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Bad apples or bad orchard? KPMG Australia fails ethics test

by Michael West | Oct 25, 2021 | Finance & Tax

It’s a good thing engineers didn’t have the professional standards of some of today’s accountants when the Sydney Harbour Bridge went up, or we might be driving straight into the water. Michael West examines the ethical cloud over a local arm of one of the Big Four accounting firms, with some technical advice from accountant Jeffrey Knapp.

Last month a regulatory body from the US censured and fined KPMG Australia over professional standards. The findings raise a pressing question: how widespread is this poor culture within the accounting industry?   

On September 13, the Public Company Accounting Oversight Board (PCAOB) of the US made an order that (1) censures KPMG Australia; (2) fines KPMG Australia $450,000; and (3) requires KPMG Australia to undertake remedial actions.

The board’s website explains that its mission is to oversee audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports.  This body investigates and, if necessary, disciplines registered public accounting firms and their associated persons for violations of specified laws, rules, or professional standards.

So why do investors in public companies need protection from KPMG Australia?  What ghastly behaviour has attracted the ire of the Americans?  

The board found that from at least 2016 until 2020, KPMG Australia failed to identify that more than 1100 firm personnel, including more than 250 auditors, were involved in cheating on tests for mandatory training courses that included professional independence, auditing, and accounting. The cheating involved improper answer sharing including the giving and receiving of answers relevant to the tests.

Perhaps the most disturbing aspect of the KPMG Australia cheating scandal is that it reportedly involved18 partners, including two who are no longer with the firm.

From time to time there might be one or two bad apples in a firm that act unprofessionally and humiliate themselves and embarrass the firm. But according to Jeffrey Knapp, retired accounting lecturer from UNSW,  KPMG Australia’s failings of professional ethics in training courses is “not a case of one or two bad apples”.  

According to its Audit Transparency Report for 2020, KPMG Australia had 1187 client service audit staff excluding partners.  Apparently, around 250 of those audit staff have been cheating on mandatory professional training tests. That comes in at over 20%.

Knapp says the public will not tolerate that sort of behaviour from that many partners at a Big Four Audit firm. ‘’Reputation and trust are everything  in the audit business and KPMG Australia should expect to lose some audit clients over this,’’ he said.  

‘’KPMG has an Audit and Assurance Services Division. How utterly unassured an audit client of KPMG Australia over 2016-2020 must feel.  There is a one in five chance that someone in the KPMG Australia personnel on their audit engagement has been cheating on their professional training tests.  Stakeholders of public companies would also have the right to feel utterly unassured by a KPMG Australia audit report if 1 out 5 of their professional audit staff have been caught cheating.’’ 

Only 16% cheating, que?

The odds improve a little when the entire KPMG Australia workforce is considered. Only 1100 personnel out of a workforce of approximately 6700 have been cheating, or 16.4%.  ‘’When KPMG Australia was providing services over 2016-2020 in respect of government-awarded contracts, there is only a 1 in 6 chance that someone providing the services cheated on mandatory training courses,’’ Knapp said.

‘’To be fair, KPMG Australia self-reported the misconduct of its staff to the PCAOB in 2020. But this is at least four years after the cheating began. It may be a case of better late than never.  Nonetheless, the public expects, and has every right to expect, more timely action from a Big Four audit firm when there is dishonest behaviour or fraud happening under its nose.  Imagine being an audit client of KPMG Australia and having to wait four years before the firm reports (blatant) accounting fraud to the board of directors?  Imagine being a government department and finding out four years after the event that KPMG Australia has compiled a report for you on cheating within the department.’’

According to KPMG Australia’s website, at the core of the firm’s vibrant culture are the key values of ‘’integrity, excellence, courage, together’’ and ‘’for better’’.  So why did 20% of the professional audit staff of KPMG Australia think that cheating on mandatory training tests was the way to go?  ‘’Maybe they were under too much pressure from the firm to finish audit jobs,’’ says Knapp.

‘’Maybe they were  time deprived to complete training.  Maybe they thought that ongoing professional education and training at KPMG Australia was a bit of a joke. Irrespective of the culture or values of the firm, there is no acceptable excuse for the behaviour of auditors that embrace cheating to get ahead for personal reward or professional accomplishment. It is wrong for any person working in the accounting profession to cheat in professional tests.  It has always been wrong, and it always will be.’’ 

The cheating at KPMG Australia drips with irony because the tests included professional independence, which is a topic at the epicentre of professional ethics.

‘’In truth, 250 audit staff at KPMG Australia have dragged the Australian audit profession into the mud by failing to understand their personal responsibility as professional accountants, or aspiring professional accountants, to act with integrity,’’ says Knapp. 

Regulators ASIC, CAANZ, CPA all MIA

It is appropriate that an American auditor has censured KPMG Australia.  But what of Australia’s own regulatory bodies?  Surely there is one that wishes to pass comment on this matter, if only to emphasise the importance of ethics to the Australian accounting profession.  

But based on a MWM search of the relevant websites, there doesn’t appear to be anything out there from ASIC (Australian Securities and Investments Commission), CAANZ (Chartered Accountants Australia and New Zealand) or CPA Australia.  There does not appear to have been any comment from the Treasurer or Treasury, the Financial Reporting Council, the accounting/audit professors at Australian Universities, the Accounting Professional & Ethics Standards Board or the  Australian Auditing and Assurance Standards Board.

‘’Every single person on the audit staff at KPMG Australia who has been caught out cheating on professional tests needs to be externally censured,’’ says Knapp. 

‘’They do not need to feel censured vicariously through the PCAOB’s censure of the firm, rather they need to feel personally censured.  Whether the members of  CAANZ or CPA Australia involved in this matter are named and shamed in disciplinary proceedings is a matter for those professional bodies.  It should certainly be considered.  According to one report, CAANZ is still considering what to do 18 months after becoming aware of rampant cheating by members within its ranks.’’

Perhaps CAANZ is still waiting for the Big Four audit firms to tell it what to do.

As a minimum, it would be reasonable to expect that each member of CAANZ caught cheating on professional tests receive an official warning together with an explanation of why their behaviour was wrong and how it is damaging to the whole Australian accounting profession.

In December 2019, Knapp gave evidence at a Joint Parliamentary Inquiry into the Regulation of Audit in Australia. After reciting some of the sloppy audits of KPMG Australia on multinational clients, Knapp concluded that “the audit partners at KPMG should take themselves outside and give themselves an uppercut”.

It might be time for another round of self-discipline.

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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