Ethical accountants are groaning in the wake of the PwC scandal which has thrashed the reputation of the profession. While most accountants abide by ethical standards, the Big 4 have dragged the profession into the mud. Wally the Chartered Accountant reports on the decline of ethics and self-regulation.
While PwC is keeping the terms of its internal ethics inquiry a secret, documents released under Freedom of Information (FOI) reveal how KPMG Australia was allowed to manage the investigation of rampant dishonesty within its ranks and the sanctioning of auditors involved. The pattern is clear; these powerful firms are left to police themselves.
The documents (published below) reveal how corporate regulator the Australian Securities and Investment Commission (ASIC) prefers the interests of KPMG and the mantra of silence is golden when the Federal Parliament is inquiring into the state of audit regulation in Australia. Together, KPMG and PwC have dragged the Australian accountancy profession into the mud with little consequence to themselves so far.
KPMG Australia staff trash the ethics code
KPMG Australia staff have trashed the ethical code applicable to all members of the Australian accounting profession, APES 110 Code of Ethics for Professional Accountants (including Independence Standards). Contrary to the professional obligation of integrity, 1131 KPMG staff were involved in cheating on online tests for self-advantage.
On 13 September 2021, the Public Company Accounting Oversight Board (PCAOB) in the United States censured KPMG Australia, imposed a US$450,000 civil monetary penalty on the firm, and required it to undertake certain remedial actions. These sanctions arose from systemic cheating at KPMG Australia during online training courses for topics such as independence, audit foundations, Australian accounting and auditing standards and US generally accepted accounting principles and generally accepted auditing standards.
The irony of cheating on the independence topic was apparently lost on those involved.
The cheating at KPMG Australia on online tests was long standing, widespread within the firm’s audit practice, and across all staff levels (a proxy for age and experience). From at least 2016 until early 2020, more than 1131 personnel at KPMG Australia, including 277 of its audit personnel, were involved in improper answer sharing when taking online training tests.
An array of techniques was used to facilitate cheating on online tests. Answers were improperly shared using hard copies, emails, text messages, instant message services and orally when taking the tests in the presence of others. This behaviour might be understandable if the cheaters were untrained adolescent high school students, but alas many were tertiary educated, professionally educated, highly trained and highly experienced.
Despite this, they carried out their professional duties as if they were above the Code of Ethics, as if untouchable. They dispensed with the once proud motto of the Institute of Chartered Accountants in Australia, without fear without favour and replaced it with a more pragmatic one: without fear to favour oneself.
KPMG takes test cheating global
The cheating on tests and trashing of the fundamental professional obligation of integrity by KPMG Australia staff appears to be a global [dis]advantage.
In June 2019, the Securities and Exchange Commission found that numerous KPMG audit professionals in the United States cheated on internal training exams by improperly sharing answers and manipulating test results. This event should have made the management at KPMG Australia alive to the possibility that cheating was happening in their offices around the same time, but it did not.
In December 2022, the PCAOB disciplined KPMG United Kingdom for failing to detect and prevent cheating on tests on mandatory internal training courses by hundreds of individuals from 2018 until March 2021. During 2022, the PCAOB has also sanctioned KPMG India, KPMG Colombia, and KPMG Korea for what appear to be similar quality control failures.
PwC Australia staff trashing the ethical code
PwC Australia staff have also trashed APES 110. Contrary to the fundamental professional obligation of confidentiality, at least 63 PwC partners and staff are recipients of emails that relate to using secret information from the Australian Taxation Office (ATO) for self-advantage. Partners [no less] failing to observe confidentiality; failing to act with integrity, failing to follow the most basic of ethical principles.
In June 2023, an interim report released by an Australian Parliamentary Committee into this mater summed up the situation as follows: ““It is clear that the desire for personal gain trumped any obligations that PwC had to the Commonwealth of Australia and its citizens” In contrast, APES 110 neatly explains that: “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest”.
