• Accounting News Roundup: Bad Press for KPMG and Revolving Doors | 04.14.17

    By | April 14, 2017

    Bad press for KPMG

    Last month we noted how PwC had become the Big 4 firm of ridicule and abuse after a series of bad publicity. We all knew that one day another firm would take PwC’s place on the dunk tank and, yes, as you might’ve guessed, that firm is KPMG.

    And it was confirmed by this finger wagging editorial that appears in today’s New York Times:

    The reputation of KPMG, one of the Big Four accounting firms, took another hit this week, when it fired five partners, including the head of its audit practice in the United States, for “unethical behavior.” The firings come on top of existing questions about the firm’s policies and practices: KPMG has for years been the auditor of scandal-scarred Wells Fargo and was the longtime auditor of problem-plagued FIFA, the world soccer governing body. Year after year, KPMG auditors saw no evil in either company.

    The latest breach deepens doubts about KPMG and, in the process, raises fundamental questions about the integrity of all public-company audits.

    There’s nothing particularly remarkable about the NYT editorial other than it appears in the NYT. Auditors mostly fly below the radar and even when they are heavily scrutinized, it’s still pretty rare for it to be elevated to the editorial page in our country’s paper of record. But even if you think the New York Times editorial page is a bunch of liberal snowflakes, the damage to the firm’s brand will be severe. If the firm improves its performance on its next PCAOB inspection report, for example, lots of people, rightly or wrongly, will assume the firm cheated.

    Now, is that worse than PwC’s stuation vis-à-vis the Oscars debacle? I guess that depends on whether you prefer your accounting firm to be thought of as dishonest or incompetent.

    Revolving doors

    Here’s a Financial Times column by Brooke Masters that wants something done about the revolving door between auditors and the PCAOB:

    [T]he [KPMG/PCAOB] episode highlights the troubling side of Washington’s revolving door. While the US has long been comfortable with watchdogs and industry lawyers changing places, the auditing profession has a particular problem.

    The Big Four are so dominant that today’s regulator is not just a potential future industry peer, but literally tomorrow’s co-worker or boss. Stricter conflict of interest rules and longer cooling off periods should be required.

    I’m not so sure. A former PCAOB employee got information from a current PCAOB employee. Most people don’t leave a regulator for the private sector so they can help their new firm cheat the system. Most people leave regulators for the private sector so they can make a lot more money. This former-PCAOB-now-former-KPMG employee is now unemployed for being brazenly unethical and isn’t making any money at all. No revolving door rules would’ve prevented that. Likewise, the PCAOB leaker is now unemployed and probably won’t be working for a Big 4 firm any time soon.

    KPMG, and other the major audit firms, don’t want to hire cheaters. They want to hire competent, scrupulous and honest PCAOB inspectors so they can have people on hand who understand the regulator’s complicated rules and shifting expectations. A lot of PCAOB inspectors want to make more money and get out from under the thumb of a new SEC that might be more hostile towards their activities. Any rules that would make it more difficult doesn’t benefit the firms or the PCAOB inspectors that want to work for them. It may, however, insure that audit firms continue to fumble around trying to lower their PCAOB inspection deficiency rates by any means necessary.

    Brought to you by Accountingfly

    Brad Hughes of Beech Valley wrote about freelance CPAs traveling the world. Also, Accountingfly’s featured job of the week is for an experienced Staff Auditor in Portland, Ore.

    Previously, on Going Concern…

    After a week full of KPMG stuff, we took a breather. ICYMI on Wednesday: Adrienne wrote about a BDO auditor who spied on his co-workers for the FBI. And Greg Kyte covered hot assets in his Exposure Drafts cartoon.

    In other news:

    Get the Accounting News Roundup in your inbox every weekday by signing up here.

    Image: Russell James Smith/Wikimedia Commons

    • Commando

      I disagree. Part of the problem was the personal relationships the KPMG crook had with someone at the PCAOB. Let those relationships go stale before people jump from the PCAOB to the firms. Sure, that hurts career prospects for PCAOB people since they can’t swing through the revolving door to a registered firm to get the big bucks, but it ain’t about them.

      • Caleb Newquist

        But the relationships have little to no value if people behave unethically, right?

        If the former-PCAOB-now-Big-4 person can say, “Hey, is this still how you’re doing things, etc. etc.” or “Remember that one engagement we worked together that had Situation A?” And the current PCAOB person can say, “Yep, except now the focus is on this and this too.”

        *That’s* what the firm wants. Longer revolving door rules seem would seem to have diminishing returns after awhile.

        • Commando

          The relationships enabled the bad behavior.
          Sure, what the firms legitimately want is knowledge of how the PCAOB acts. But the temptation is great to leverage relationships to get the forbidden fruit. This case evidences that. A way to stop it is to prohibit PCAOB people from joining a registered accounting firm for a year or two. Hurts the PCAOB people, but it is not about them.

    • SouthernCPA

      You are missing the quid pro quo, Caleb.

      The former regulators are hired at the big firms, and paid the big bucks, BECAUSE they can help their new firm cheat the system. This is at least partially because of the absolute insanity and overreach of the PCAOB. When you create a system that any small “issue” results in a failure, and you pressure your inspectors to stretch as far as they can in finding “issues”, you encourage the firms to cheat. Hell, you are basically asking for it.

      It’s no different than politicians/political staff becoming high-paid lobbyists. They aren’t hired for their working abilities… they are hired for their access, and they are hired so that the companies they lobby can get back channel information.

      The entire system is corrupted. Not just auditors – all of it.

      And yes, “ethics”, but come on. Clearly, leaning on that isn’t working, is it?

      • Commando

        Correct. This is just the first instance where we have seen bad results coming from the revolving door. It is a widespread problem in Washington. Companies capture regulators by placing their people inside. Also by the promise of lucrative private sector employment to those who play the game.

      • Caleb Newquist

        I like this. But is it really so black and white? “Cheating the system” really is sometimes cheating the system” and other times it’s “specialized knowledge.” Sometimes bribes aren’t bribes, they’re taking clients to a baseball game or a Rolling Stones concert.

        It’s too easy to look at the PCAOB and government in general as a monolithic entity. Reality is way more subtle.