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Uppercut: KPMG cheating scandal mirrors Big Four rot, business leadership

by Michael West | Sep 22, 2021 | Finance & Tax

It was hardly the venue for violence, the Joint Parliamentary Inquiry into Regulation of Audit in Australia. The Committee transcripts have now dropped and we can report on an extraordinary day in the history of audit, the day when, finally, there were calls for violence. Michael West reports.

Mr Jeffrey Knapp: Frankly, the audit partners at KPMG should take themselves outside and give themselves an uppercut.
Chair, Senator James Paterson: Mr Knapp, that’s not really an appropriate contribution to a parliamentary committee.
Mr Knapp: The last paragraph of my presentation was unscripted.
Chair: I gathered that.
Mr Knapp: But it was based on evidence.
Chair: Mr Knapp, we’re interested in your observations based on evidence. We’re not interested in recommendations for people to do harm to themselves, to put it bluntly.

Thank heavens Mr Knapp did not advocate that partners of the Big Four accounting firms “Go and jump in the lake”. It may have invited a rebuke from Senator Paterson for incitement to mass drownings.

Quis custodient ipsos custodes? Senatoris custodiet ipsos custodes. Who guards the guards? The Senator guards the guards.

Setting the scene

The scene was the Joint Parliamentary Inquiry into auditors which is investigating slipshod audit standards and rampant conflicts of interest by the Big Four. Deloitte, EY, KPMG and PwC are Australia’s largest political donors; they now earn $700 million a year for Government consulting and enjoy firm-wide double digit revenue growth while they audit the same multinational companies for which they provide tax dodging and other advisory services.

In lay terms, if this were a board game, the Big Four would be holding all the chips.

The testimony for retired UNSW accounting academic was refreshing, coming hard on the heels of some fairly dry witness stuff from other academics.

Knapp, unlike other witnesses spruiking technical wares and generalities, was naming names, the biggest corporate names in the world. And here is his actual evidence of reckless and compromised accounting, which includes the biggest corporate names in the world.

Knapp segued into his call to arms with this:

“One final example (of falling transparency and audit quality): KPMG. KPMG allowed Ansett to prepare special purpose financial statements when it had 15,000 employees. KPMG allowed Pfizer Australia to recognise dividend income directly in equity. KPMG allowed Fresenius Medical Care Australia to prepare general purpose financial statements that did not consolidate subsidiaries.

“Frankly, KPMG is not acting in a professional manner in these audits, and it’s high time that they considered their role as a leader in the profession, as an educator to the accounting profession. If I can just conclude on this note: frankly, the audit partners at KPMG should take themselves outside and give themselves an

Then this on one of the companies in the bidding duel for the privatisation of Australia’s visa system:

“It’s baffling to me that you can have a large company like Oracle in Australia that hasn’t filed its annual financial report on time nine years in a row and sometimes with a very lengthy delay — six months or a year — and the auditor is not in some sense following up on that and saying, ‘You’ve got to comply with your legal responsibilities for lodging your financial reports’. It’s also baffling to me (that) ASIC, as the custodian of these financial reports, should know when a company like Oracle hasn’t filed nine years in a row”.

There were other memorable moments at the Committee hearing in Canberra on Friday. One of these was the grilling of Financial Reporting Council (FRC) chair Bill Edge for being paid by PwC at the same time as being in this key oversight role of the accounting profession. Senators Peter Whish-Wilson, Steve Georganas and Deborah O’Neill were suitably energetic in questioning Edge on this one, besides trying to get to the bottom of what the FRC actually did, and why taxpayers should have to finance an agency which apparently did so little.

Who Guards the Guards? Big Four prepare for war as beach-side senator brings corporate inquiry

A simple and efficient outcome from this inquiry would be to compel multinationals and their auditors to file proper General Purpose financial statements, instead of the skimpy Special Purpose variety. This would ensure more tax, and more accountability for the public and for creditors.

Knapp: “Unfortunately, there are many multinational companies preparing inappropriate special purpose financial reports with impunity. The Big Four audit firms signing off on these special purpose accounts have abused the law with reckless indifference to the reporting entity definition. For example, KPMG audit failures include JBS Holdco Australia Pty Ltd, special purpose accounts for 2013, $3.6 billion of revenue, 7,721 employees; Ernst & Young audit failures include Apple Pty Ltd, special purpose accounts for 2016, $7.5 billion of revenue, 3,729 employees; Deloitte audit failures include Anglo American Australia Ltd, special purpose accounts for 2015, $2.8 billion in revenue, around 2,000 employees; and PricewaterhouseCoopers audit failures include Johnson & Johnson Pty Ltd, special purpose accounts for 2016, $1.3 billion of revenue, 1,180 employees.

