fact that one of the world's largest accountancy firms and a supposed watchdog of capitalism, EY, had designed the scheme for him and others, including several oligarchs, went largely unnoticed. Moreover, covering every area of business and public service, the big four firms have become the reporter's friends. They can be relied on to explain complex regulatory and economic developments as 'independent' experts and provide easy copy on difficult subjects.".Read also: Greedy KPMG and friends eat into the legal profession – FT.The Guardian says partners of Big Four firms charge their time at several hundred pounds per hour, but make their real money from selling the services of their staff. "The result is sports-star-level incomes for men and women employing no special talent and taking no personal or entrepreneurial risk. In the UK, partners' profit shares progress from around £300,000 to incomes that at the top have reached £5m a year.".Figures in the US are undeclared, says The Guardian, because the firms are registered in Delaware and don't have to publish accounts, but are thought to be similar. ."Targeting growth like any multinational corporation, despite their professional status, the big four continue to expand much faster than the world they serve. In their oldest markets, the UK and US, the firms are growing at more than twice the rate of those countries' economies. By 2016, across 150 countries, the big four employed 890,000 people, which was more than the five most valuable companies in the world combined," reports The Guardian..Read also: Regulators and rivals ask: Is KPMG the next Enron or is it too big to fail?.Over the past decade, the Big Four have sold more consulting services. "Advising on post-crisis financial regulation has more than made up for the minor setback of 2008…The big four now style themselves as all-encompassing purveyors of 'professional services', offering the answers on everything from complying with regulations to IT systems, mergers and acquisitions and corporate strategy.".Worldwide, they now make less than half of their income from auditing and related "assurance" services. They are consultancy firms with auditing sidelines, rather than the other way round, says Brooks.."The big firms' senior partners, aware of the foundations on which their fortunes are built, nevertheless insist that auditing and getting the numbers right remains their core business. Still, all spew out reams of 'thought leadership' to create more work.".Brooks highlights a snapshot of KPMG's offerings in 2017: "Price is not as important as you think"; "Four ways incumbents can partner with disruptors"; and "Customer centricity". EY adds insights such as "Positioning communities of practice for success", while PwC can help big finance with "Banking's biggest hurdle: its own strategy"..Read also: From KPMG to Google: Here's why capitalism is failing us."The appeal of all this hot air to executives is often based on no more than fear of missing out and the comfort of believing they're keeping up with business trends. Unsurprisingly, while their companies effectively outsource strategic thinking to the big four and other consultancy firms, productivity flatlines in the economies they command.".Brooks explains the commercial imperatives behind the consultancy big sell. KPMG UK's first two "key performance indicators", for example, are "revenue growth" and "improving profit margin", followed by measures of staff and customer satisfaction (which won't be won by giving them a hard time). Exposing false accounting, fraud, tax evasion and risks to economies – everything that society might actually want from its accountants – do not feature, he points out.."Few graduate employees at the big four arrive with a passion for rooting out financial irregularity and making capitalism safe. They are motivated by good income prospects even for moderate performers, plus maybe a vague interest in the world of business. Many want to keep their options open, noticing the prevalence of qualified accountants at the top of the corporate world; nearly a quarter of chief executives of the FTSE100 largest UK companies are chartered accountants.".Where once they were outsiders scrutinising the commercial world, the big four are now insiders burrowing ever deeper into it, continues Brooks. "All mimic the famous alumni system of the past century's pre-eminent management consultancy, McKinsey, ensuring that when their own consultants and bean counters move on, they stay close to the old firm and bring it more work.".The Guardian ends with a note of caution that bean counting is too important to be left to today's bean counters..The Guardian feature is adapted from Bean Counters: The Triumph of the Accountants and How They Broke Capitalism by Richard Brooks.

How KPMG and friends earn BIG bucks for failing the world

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