Senate report is out: is the “multi-year cover-up” “game over for PwC”, or not?
Why it matters to other members of the Australian accounting profession
Do KPMG and PwC belong in the Australian accounting profession? The disgracefully self-interested behaviour of their staff has stained the reputation of all members of the Australian accounting profession. All members must partake in the consequences of declining public trust and public cynicism for the accounting profession that flows from large scale cheating on tests and monetising of confidential client information.
If Australians can’t trust people at the upper echelon of the Australian accounting profession to follow the Code of Ethics, then why should they trust anyone else in that profession?
Again APES 110 explains things in a way that even the management of KPMG Australia and PwC Australia should understand: “Confidence in the accountancy profession is a reason why businesses, governments and other organisations involve Members in a broad range of areas, including financial and corporate reporting, assurance and other Professional Activities. Members understand and acknowledge that such confidence is based on the skills and values that Members bring to the Professional Activities they undertake, including: (a) Adherence to ethical principles and professional standards.”
Most professional accountants in Australia do act with integrity day-in-day-out. Most have studied hard and worked hard to achieve their professional designation. They know that the privilege of being a member of the Australian accounting profession comes with the obligation to follow the Code of Ethics. Most members of the Australian accounting profession are either embarrassed, unimpressed, or quietly seething about KPMG Australia and PwC Australia trashing the Code of Ethics and bringing their profession into disrepute.
Parliamentary Committee on Audit misses the KPMG and PwC evidence
In February 2020, an Australian Parliamentary Committee into the regulation of auditing handed down its Interim Report after a due process that included public submissions and public hearings. In November 2020, the Committee released its Final Report.
When the chairperson of this Committee, Senator James Patterson, tabled the Interim Report in the Parliament he noted how important it was that auditing in Australia not only be high quality but be seen to be high quality.
A relevant question for the Committee should have been: how can auditing in Australia be seen to be high quality when there are 277 audit personnel at KPMG Australia cheating on online tests?
But this question was not asked because the Committee missed the evidence that 1131 KPMG Australia staff were in breach of professional standards from 2016 to 2020. Around the end of February 2020, KPMG self-reported the test cheating within its ranks to the PCAOB but did not inform the Committee about it. KPMG simply stood by its submission to the Committee entitled “Advancing trust in audit” and the statements therein including: “Quality is fundamental to our purpose and we constantly monitor and evaluate it”; and “Our values emphasise that above all, we act with integrity.”
KPMG also notified ASIC about the test cheating around the end of February 2020, but ASIC chose not to inform the Committee
KPMG also notified ASIC about the test cheating around the end of February 2020, but ASIC chose not to inform the Committee inquiring into the regulation of auditing about it either. Maybe ASIC thought it wasn’t their role to inform the Committee. Maybe ASIC believes that auditing does not need to be seen to be high quality.
Another relevant question for the Committee should have been: how can auditing in Australia be seen to be high quality when 63 partners and staff at PwC Australia prefer the interests of their firm and multinational clients over their professional obligation to maintain confidentiality?
But this question was not asked because the Committee missed the evidence that PwC was monetising confidential information it had acquired from doing consulting work for the ATO. PwC knew it, the ATO knew it, the Australian Federal Police knew it, but nobody told the Parliamentary Committee. PwC simply stood by its submission to the Committee including the statement that: “Controls to mitigate conflict risk include restrictions on access to information to ensure confidentiality and segregation of teams.”
The Committee may have missed the PwC confidentiality evidence, but it also seems to have missed the warning signs that the Big 4 audit firms were preferring their own interests over their professional obligations. Submission 79 to the Committee noted that the Big 4 audit firms were: (1) failing to apply applicable accounting standards to many multinational clients; and (2) enabling many multinational clients to avoid the legal requirements for the publication of their annual financial statements.
