KPMG & the Pinstripe Mafia

KPMG have been at the heart of the Debenhams dispute in their role as liquidators. But their abhorrent actions in that case is only the tip of the iceberg, as Stewart Smyth explains.

KPMG have been in the news a lot in recent months and not just due to their role as liquidators of Debenhams Ireland. In early October the airwaves of Joe Duffy’s Liveline were filled with a story related to another KPMG liquidation – St Monica’s nursing home, formerly run by the Sisters of Charity – where a safe with its contents of private documents and belongings had been sold in error at an auction.

Paul Ryan, who bought the safe, was resisting handing its contents back, despite two hired detectives claiming to represent KPMG turning up unannounced at his doorstep. Paul preferred to return the contents direct to the relevant families, via Liveline, as he did not trust the accountancy firm to do the job. How did a professional firm, one of the ‘Big Four’ global accountancy firms, end up with such a lack of trust being expressed about it?

After all, accountants are supposed to be trustworthy – it is a core element of their professional code of conduct. KPMG’s Global Code of Conduct starts by stating, “At KPMG, trust is earned by doing the right thing – not just some of the time but all of the time”.

Lack of Trust

This trust is important because the core of what accountancy firms (are supposed to) do is an important social activity –  conducting the annual audit of corporations and other organisations.

In capitalism auditing is necessary because there is a separation between those who invest in companies and the management who run those companies. Further, management has control over all the information about what they have done with the investors’ money.

In theory, auditing developed to examine the internal documents of corporations by an outside, independent body, with the aim of ensuring that what management say they have done (in the annual reports) is what has actually happened.

Auditing is such an important social activity that it is a legal requirement and the industry to practice as an auditor is itself regulated. However, in many English-speaking countries the governments have delegated the regulatory responsibilities to independent professional bodies – such as the Institute of Chartered Accountants in Ireland (ICAI). ICAI regulates its own members who work in accounting firms – large and small – including the global Big Four of KPMG, PwC, Deloittes and Ernst & Young (EY).

There is a similar regulator arrangement for liquidators with the actions of accountants and lawyers again being regulated by industry bodies.

Enriching themselves …

While auditing is the originating activity for the Big Four firms, they are now involved with many more consulting and advising activities. The ten largest consulting firms in Ireland generate fees of over €2 billion, with the top four slots occupied by the Big Four:

1. PwC – € 564 million
2. KPMG – € 458 million
3. Deloitte – € 380 million
4. EY – € 373 million

These accountancy firms are capitalist organisations in themselves – their overriding objective, as with any business organisation, is to make money for their owners.

The state-sanctioned, social activities of annual audits and liquidations generate huge fee income for the Big Four and other accountancy firms. For example, in the case of Carillion Deloitte was paid over £10 million but failed in their internal audit role to identify the oncoming corporate collapse. In another case, some of Deloitte’s partners were charged out at a cost of £1,160 per hour during the liquidation and administration of the UK electrical retailer, Comet.

… failing society

Just because something is expensive does not mean it does what is expected. Deloitte were fined £925,000 for failures in independence during the Comet liquidation. This is not an isolated occurrence. Last month Grant Thornton (one of the second tier of accountancy firms) was found to have fallen below required standards in five out of six audits it carried out on public sector organisations. Earlier this year Grant Thornton was fined £3 million for “ethical and objectivity failures during its audit of British drinks retailer Conviviality”.

Grant Thornton is also under investigation for its audits of Patisserie Valerie, Sports Direct and Interserve.

Again Grant Thornton is not unique and audit failures are not restricted to the few that make the news cycle. Prem Sikka has reviewed the finding of the UK’s audit industry regulator, the Financial Reporting Council (FRC):

“The FRC reported that 39% of the audits delivered by KPMG were deficient compared to 35% for PricewaterhouseCoopers (PwC), 29% for Ernst & Young, 24% for Deloitte and 45% for Grant Thornton.”

The main driver of these high fees and poor audit work is the changing culture among the big accounting firms. No longer is it one of providing a social good but is now one of realising an entrepreneurial spirit. Despite the huge fees, statutory functions such as audits and liquidations have become loss-leaders (products sold at a loss in order to attract clients) for these firms. Instead, they are much more interested in selling their additional products and consultancies – this is where the big money resides.

