Why KPMG is on the operating table, not the mortuary slab
They've lost their CEO, head of audit, and maybe their biggest clients, in a matter of weeks. Here's what they need to do.
Societal Capital catastrophes can jeopardise any business, but what if your business IS your Societal Capital? That’s the situation the big four Australian auditors are in. They command premium fees because of their societal standing, and all of them have had that standing rocked in recent times.
To see how bad the consequences can be you only have to look back to Arthur Andersen, the 89-year-old institution with 85,000 global employees that, by covering up its Enron audit failure, brought about its own complete erasure in 2002.
The reason was obvious. Even if it could survive the lawsuits, who could ever put faith in Andersen’s word again? Each of its three licences, Social, Public and Popular, was destroyed. Such was the fallout that the Sarbanes-Oxley Act of 2002 was passed in the US as a Public Licence response across the whole sector, overhauling the regulation of auditors and permanently tightening the rules separating audit from other services.
So where does each of our big four Australian candidates sit on the road to the same fate?
For now the safer two appear to be EY and Deloitte. EY’s is an employee safety issue, largely localised to its Social Licence (stakeholders), although it did attract Senate scrutiny (Public Licence).
Deloitte’s landed wider. Letting AI fabricate citations in a government report didn’t just touch its Social Licence (clients), it also hit its Popular Licence as it became the poster child for a dynamic all white-collar workers are grappling with.
PwC’s event was serious enough to require amputation. Its leaking of privileged government tax policy was a “double threat”, impacting both its Social (government customers) and Public Licences (the government) simultaneously. For a B2B professional services firm, these are the most important licences. Helping corporates avoid paying tax threw in a knock-on Popular Licence hit for free.
The choice of body part to amputate was telling. Despite the transgressions coming from the tax practice, it was the government practice it sold for $1. Yes, this was the smaller organ, but it was also the one most exposed to the damaged government relationship, the Social and therefore Public Licence, which allowed a clean cauterisation.
In all three cases there was no direct infection of the audit function. The patients are in recovery.
KPMG’s body shock is far more systemic. While not a direct undermining of its audit veracity, the alleged misconduct involved audit teams misusing audit-derived client data to chase other audit tenders, betraying the fundamental trust of its key stakeholder group. The Public Licence response is already under way, an ASIC investigation, a parliamentary inquiry, and reviews of the roughly $270 million in federal contracts the firm holds.
Perhaps even more concerning was the ensuing cover-up, which included three investigations the firm now concedes were inadequate and the marginalisation of a whistleblower, presided over by senior leaders making public overtures about transparency at the same time. The firm even covertly accessed the whistleblower’s computer to extract the very documents it claimed it lacked, the AFR reported.
There’s been some bloodletting, but many of those charged with remediating the problem were present at its genesis. For example the fourth investigation has gone to Allens, the same firm whose earlier review dismissed most of the allegations.
The patient is still on the table, and as yet there’s no clear therapeutic strategy.
Treatments have to be matched to the licence they’re healing. On Public Licence, that means full cooperation with ASIC and the parliament and an end to privilege games. On Social Licence, it means repairing the client relationships directly and giving the whistleblower the vindication the apology only gestured at, under a leadership not implicated in the original failure. On Popular Licence, it means an independent investigation published in full. KPMG is doing close to the opposite of all three.
The first real test is 19 June, when 13 current and former partners appear before the committee alongside Lendlease, Ashurst, Allens and ASIC. A firm trying to rebuild its licences would treat that hearing as the start of the cure. A firm still managing the cover-up will treat it as something to survive.
One thing is keeping KPMG off the mortuary trolley that took Andersen: the misconduct surrounds the audit relationship, it hasn’t touched the numbers the firm has signed off. Should it ever do so, the prognosis changes in an afternoon.
Because when your business is your Societal Capital, the real measure of solvency is trust. KPMG still has some, but is spending it fast.