How KPMG’s shoddy work is finally catching up with it

A $600 million lawsuit over its role in the collapse of Dubai private-equity firm Abraaj Group is the latest in a long list of headaches for KPMG stemming from the Abraaj case. The claimants –two units of Abraaj now in liquidation – accuse KPMG and its Lower Gulf subsidiary KPMG LG of having “failed to maintain independence and an appropriate attitude of professional scepticism” as well as breaching their duty of care during the Abraaj audit, leading to the “irregularities” at the root of the scandal to be overlooked.

Abraaj’s subsequent 2018 collapse on KPMG’s watch – amid allegations of embezzlement and incorrect bookkeeping - has been haunting the firm ever since, not least because it has called into question its competence and trustworthiness. What’s more, the scandal is just one example of a growing number of suits being brought against KPMG for negligence, suggesting that the firm may finally have to face the music and clean up its act if it wants to move forward.

Abraaj shatters the pretence

The shadow cast by Abraaj over KPMG’s reputation is considerable. At its peak, the Emirati investment fund was handling some $14 billion worth of assets from big-name investors like the Bill & Melinda Gates Foundation and Hamilton Lane, who first harboured misgivings about how their money was being spent in 2018 after receiving an email from a whistle-blower hinting at improprieties. In an attempt to dispel these doubts, Abraaj hired KPMG to conduct a month-long review of its dealings, which the auditors eventually concluded by giving Abraaj a clean bill of health. Concerningly, KPMG delivered its all-clear verdict despite the fact that Abraaj’s accounts showed it had pumped money in from loans taken out from lenders to plug gaps just days prior.

When it later emerged that the CEO of the KPMG branch in charge of the audit had a son employed by Abraaj – and that at least three executives had spent time on the payroll of both businesses – the alarm bells were well and truly sounded. Deloitte were drafted in to conduct a further audit of Abraaj’s records, finding evidence that over $1 billion in funds had been used for purposes other than those officially stated. This provided further evidence suggesting that KPMG auditors had lacked the professional distance necessary to spot these suspicious transfers and regularities, which, according to prosecutors, constitutes a breach of KPMG’s duty of care.

With the company thus facing an increasing burden of lawsuits and fines resulting from suspected or proven misconduct, it shouldn’t be surprising that KPMG executives have gone on the offensive. Case in point is the fact that KPMG responded to the recent $600 million professional negligence lawsuit by calling into question the authority of the Dubai International Financial Centre Court of First Instance (DIFC) in the matter. However, the DIFC swiftly rejected the jurisdictional challenge against it before proceeding with the lawsuit brought forward by Abraaj claimants.

Sinning by omission

With the lawsuits thus under way, it’s becoming increasingly clear that in terms of current and potential future fallout, the Abraaj scandal may be second to none of all KPMG’s issues currently under investigation in jurisdictions across the world. It points to a pattern of negligence apparently so common among KPMG accounts. For example, in the UK, the company is embroiled in two scandals within the construction industry alone. In 2018, it was accused of being complicit in the collapse of government contractor Carillion, which went into liquidation in January of that year. The Financial Reporting Council (FRC) labelled KPMG’s work “unacceptable” on that occasion.

Carillion’s liquidators are currently preparing a £250 million negligence claim against KPMG, based on the Carillion board’s view that KPMG’s conclusions about the firm’s finances being “profitable and sustainable” were misleading and caused the board to approve dividends and adviser’s fees £250 million in the years before the collapse – even though Carillion was in reality buckling under a debt load of £7 billion offset against barely £30 million in cash. With KPMG already on the offensive, the FRC’s move to file a formal complaint against the auditor for misleading the financial regulator is almost just another drop in the bucket.

Ripe for reform

The collapse of Carillion and Thomas Cook has sent shockwaves across the entire auditing industry: British consumer confidence in auditors is at rock bottom, with just 17% of those surveyed affirming their support for the Big Four and their quasi-monopolistic market position. Parliament has been mulling over the introduction of “managed shared audits”, whereby Big Four companies would be compelled to bring in a smaller firm to handle a portion of their work for all clients. Almost three-quarters (72%) of the general public would be happy with that change.

Of course, the fact that even smaller auditing companies like Grant Thornton, BDO, Crowe and Mazars have been subject to scrutiny by the FRC does not bode well for the future of the industry. But in a world where 99 out of the FTSE 100 contracts are handled by the Big Four – and 99% of the FTSE 350 audit fees flow into their coffers – something has got to give. The scandals and massive financial losses following from negligence and complicity, as in the case of KPMG, are a wakeup call that reforms are long overdue. A shake-up in Britain and beyond could help change the industry and remind auditing firms that they can no longer get by with cutting corners and sloppy standards.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes