KPMG may not be following in the footsteps of the dearly departed Arthur Andersen, but potential similarities are emerging.
Last month, Crikey pointed out the fact that KPMG was the common link between the fiascos occurring at MFS and Allco. KPMG not only audited both companies but, like Arthur Andersen, earned significant amounts from non-audit related services. In fact, KPMG charged MFS $483,600 for audit services and $771,098 for non-audit work during 2007. As it turns out, MFS’s balance sheet wasn’t entirely accurate.
The situation at Allco is even more stark. As Elizabeth Knight noted in the Sydney Morning Herald last week:
In a nutshell, the June 2007 Allco accounts contained at least one error. The one that it pointed out yesterday was to classify $1.877 billion of current liabilities as non-current liabilities.
… Had the error been righted on Monday, along with an alert and explanation, the position might, perhaps, have been acceptable.
But this is not how it happened. The company and the auditor slipped the liabilities out of the non-current column and into the current column ($1.877 billion of them) without even as much as an asterisk and some fine print.
It smacks of the hope that no one would notice.
Allco paid KPMG a whopping $3.0 million in non-audit fees in 2007, not to mention its $3.1 million in audit fees. Further, KPMG also audited Allco Equity Partners (which is part-owned by Allco) – and performed non-audit services to AEP. However, despite charging Allco shareholders more than $3 million, KPMG appeared to be derelict in performing their role. In fact, one wonders exactly what KPMG did to earn their fees if they were unable to tell the difference between a current and non-current liability – arguably the most important classification on a balance sheet – especially in a highly geared company. It appears that the KPMG team auditing Allco were either reckless or utterly incompetent.
Yesterday, struggling financier, City Pacific (whose share price slumped from more than $4.00 to 97¢ before being suspended), which last week was forced to embarrassingly restate their financial results, appeared to have also made errors in its financial results. The Smage reported that:
In its half-year accounts, reviewed by its auditor KPMG, the 60% City Pacific-owned CP1 added up some items incorrectly, such as its current liabilities.
In the accounts it said $145.6 million in borrowings added with $6.1 million in other payables amounted to $125.4 million in total current liabilities. CP1 shares plunged 13¢ to 18¢.
As noted by Knight, City Pacific were also audited by KPMG, who were paid $441,400 for their audit-related services (and $139,500 for ‘non-audit services’). KPMG also happened to audit City Pacific’s Managed Investment Schemes. What’s more, City Pacific’s chief financial officer Adam Purss, the man who was directly responsible for preparing the completely incorrect financial results used to work for none other than KPMG as an auditor. Just in case you were wondering, Purss’s major client was City Pacific. City Pacific’s head of Investor Relations, Lee Danahay also used to work at KPMG as an auditor.
City Pacific shareholders would also be wondering just why they paid KPMG more than $400,000 annually when the auditor wasn’t even able to pick up a basic counting error in a publicly filed document.
The similarities between KPMG’s recent follies and the demise of Arthur Andersen will be sending shivers up the spines of KPMG equity partners.
Since its 2002 collapse, Arthur Anderson is sadly but a footnote in accounting folk law. The firm, founded by the Norwegian immigrant Arthur Andersen in 1913 with partner, Clarence DeLany, rose to be one of the largest and most respected accounting firms until the 1970s. Sadly for Anderson, it spent too much time seeking consulting work and failed to adequately perform its core audit functions, leading to scandals at Waste Management, Sunbeam, HIH and ultimately Enron. Andersen effectively ceased operations after being convicted on charges of obstruction of justice in 2002 relating to the shredding of documents relating to Enron (the conviction was later overturned on appeal but it was too late to revive the firm).
Hopefully no-one at KPMG has bought any shredders recently.