November 20, 2018

Does the ‘P’ in KPMG Stand For ‘Probes?’

Because we have two new probes into KPMG to tell you about.

First, two weeks after the quality of its audit work was called “unacceptable” by the Financial Reporting Council, KPMG is being probed by the United Kingdom’s accounting watchdog over its audit of British beverage wholesaler Conviviality’s financial statements, according to the Financial Times.

Then, the Wall Street Journal came out with a report today detailing the role KPMG’s Dubai-based affiliate had in the unraveling of Middle Eastern investment firm Abraaj Group. KPMG International, the firm’s umbrella organization, is working with a law firm on an independent probe of KPMG Lower Gulf Ltd.’s work for Abraaj.

Let’s head back over to Britain where the FRC is probing KPMG’s audit work for Conviviality for the year ended April 2017, even though the accounting irregularities that the beverage company admitted to occurred in its 2018 financial year, the Financial Times wrote.

The FRC said it also was investigating an unnamed member of the Institute of Chartered Accountants in England and Wales over the “preparation and approval of Conviviality’s financial statements and other financial information.”

Conviviality collapsed into administration in April after several profit warnings and the admission it had failed to spot a looming tax bill:

The group warned on profits in March because of erroneous financial modelling that had introduced material errors into its earnings forecasts, while also disclosing it had discovered a £30 million, previously unexpected tax bill.

KPMG said the firm had not started work on Conviviality’s 2018 accounts before it fell into administration, according to the Financial Times:

“We note today’s announcement by the FRC of its investigation of the preparation, approval and audit of the financial statements of Conviviality for the year ended 30 April 2017,” KPMG said. “We believe we conducted our audit appropriately and will co-operate fully with the investigation. …

“Our audit of the company’s financial statements for the year ended 30 April 2018 had not yet commenced at the point which administrators were appointed.”

Now, let’s travel to the Middle East where the ties between KPMG Lower Gulf and Abraaj run deep, according to the Wall Street Journal:

KPMG Lower Gulf Ltd., the Dubai-based affiliate, is led by chairman and chief executive Vijay Malhotra. His son has worked at Abraaj. An executive named Ashish Dave alternated between stints at KPMG and as Abraaj’s chief financial officer, a job he held twice. At least two other members of Abraaj’s finance team in Dubai also previously worked for KPMG.

Investors have accused Abraaj of taking money from its funds and using it for purposes that were not sanctioned, the Wall Street Journal wrote. The private-equity firm has filed for a liquidation proceeding in the Cayman Islands.

Public records show that KPMG audited Abraaj and at least nine of its biggest funds, including funds where investors say money was uses for purposes other than intended, according to the Wall Street Journal. KPMG also audits companies Abraaj invested in, like Air Arabia Group, an airline which received Abraaj money and invested $336 million with Abraaj.

In response to questions he received from the Wall Street Journal regarding KPMG and Abraaj, Brian Bannister, KPMG’s London-based global head of communications, said, “We take the questions raised in relation to Abraaj very seriously.”

All of this comes on the heels of KPMG’s role in Carillion’s collapse, the Big 4 firm being fined £4.5 million by the FRC over its audit of Quindell, and KPMG South Africa losing several high-profile clients, including Barclays Africa and the government’s Auditor-General, following the Gupta and VBS Mutual Bank scandals.

Oh, and there’s that little KPMG inspection-leak scandal going on in the United States.

[FT] [WSJ]

Image: iStock/justhavealook

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In probably the most shocking news of the day, KPMG’s “fraud barometer” reports that the number of fraud cases in UK courts in the first six months of the year are the highest since the firm started issuing the report, 21 years ago.
Here in the states, the big sexy fraud gets all the attention but there is plenty of small fraud to go around. Plus, the bright side is, we’ve haven’t seen anything yet:

“These figures are bad, but the worst is yet to come,” Hitesh Patel, a partner at KPMG, said. “It will be a number of years before the impact of the recession fully feeds through into the fraud statistics.”

So our advice would be for any of you that are nervous about layoffs, look into getting transferred to the forensic accounting practice. You won’t be out of work any time soon.
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Ernst & Young Is Here to Help (For a Small Fee)!

ernst_young.jpgWe thought that Ernst & Young was advising the New York Fed on the winding down of AIG out of the goodness of their hearts but it turns out it’s actually about the money.
E&Y could make as much as $60 million advising the New York Fed, which is 50% more than the initial agreement, according to Bloomberg. The NYF is also reimbursing E&Y for expenses, up to 10% of the professional fees. This occurs after the parties had initially said $40 million would be the cap but $60 mil is it, we swear, no more.
And because E&Y is solid like that, the firm is billing out partners and directors at discounted rates ($775/hour). I mean, ’cause, let’s face it, this thing’s a mess and E&Y is going to be working hard, working late, working weekends.
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