KPMG And New Century – The Deed Was Done

By • Mar 26th, 2008 • Category: Audit Quality, KPMG, New Century

And this dispatch from an Australian blogger , who makes the connection between KPMG/New Century and KPMG and some recent failures amongst their clients down under….

…According to the report, one of the reasons for KPMG’s apparent gross failure to adequately undertake its responsibilities was due to it being intimidated by the forceful nature of New Century’s financial controller, Dave Kenneally. Kenneally, who was described as ”difficult, condescending and quick tempered” just happened to be previously employed by KPMG.

Crikey readers will remember that MFS, Allco and City Pacific all had former KPMG auditors at very senior levels in their organizations. Meanwhile, KPMG were happily signing off financial reports which appear to have been incorrect…

It looks like Bloomberg, LA Times, Norris at NYT and others are reporting that KPMG has come out as the major bad guy in the New Century bankruptcy examiner report. They actually roll out my favorite term, “aiding and abetting.”

This blog has tracked this story from the beginning. Go here, here, here and here for more.

Take that Supremes!

Norris in the NYT seems surprised to find that the client partners at the firms do not listen to the Risk and Quality or Technical Partners when making client decisions.

I have written about that issue specifically here. I compared it to the specific occurrences at Andersen with Enron. There are two major constraints which keep the Technical and Risk and Quality Partners from having final say and authority, regardless of what the firms tell the PCAOB and others:

1)The Client Partner is the one officially responsible for the audit. He is also the one who is on the system from a financial perspective and loses personally, big time, if the client walks away.

2)The partners who man the Risk and Quality and Technical Consulting areas of the firms are pulled, for the most part, from the client service ranks. And they rotate back in to client service after a time unless they are near retirement. Even retirees have a financial interest in the firm’s success, however.

Either way, these professionals are still under the influence of their other client service partners, both personally and professionally as well as financially, and in their industry group or technical area and for the firm as a whole. They are Partners! They want the firm to do well. No one wants to lose a big client. And no one wants to go back to client service when they have been responsible for losing the client and the revenue associated with a big audit.

There’s just no motivation to be the sacrificial lamb. It just ain’t done.

I also received a good question from a reader. It’s a question that is probably on other’s minds today. You might be surprised by my answer.

Dear Madam

I am writing you with regard to the article “New Century Financial- It’s KPMG Again” published in your weblog. I’ve been offered a job at KPMG, UK which starts September 2008. Reading the recently released news I am really concerned about the future of my career as this situation seems identical to Enron incidence and the collapse of Arthur Andersen. I’d greatly appreciate if you could share with me your opinion of the possible outcome of this case and whether it may lead to collapse of KPMG. I am very thankful for your help.

Best wishes,
An Interested Reader

Dear Reader,
You are insulated, in a sense, from what happens with KPMG in the US. KPMG in the UK will go on, in some form, regardless.  I think that KPMG is only the first of the firms to see this type of suit. Deloitte actually has more exposure to losers. But New Century went bankrupt and it was one of the first failures, and so this precipitated a faster public evaluation of situation. Deloitte’s issues will go through courts instead of the court of public opinion as KPMG is now suffering through.  Deloitte will settle and details will not be known.

I would not want to say anything to deter you from joining KPMG UK. Just keep your antennae up and make decisions that are best for you as time goes by. That includes taking advantage of this good opportunity now. Good luck and keep in touch.

Regards,
Francine

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11 Responses »

  1. can kmpg not stay out of trouble?

  2. kPmg cannot, nor can any of the firms. exposure to these instances is inevitable, for every firm; people make mistkes, and a scape-goat is ALWAYS needed. it all depends on the angle the media runs with…although it seems that every time a sh*tty company falls, the accountants are somewhere to blame.

  3. @2:57

    From the CNN article:

    “Such controls might have caught “at least seven “wide-ranging, improper accounting practices”, most of which were not in accordance with generally accepted accounting principles”

    KPMG is filled with crooks, first there was the tax shelter scheme (which nearly took them under) and now this. I await reports of arm dealings with Iran or a report of human trafficking from China. Hell of a job boys, hell of a job.

  4. Isn’t it more than simple incentives that don’t match?

    There is no money to be made by shutting down a deal because that non-event no longer has any consequences.

    We don’t give hero prizes out to people whose warnings prevented disasters.

    But we better find a way to do it, if we want to minimize the effect of these type of social diasters.

  5. I have to disagree with your comments on sacrificial lambs. My firm has widely recognized those who have walked away from risky or questionable clients, especially subprime.

    Also, I am not sure how every firm’s compensation system works, but I wouldn’t say client partners are penalized “big time” if clients walk away. Sometimes it is for the right reasons – quality being the biggest one.

    NonBig4

  6. @8:49 am – Tell us what firm you’re at and we can give them credit for encouraging integrity.

    As far as clients walking away, I agree. Sometimes it’s best to let the clients who are being difficult go to someone else. Unfortunately, there is always another firm willing to pick them up. If the firm makes a conscious risk decision to drop a client or let a client drop them, then I hope they are fair with the Partner. But in the end, that revenue has got to be replaced.

  7. [...] failed. There was a very detailed, well-done bankruptcy examiner’s report on that one, too.pointed the finger at KPMG for not heeding the advice of their own experts, a la Andersen/Enron. Instead of the KPMG partner [...]

  8. [...] was a very detailed, well-done bankruptcy examiner’s report on that one, too. Mr. Missal pointed the finger at KPMG for not heeding the advice of their own experts, a la Andersen/Enron. Instead of the KPMG partner [...]

  9. [...] claims, the auditors are named in high profile subprime cases where fraud is alleged such as New Century and [...]

  10. [...] cases may provide some guidance.  In the New Century Financial case, junior auditors and professional practice specialists saw their names in the bankruptcy [...]

  11. [...] enforce them. As a result, you now see the dramatic corrections as failures and collapses such as New Century, Northern Rock, and Bear Stearns make paying the piper impossible to put off any [...]

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