KPMG ideal host for a risk management conference. The Financial Review reported last Friday that “a large group of risk management specialists met in Sydney … to hear their firm’s experts speak on the latest trends in risk management.” The firm holding the conference was Australia’s second largest accountancy practice, KPMG. According to the Fin’s Mark Fenton-Jones, “risk management” in a financial services firm is about “ensuring that the services it provides are appropriate. For example, in the area of audit independence, risk management would ensure that clients are not receiving audit and non-audit services from the firm that could give rise to a conflict of interest.” Given that the Financial Review is one of the most expensive financial rags in the world, you’d hope that their reporter would do some research, perhaps noting that KPMG’s own internal procedures (especially in Australia) aren’t exactly world leading. Let me explain. KMPG is currently being investigated by ASIC for its unqualified opinion provided on Westpoint’s grossly incorrect June 2004 accounts. It is believed that at the time that KPMG signed off on Westpoint’s reports, the financier was insolvent. KPMG also audited the still suspended MFS/Octaviar group. Based on subsequent disclosures, MFS’ financial reports appear to be a complete work of fiction. Naturally, its auditor, KPMG, failed to detect that anything was amiss last year, possibly because it was too busy performing non-audit services (KPMG earned almost double the revenue from providing non-audit services to MFS in 2007). KPMG also audited the imploding Allco Finance Group, earning almost as much from non-audit related services than it did from checking Allco’s rubbery figures. KPMG didn’t do such a good job at Allco either, not noticing that $1.9 billion worth of liabilities had been incorrectly classified in Allco’s 2007 Financial Report. KPMG’s highly paid auditors also missed the fact that CP1 (a subsidiary of property developer City Pacific) made a simple arithmetic error in its financial reports. Ouch. Meanwhile, in March the US Justice Department recommended that creditors of failed sub-prime lender New Century Financial take legal action against KPMG for “professional negligence and negligent misrepresentation” after the firm “contributed to certain of these accounting and financial reporting deficiencies by enabling them to persist and, in some instances, precipitating the company’s departure from applicable accounting standards.” Yes, if anyone needs a conference on risk management, it is KPMG. — Adam Schwab

Americans driving less, shock. The Financial Review yesterday produced a statistic that will warm the cockles of environmentalists and peak oilers. According to US correspondent, Anthony Hughes, last March, Americans drove 18 billion fewer kilometers than during the corresponding period in 2007, a significant decline of 4.3%. The drop defeats the argument that petrol use is inelastic, with a rise in prices having a significant effect on overall consumption. Given that prices have further leapt since March, it is likely that fuel consumption in the US will have continued to drop. Assuming the theory holds true in Australia, that bodes very poorly for companies like MIG, ConnectEast and Transurban, all of whom rely on increasing usage to vindicate absurdly high dividends being paid from capital (all three companies have experienced sharp share price declines in recent months), as well as Macquarie, which earns fees based on the share price of its satellites. The statistic also makes former Macquarie Boss, Alan Moss, appear slightly less sage-like. Moss claimed last year (in response to heavy criticism of the “Macquarie Model”) that Macquarie had enough strings in its bow to weather a downturn, claiming that “What assets are they? Well, they’re tollways. How bad does it have to be, really, before the people in this room get on the bus?” Sorry Alan, looks like it could be that bad.  — Adam Schwab

Westpac and St George: the national interest. The Westpac bid for St George may have passed its first checkpoint with the signing of the merger implementation agreement but it still has to overcome a number of significant obstacles before it can be completed. One of them is the Federal Treasurer, Wayne Swan. While most of the focus since the agreed offer was announced earlier this month has been on the possible competitor response, the regulatory obstacles to a bid by either Westpac or a competitor bank remain the biggest threat to an acquisition of St George. The Australian Competition and Consumer Commission is the more obvious source of opposition to the bid, given that it would create the nation’s biggest bank, give Westpac a much stronger position in NSW and increase the concentration of ownership of the banking sector by the “Big Four” banks. — Stephen Bartholomeusz, Business Spectator 

GE to lose its Wizard? GE Money may clarify its plans for the Wizard Home Loans network today. GE circulated a note to franchisees yesterday that “we will be in a position to communicate the changes with you tomorrow morning”. The company told its affiliates that much of yesterday’s report in The Australian, and followed up in this newsletter, was “factually incorrect”. “Mark Bouris and GE Money are working together closely to make sure the interests of branches, staff and both businesses are aligned. Importantly, any changes to the business model will underpin the future success of the business and continue to develop and grow the value of the Wizard brand.” The Australian today reported that Bouris (who helped found Wizard and was one of the vendors to GE in 2004) confirmed his interest in buying back the business. The newspaper also quoted the head of GE Money, Mike Cutter, indirectly confirming some sort of sale or restructure, the details of which may be clear this morning. — The Sheet

RBA to move on “borrowed” trades. Investors might have to reveal whether shares they trade are borrowed, as part of a series of changes called for by the Reserve Bank of Australia to prevent a repeat of the Tricom settlement failure which spooked the share market in January. In a rare intervention into the operation of the stock market, the central bank called for “an increase in the transparency of securities lending activity”. The Australian Securities Exchange yesterday broadly welcomed the results of the review of settlement practices, revealing that it was taking up the RBA’s call to more heavily fine brokers who failed to settle or pay for their trades in time. The ASX said it would more than double the so-called fail fee from $2000 a trade to $5000 a trade, designed to make it less profitable for short sellers to fail to settle.Michael Sainsbury & Tim Blue, The Australian

The great supermarket swindle that wasn’t. Ever wondered why you pay $3 for a toothbrush at Woolies and Coles when a toothbrush costs all of 20c to produce, after packaging? The latest market research from this bureau into the price of toothbrushes, arising from a trip to the local Coles supermarket last night, showed there was one item – an Oral B toothbrush – ”on special” at $3.99, down from $5.25. When you consider that you can buy a whole set of steak knives from the $2 shop for $2, forking out $3.99 for a toothbrush is about as ”special” as being pick-pocketed. And of one thing you can be sure, Woolies pricing will not be far from the Coles mark. Most toothbrushes it seems are still manufactured in the US, Germany and even Switzerland so first-world costs are factored into the price. Besides, trust and branding are paramount with a product one puts into one’s mouth. Hence the brand premium. — Michael West, Sydney Morning Herald

Peter Fray

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