Regulators and rivals ask: Is KPMG the next Enron or is it too big to fail?

EDINBURGH — Some believe that corrupt auditor KPMG is like the Titanic seemed before it set sail on its maiden voyage - too big, too robust to sink. In this camp you can include KPMG South Africa bosses and the KPMG spokespeople who consistently fob off journalists who ask tricky questions. Others reckon that KPMG could become an Enron, ultimately facing collapse for a series of poor decisions and downright dishonesty at times. Among these people are many South Africans who are pinning their hopes on the Gupta-tainted professional services firm getting its just desserts after playing a major role in state capture. Also angry with KPMG are the many employees and investors in UK firms that have recently collapsed after auditor KPMG failed to flag irregularities or problems. The Financial Times highlights that a steady stream of damaging news has got regulators, clients and others pondering whether KPMG can maintain its status among the big beasts of global auditing. - Jackie Cameron

By Thulasizwe Sithole

When Arthur Andersen collapsed after becoming entangled in the Enron scandal in 2002, the US accounting firm was written off by many in the audit profession as an outlier, notes the Financial Times. “The likelihood that another large accounting firm could fail so catastrophically seemed impossible to the regulators and rival auditors who worked to minimise the impact of Arthur Andersen’s demise.”

But, warns the London-headquartered business publication, a steady stream of damaging news involving the accounting giant KPMG over the past 12 months has regulators, competitors and clients once again posing hard questions about the strength of one of the world’s biggest audit firms.

“KPMG’s UK profits before tax fell almost a fifth last year to £301m. The amount of money the firm put aside for potential fines and legal costs almost doubled to £56m and accounted for more than a third of the decline in profits.”

KPMG
The KPMG company sign sits at their offices in the financial district of Canary Wharf in London, U.K.

A senior director at one of KPMG’s biggest clients, speaking to the FT on condition of anonymity, said: “KPMG simply can’t be allowed to fail — there just isn’t capacity in the market for others to take up the slack.”

The director added that it was in the interests of regulators and even its largest competitors — which include EY, Deloitte and PwC — for KPMG to overcome its recent difficulties. “They are too important to fail,” he said. “Everybody will bust a gut to make sure that they turn it around.”

A regulatory official, speaking privately to the FT, said the problems facing KPMG at the moment look like a “perfect storm”, adding: “The big question is whether the government would work to prop up a Big Four [firm] or not.”

Nevertheless, continues the respected business publication, despite KPMG’s involvement in several major scandals spanning three continents, there are no signs at this stage that its biggest international clients are distancing themselves from the firm.

These scandals include its work for the controversial Gupta family in South Africa, its audit of collapsed UK outsourcer Carillion and an investigation by the Securities and Exchange Commission into three former KPMG partners who were accused of leaking confidential information in a bid to improve inspection results for the firm.

Guptas: Things fall apart. More of Zapiro's brilliant work available at www.zapiro.com.

It recently won the coveted contract to audit mining company Rio Tinto, and its appointment as the new auditor at telecoms group BT was waved through by shareholders last month almost unanimously. “KPMG is in robust financial health. KPMG is seeing outstanding growth right across our audit, tax and advisory arms, we have a strong balance sheet and are well funded with a growing pipeline,” the FT quotes Bill Michael, its UK chairman, as saying.

“Yet regulators remain concerned, prompting the Bank of England’s Prudential Regulation Authority to raise questions about potential risks to KPMG’s viability. The regulator increased its scrutiny of the UK’s largest accounting firms after the Parliamentary Commission on Banking Standards criticised auditors for failing to spot the signs of financial instability that led to the financial crisis.”

Stephen Haddrill, chief executive of the Financial Reporting Council, the UK accounting watchdog, said in March that the CMA should investigate the case for “audit-only” firms in an effort to bolster competition and stamp out conflicts of interest in the sector, recalls the FT.

Prem Sikka, professor of accounting at the University of Essex, told the FT: “It is not just KPMG but the whole of the auditing industry in crisis. I am sure that some company boards will be thinking about whether to retain KPMG. Its collapse would only leave the ‘big three’ and that possibility is likely to influence the [competition watchdog to consider a] break-up of the Big Four.”

Regulatory officials, investors and academics are now additionally considering whether the Big Four have — like many of the world’s largest banks — become too big to fail, adds the FT.