Of all the similarities between struggling financial companies Allco and MFS, one obvious link which has so far escaped media attention has been the role of auditor KPMG in the twin fiascos, writes Adam Schwab.
Of all the similarities between struggling financial companies Allco and MFS, one obvious link has so far escaped media attention: the role of auditor KPMG in the twin fiascos.
While MFS remains suspended (it lasted traded at 99 cents compared with a high of around $6.70 in June) and Allco continues to struggle (closing at $3.30 compared with a high of approximately $13.00 in March) the common ground between the two companies is that they were both audited by (and more importantly, paid significant non-audit fees to) KPMG.
Both of MFS’s company secretaries were previously employed by KPMG; David Anderson, chief financial officer of MFS, was previously a partner at KPMG in the finance area while Kim Kercher, MFS’s chief “governance” officer was previously a manager at KPMG.
The auditor signing off on MFS reports (which in light of recent announcements, don’t seem to be entirely accurate) was Mitch Craig (who is KPMG’s National Partner in Charge of Risk Advisory Services). According to MFS’s 2007 Annual Report, KPMG were paid $483,600 for audit services. However, the audit fees pale in comparison to the non-audit related services performed by KPMG. The firm was paid $771,098 for assurance, taxation and diligence services in 2007. KPMG also provided $665,600 in non-audit services to MFS satellite, MFS Diversified (KMPG also audited MFS Diversified until last year).
In the Sarbanes-Oxley era, this is a farcical situation, with KPMG collecting almost double as much from MFS for non-audit related services as they did for conducting the audit. As noted by The Guardian back in 2002:
Regardless of the individual integrity of those involved, this situation [of auditors performing non-audit related services] raises a serious conflict of interest.
Where an auditor is providing other services to a company it is auditing, it can hardly be said to be independent and it is less likely to be critical or do anything that might embarrass management.
Companies may hire or fire an auditor. Consequently, with future career prospects and income hanging in the balance, there is little incentive for an auditor to publicly expose improper behaviour or “creative” bookkeeping being used by the company they are auditing.
KPMG signed off on MFS’s financials on 20 August 2007. MFS shareholders paid KPMG handsomely to ensure that the financial information provided was true and fair. Based on recent announcements, and the sudden departure of executive Michael King, it seems that MFS shareholders didn’t get great value for money.
Across at David Coe’s Allco things seem similar. Allco’s auditor was also KPMG. During 2007, Allco paid KPMG a significant $3.1 million for audit fees (signing off on the report was Chris Whittingham). On top of that, Allco also handed KPMG a very tasty $2.96 million for other services, including financial due diligence and taxation services. Allco’s Annual Report noted that:
It is the Consolidated Entity’s policy to employ KMPG on assignments additional to its statutory duties where KPMG’s expertise and experience with the Consolidated Entity provides an efficient solution to [Allco’s] professional service needs.
This situation was meant to have stopped after Arthur Andersen’s infamous association with Enron. In 2001, Anderson was paid US$25 million for audit services and US$27 million for non-audit services. Many believe that Andersen’s willingness to turn a blind eye to the frauds occurring at Enron was partially caused by its willingness to retain non-audit revenue. Many Enron executives had previously worked at Arthur Andersen. Similarly, several key MFS executives were employed by KPMG.
Interestingly, the ratio of audit services to non-audit services paid by MFS to KPMG was even worse than Enron’s although its fate may very well be similar.