“The significance of the multinational economic activity concealed in special purpose financial reports is non-trivial. My limited sample totals $63 billion of revenue.  Multinational companies with dominant positions in Australian markets, or those with hundreds of employees or an array of unsecured creditors, are most likely reporting entities. In the absence of compelling evidence to the contrary it is reasonable to expect the existence of users dependent on general purpose financial statements for these companies.”

Josh’s Shark Pool: meet the Treasurer’s tax advisors

Accounting expert and inquiry observer Tom Ravlic, whose submission is worth a read, has an equally simple reporting remedy on a broader scale:
“The simplest and most elegant solution for those entities that are obliged to report under the law to the corporate regulator is to require full compliance with accounting standards. No exceptions should be entertained”.

Amid the squabbling over audit standards and the fineries of interpretation, it is always open to government to simply insist all companies over a certain size report fully and uniformly. This might do the Big Four out of some business but it would bring the tax dollars in. After all, if business people wish to enjoy the protection of the corporate veil, with that should come accountability and transparency. Otherwise, just don’t incorporate.

Knapp: Big Four failed Australia for their multinational clients

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Revelations of rampant cheating at KPMG echo the broader decay in culture at the top of business in Australia; at the Big Four firms which advise both our largest corporations and government, indeed the firms to which government itself is being outsourced. Michael West speaks with Jeffrey Knapp.

If the big news of the week is Australia passing even more of its sovereignty to the United States via AUKUS, the other news is that our regulatory sovereignty was also transferred when regulators from the United States took aim at KPMG Australia and blew it out of the water for cheating.

The news mirrors the wider decline in business ethics and government in Australia as evinced by the abuse of public money from the slew of political rorts scandals and, in corporate Australia, by the unseemly rush by profitable companies to claim public subsidies such as JobKeeper; and then the abject failure of “business leaders” to do anything about it other than feel quiet shame.

The KPMG revelations are extraordinary.

On 13 September 2021, the Public Company Accounting Oversight Board (PCAOB) of the United States made an order that one, censures KPMG Australia; two, fines KPMG Australia $450,000; and three, requires KPMG Australia undertake remedial actions.

The PCAOB’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. The PCAOB investigates and, if necessary, disciplines registered public accounting firms and their associates for violations of laws, rules, or professional standards.

So why do investors in public companies need to be protected from KPMG Australia?  What ghastly behaviour at KPMG Australia has attracted the ire of the PCAOB?  

According to PCAOB Release No. 105-2021-008, from at least 2016 until 2020, KPMG Australia failed to identify that more than 1,100 of the firm’s employees, including more than 250 auditors, were involved in cheating on tests for mandatory training courses that included professional independence, auditing, and accounting. The cheating at KPMG Australia involved improper answer sharing, including the giving and receiving of answers relevant to the tests.

A few bad apples or 20% of the orchard

“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. KPMG Australia’s deep dive on professional ethics in training course is not a case of one or two bad apples,” says forensic accountant and retired academic Jeff Knapp.  

“According to its Audit Transparency Report for 2020, KPMG Australia had 1,187 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% of the KPMG auditor orchard.

For clients of KPMG’s Audit and Assurance Services Division, the news is unedifying, to say the least. 

There is a one in five chance that someone in the KPMG Australia audit team has been cheating in 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,” says Knapp. 

The odds improve a little when the entire KPMG Australia workforce is considered. Only 1,100 KPMG Australia personnel out of a workforce of approximately 6,700 have been cheating, or 16.4%.  

That means that when the firm was providing services over 2016-2020 in respect of government awarded contracts, there is only a one in six chance that someone providing the services was a cheat on mandatory training courses.

Untimely advice

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 had commenced in 2016.  

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 afoot.

These are the firms which advise the world’s largest corporations on minimising their tax, the same firms whose audits they collectively conduct – often selling tax advice to the same companies they audit – while their consulting divisions collectively rake in more than half a billion dollars in fees each year giving advice to the Federal Government alone.

They enjoy a cherished position in society and government yet cheating is central to their business model and the KPMG scandal has put this in stark relief.