ASIC monitors the situation
What exactly did ASIC do when it received the KPMG Australia staff cheating report around the end of February 2020? Documents released under Freedom of Information suggest that ASIC took a watching brief and applied the mantra of silence is golden. ASIC responded with the noise that it is most famous for when people in institutions at the big end of town are up to no good, that is, the sound of crickets.
The FOI document indicate that: (1) ASIC did not inform the Parliamentary Committee; (2) ASIC did not undertake its own investigation but accepted that KPMG could manage the investigation and any penalties itself; (3) ASIC met with representatives of KPMG Australia and prepared notes that provide an incomplete record about what had happened at KPMG and how KPMG was handling things; and (4) ASIC let the PCAOB, a regulator in the United States – in another country or jurisdiction – do its job of enforcement against auditors at KPMG Australia.
On 7 February 2020, ASIC attended a public hearing in Canberra and, in answers to Committee members, ASIC suggested it had the power to enforce the Code of Ethics against auditors. ASIC argued that APES 110 indirectly has the force of law because auditing standards require auditors to comply with relevant ethical requirements including integrity, confidentiality and professional competence and due care.
cheating at training is not training … cheating and auditing are mutually exclusive
It seems obvious that auditors cheating on training tests for auditing disqualify themselves from meeting the ethical requirement for professional competence on standards and relevant legislation. Although ASIC may beg to differ, cheating at training is not training. Cheating during continuing professional education means it has not been satisfactorily completed. Cheating and auditing are mutually exclusive.
On 14 September 2021, ASIC had a very different answer about whether it could enforce the Code of Ethics against auditors when the details of KPMG Australia’s cheating had been made public by the PCAOB disciplinary action and the badness of it had attracted international attention.
Carol Paradine, CEO of the Canadian Public Accountability Board, sent an email to ASIC and asked the question that was on the lips of most members of the Australian accounting profession: “The KPMG Australia answer sharing situation outlined in the PCAOB order is quite troubling. Did any Australian regulators take action?”
ASIC answered the question so: “We have been monitoring the situation but have not taken action, other than understanding the investigation conducted by the firm and the [firm] sanctions imposed on those involved. ASIC was full of excuses like this one: “The conduct related to internal training and we felt that it would not possible to establish in court that there was a breach of the quality control standard and Australian law.”
ASIC media comms swings into action
When the KPMG test cheating finally became public knowledge, ASIC transitioned from monitoring the situation to managing perceptions and relations. The perceptions of it as a regulator and the relations with its overlords in Canberra. When important regulatory issues are considered at ASIC, or if ASIC has been watching but not acting and this becomes public knowledge, then ASIC central – the ASIC media comms team – is never far away.
The following email exchange was released under FOI. The emails show that ASIC must weigh up many interests as a regulator when dealing with auditors at a big audit firm who are cheating in the course of their professional duties, but it seems the public interest is the least preferred one.
Postscript
On 19 April 2022 and 13 July 2022, Chartered Accountants Australia and New Zealand (CAANZ) provided updates on the KPMG Australia cheating scandal. CAANZ noted that 422 CAANZ members were involved to some degree in the cheating. Of these, four members have received a caution and eight remain subject to disciplinary action. None of the 422 CA ANZ members have been named.
On 21 June 2023, the Finance and Public Administration References Committee of the Senate release its report entitled “PwC: A calculated breach of trust”. The Committee concluded that “PwC engaged in a deliberate strategy over many years to cover up the breach of confidentiality [of ATO information] and the plan by PwC to monetise it.”
On 23 June 2023, the Parliamentary Joint Committee on Corporations and Financial Services announced an inquiry to examine the partnership models of the Big 4 audit firms including how regulators can impose penalties on their personnel for bad behaviour. Bravo to the Australian Parliament for establishing this inquiry. Perhaps the Committee will find that Australia needs a new fearless regulator to restore trust in our auditor eco-system.
Wally the Chartered Accountant (not his real name) is a veteran of the accounting profession who is concerned about dishonesty and falling professional standards. Wally's true identity is known to MWM.