November 15, 2018

A Massive Scandal, the Likes of Which the Accounting Profession Had Never Seen, Got KPMG to Consider Outside Directors

Lynne Doughtie KPMG

In an effusive, buzzy word salad published in Accounting Today, KPMG Chairman and CEO Lynne Doughtie announced that the firm would be adding independent directors to its board. Why, might you ask? I’ll let Lynne tell you unabated:

In today’s complex and fast-moving global business environment, successful organizations regularly reassess their mission and responsibilities to the markets they serve.

They raise a mirror to themselves — closely evaluating what they believe to be their proven tools — and determine if those tools remain fit for purpose. And leaders who steer these organizations — whether publicly traded companies or private partnerships — similarly must be willing to take a fresh look at the systems and structures they have in place to ensure their organizations are best positioned to thrive.

At KPMG, we embrace that responsibility. That’s largely why we’re now embarking on the important process of adding outside directors to our board. We regularly evaluate ways to improve how we manage our business to meet the expectations of our stakeholders, including the companies we serve and their boards and investors, the capital markets, our regulators and our people. In 2017, certain events, and the actions of a few former colleagues, caused us to take a deeper dive into examining our culture and values, and to assess with fresh eyes how we could improve and best position our more than 100 year-old firm for future success. What has emerged from that ongoing exercise is not surprising. We have been reminded of the cardinal rule in our business, namely that trust is paramount and, as such, must inform all that we do.

You may have missed it, but buried in that third paragraph, Doughtie used 10 words to summarize a small matter of six KPMG employees being fired for mishandling confidential PCAOB inspection information, four of whom face a slew of criminal charges. (Sidebar: The firm is paying the legal fees for three of the people charged.)

That’s what got the firm to do some soul-searching. I suppose this is the accounting firm equivalent of an alcoholic hitting rock bottom. “KPMG, you promised to be independent, objective, and to act with integrity, but then you got hammered, soiled yourself in front of everyone at the Christmas party, and then drove off and crashed into a parked cop car.”

But the most annoying thing about this essay isn’t Doughtie barely admitting that mistakes were made, but how much time she spends saying how awesome KPMG is:

We are a vibrant private partnership, deeply committed to our clients, to the public, to our communities, and to each other — and, because of the work that we do each day for the most important organizations in the world, we know that commitment is made stronger when informed not only by deep experience, but also by diverse perspectives. We know that we are best at what we do when we push ourselves to think innovatively and act boldly. We craft the smartest ideas and deliver the most effective solutions when we step outside our comfort zone and beyond what is familiar. And we provide the most fertile ground for our people to show up each day and be stewards in the workplace when we aim to eliminate groupthink and reward individual responsibility and accountability.

And that’s just one paragraph. To read the rest of it, you’d think KPMG had planned the invasion of Normandy.

Maybe it occurred to KPMG leadership that outside directors were a good idea before its partners got in trouble up to their eyeballs, but they were probably too busy peddling golf hats. Now that the firm actually has to salvage what’s left of its reputation, no one should be impressed by directors short of Pope Francis, Malala Yousafzai, and the ghost of Nelson Mandela. Get on it, Lynne.


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SHOCKER: Number of Fraud Cases in the Courts is High

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.
Record total of fraud cases in court – and worse to come []

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.
Ernst & Young’s Maximum Pay for AIG Advice Swells [Bloomberg]