Pushing the limits of ethics and laws is central to the very practice of Big Four tax advice, central to the proliferation of tax avoidance. And the ATO has been ramping up its scrutiny of Big Four advisers. In 2019, Deputy Commissioner Jeremy Hischhorn told a Senate Estimates hearing “some partners” at the firms were “disrupting” the tax system.

Again, this was the “a few bad apples” explanation by the Deputy Commissioner but Hirschhorn is also – along with Commissioner Chris Jordan, a former partner of the firm. It is a fair call to say then that they are probably understating a broader failure in professional ethics, even a culture of cheating, as it is also fair to say these firms are almost unassailable, too big to fail, given their central and dominant role in society.

Since then the tax avoidance enforcement against their clients has only become more challenging and the ATO has dragged them into court for “cheating” on Legal Professional Privilege, essentially arguing they are employing a lot of lawyers to sign things so that they can claim, when prosecuted in court for tax cheating, that their documents are “privileged” so they can hide them from the court.   

Firm values ignored

Given the dominance of the Big Four and the failure of regulatory and professional bodies to uphold standards, it is also probably fair to say, cheating is increasingly a part of the culture. The KPMG scandal underlines this.

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”. 

“But what values are at the core of KPMG Australia’s systemic cheating on mandatory training courses? Some suggestions are: Whatever it Takes, Self-Indulgent, Expediency, Gutless Wonder, Together (Thelma and Louise version), For better or worse,” says Knapp.

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. Maybe they were deprived of time 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 are no acceptable excuse for the behaviour of auditors that embrace cheating to get ahead for personal reward or professional accomplishment,” says Knapp. 

“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.” 

Professional values are what really count

The cheating at KPMG Australia is ironic because the tests included professional independence, which lies at the epicentre of professional ethics. Imagine being a person at KPMG Australia about to do a test on ethics and asking around for the answers so you don’t have to do the test independently, that is, so you can cheat.  

“You shouldn’t need firm values to know what it takes to be an accounting professional. In Australia, APES 110 Code of Ethics for Professional Accountants (including Independence Standards) applies to each member reflecting the profession’s recognition of its public interest responsibility.

“The 250 audit staff miscreants at KPMG Australia would do well to remember that their public interest responsibility is more important than their firm’s interest, or personal interest, responsibility.”

Paragraph R111.1 of APES 110 says, “A Member shall comply with the principle of integrity, which requires a Member to be straightforward and honest in all professional and business relationships”.

“How hard can it be for an individual working in the KPMG audit and assurance division to understand that? 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.” 

Paragraph R113.1 of APES110 says a member must comply with the principle of professional competence and due care which means attaining and maintaining professional knowledge and skill. 

“Mandatory training courses that included professional independence, auditing, and accounting are not a joke.  It is what a professional accountant, or aspiring professional accountant, is required to do.  

“It is a privilege to have the status of a professional accountant in Australia and that privilege comes with obligations and responsibilities. For starters, and obviously, don’t cheat on professional training tests.” 

The censure and the uncensured

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

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. 

Only silence, only the assumption now that these firms are entrenched in their power, untouchable because nobody in this country has the nerve to call a spade a spade, and arrest the decline. The standard you walk past is the standard you accept.

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

“They do not need to feel censured vicariously through the PCAOB, 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 eighteen 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 them what to do.

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

KPMG’s 18 audit partners who ought to know better

Perhaps the most disturbing aspect of the KPMG Australia cheating scandal is that it reportedly involved 18 partners including two that are no longer with the firm.

According to Knapp, the public will not tolerate that sort of behaviour from that many partners at a Big 4 Audit firm. Reputation and trust are everything in the audit business and KPMG Australia should expect to lose some audit clients.  

In December 2019, Knapp attended Canberra and 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”.  

Knapp was criticised for his remarks and the consequent report of the Inquiry glossed over the failings of the profession with a particularly lame final report.

In light of the cheating scandal, however, Knapp has been vindicated. 

Following Knapp’s “uppercut” remarks, Liberal Senator James Patterson rebuked the former lecturer for encouraging violence or self-harm. 

Knapp says Patterson either did not understand the point he was making or was unfamiliar with the language of the western suburbs of Sydney which did not always rely on literal interpretations but was often given to sarcasm and irony.


To come on Michael West Media, Jeffrey Knapp runs the ruler over KPMG Australia’s recent audit of the multinational company, Paddy Power Australia Limited (the owner of all things Sportsbet).  

“Here are the odds:  KPMG Australia did a good audit ($999 for $1). KPMG Australia overlooked accounting standards ($1.00000000001 for $1).”

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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