Apparently it’s auditor punishment Monday. Or Tuesday, if you’re Down Under:
A lead KPMG auditor who only learnt about a $1.9 billion [about USD $1.88 billion] error in his audit of Allco Finance Group through a report in BusinessDay was benched for nine months by the corporate regulator yesterday.
To be completely fair, it sounds like it may have been a tricky audit:
Christopher Whittingham, a KPMG partner, led a core team of 20 audit staff that signed an unqualified audit report on the notoriously complex accounts for Allco for the year ended June 30, 2007.
Or was it?
The error detected by BusinessDay involved the 2007 accounts classifying $1.9 billion in liabilities owed by Allco as non-current, telling investors they fell due more than a year later. The liabilities were, in fact, current liabilities, meaning they were due within the year. The amount of current liabilities is a significant issue for shareholders when considering whether a company can meet its debts when they fall due.
Whatever the case may be, Mr Whittingham shouldn’t sweat it too much:
[T]he Australian Securities and Investments Commission released an enforceable undertaking with Mr Whittingham, which included a nine-month suspension, a $10,000 fine and 10 hours of professional education.
Well, at least he’s taking responsibility for his mistake and isn’t pointing his finger at anyone else or making excuses, right?
Mr Whittingham said he had relied on managers for aspects of the audit, the error had no bearing on Allco’s collapse and he had reissued its accounts the day after he became aware of the error.
Regulator suspends senior KPMG auditor [Sydney Morning Herald]
First of all, the charge is an estimate of future costs and will have no immediate impact on cash flow. And the estimate is unusually large because the accounting rules require costs that would otherwise be reported in the future to be reported now, simply because they are the result of a change in tax treatment.
As my former colleague Marie Leone reports at CFO.com, such “true-ups” over differences in tax and book accounting practices are just that. The real cost will be spread out over many quarters.
More importantly, the hit is the result of a loss of a major taxpayer subsidy. Maybe it made sense before to provide that. But given all the concern about the federal deficit, it seems to me that asking shareholders to bear a bit more of the burden for retiree drug benefits is hardly unfair.
And in the greater scheme of things, the hit may be so small as to have little impact on companies’ valuations, as a Credit Suisse analyst pointed out the other day. General Electric didn’t even break out its estimate for that reason, calling the cost “immaterial.”
The question is whether companies will stop paying for the benefits because of the cost, and that’s unlikely unless they’re willing to compensate for the loss with higher wages, as economist Dean Baker reiterated to me in an email late last week.
“The standard economist view is that the cost of health care comes overwhelmingly out of wages,” Baker wrote. “If they have to pay more in taxes, then it will mostly come out of workers’ pay and have very little impact on their costs and ability to compete.”
If on the other hand, a decline in healthcare costs leads to higher wages, that would mean a stronger economy, so I don’t see how either taxpayers or shareholders will lose here in the long run.
Yes, that’s a big if, but as I’ve said before, the new healthcare law is the biggest effort to rein in costs undertaken to date. Of course more must be done, but the law will provide a big impetus to those efforts.
Hopefully, all this will become clearer as a result of the hearings Rep. Henry Waxman plans to hold next week on this issue, but I’m not holding my breath.