Government contracts

One area where the Big Four firms have been particularly active is in securing money from government departments. In July 2019 the Irish government revealed that millions of Euro had been spent on consulting contracts since 2011, with the Big Four among those benefiting the most.

However, the quality of the consulting advice appears to be little better than the quality of audits and liquidations. For example, the government spent €25 million on consultants for the National Broadband Plan (NBP), of which it is estimated KPMG got €11 million. The NBP procurement process was designed by KPMG and was such a disaster that the contract was effectively awarded by default, as the Granahan-McCourt tender was the only one received.

This is significant because in evidence given to the Oireachtas committee in May 2019 KPMG stated they could not carry out a value for money exercise on the procurement process because there was only one tender and stated,  “The solution on the table now … is more expensive than originally envisaged …”.

The links between the state and the Big Four firms are not just through these contracts but also by co-opting former politicians. In response to the growing criticism following high profile audit failures, the accounting profession has brought in some, largely cosmetic reforms, including requiring firms to set-up Public Interest Committees (PIC).

KPMG set-up their PIC in 2013 with three “independent” non-executive members. From 2019, two of those three are former politicians Pat Cox and Mary Harney. Cox is a former President of the European Parliament and former TD for the Thatcherite Progressive Democrats. Mary Harney was also a TD for the Progressive Democrats and former Minister for Health between 2004 and 2011.

This is how social class operates in late capitalism, through a myriad of semi-opaque interactions such as at exclusive dinners (like Golfgate) or on a PIC for a professional accounting firm. And of course, what is missing from the PIC is any representation of the public – no unions, no consumer rights groups, no environmental campaigners, no patient rights groups, no pensioners, no students, no workers … the list goes on.

Enriching their clients

Besides enriching themselves, the Big Four accountancy firms also seek to enrich their clients. One of the main ways they do this is through developing and selling tax avoidance and evasive products to their client base. On this site we have highlighted several times about the tax haven nature of Ireland, and tax avoidance actions such as the Apple tax case. The Big Four firms play a crucial role in facilitating such actions.

They have turbo-charged the entrepreneurial spirit of their tax consulting departments and in the process developed generic tax products that were illegal. In the US KPMG admitted criminal wrongdoing for tax fraud, paying a fine of $456 million. In the UK the Big Four were called before the House of Commons Public Accounts Committee (PAC) following evidence by a former senior PwC employee that the firm sold tax advice that had only a 25% probability of being found legal, if challenged. As the chairperson of the PAC stated,

“you are offering schemes to your clients—knowingly marketing these schemes—where you have judged there is a 75% risk of it then being deemed unlawful.”

However, all these schemes make huge saving for the clients of the Big Four. For example, in Britain, EY and Debenhams were involved with a tax avoidance scheme involving credit card handling charges, which were not subject to VAT. The judge in the Court of Appeal referred to the scheme as “Tweedledum in Alice in Wonderland: I know what you’re thinking about, but it isn’t so, no how”. This scheme could have cost the Exchequer £500 million per annum in lost tax.  And we also know that Apple paid less than 1% in Irish corporation tax for over a decade.

There is not the space here to go into the cases where Big Four firms and partners were involved with bribery, corruption and money laundering – all for the benefit of themselves and their clients.

Maintaining the system

When we go through this litany of enrichment for themselves and their clients, coupled with work that regularly falls below the requisite standard is it any wonder that former backbench Labour MP, Austin Mitchell and Professor of Accounting, Prem Sikka, described accountancy firms as “The Pinstripe Mafia“. The above, whether Paul Ryan knows the detail or not, makes his expressed lack of trust in KPMG perfectly understandable.

The role of KPMG and the Big Four as acting in the interests of capital are brought most sharply into the light with their actions during the Debenhams dispute. They have made every effort to break the workers’ resolve – encouraging scabs to intimidate lawful pickets, resorting to court injunctions and continually misrepresenting the financial position (where is the money from the online sales going?).

Despite all their talk of integrity, ethical behaviour and the public interest – the Big Four firms act to maintain the status quo, and in the process enrich themselves and their clients at the expense of the public and workers, like those on the picket lines outside former Debenhams stores.