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‘Breaks every rule’: What the KPMG scandal is all about · The Morning Edition

• 0:04
  S1: They are one of the big four accounting firms, government
• 0:07
  S1: agencies and major corporations. Trust them to audit their books
• 0:12
  S1: and ensure everything is above board. But what happens when
• 0:15
  S1: the auditor itself is accused of a catastrophic failure of integrity?
• 0:21
  S1: KPMG will face this question and many others when it
• 0:24
  S1: fronts a Senate inquiry this week. The explosive claims emerged
• 0:29
  S1: after a whistleblower brought allegations the firm misused confidential client
• 0:34
  S1: data to potentially win business with other companies. I'm Benjamin Price,
• 0:40
  S1: filling in for Samantha Salinger Morris, and this is The
• 0:43
  S1: Morning Edition. Today, business journalist Colin Kruger joins us to
• 0:49
  S1: explain why this scandal extends well beyond the big end
• 0:52
  S1: of town and might affect anyone with an investment or
• 0:56
  S1: super fund. It's Tuesday, June 16th. So, Colin, help us
• 1:04
  S1: set the scene here. Who are the big four and
• 1:06
  S1: what do they do?
• 1:08
  S2: They keep the big four. They're kind of like the accounting, auditing, supergiants.
• 1:14
  S2: It used to be the big eight, probably before that,
• 1:16
  S2: the big 12. And they've slowly just merged with each
• 1:20
  S2: other to the point where you've got four corporate giants
• 1:25
  S2: across the globe. And if you're one of the top
• 1:30
  S2: companies in any given market for your credibility, you want
• 1:35
  S2: to have the services, especially the auditing services of one
• 1:38
  S2: of the big four E, Deloitte, KPMG and PwC, although
• 1:45
  S2: that has had its name tarnished in recent years here.
• 1:48
  S2: But really, those are the four. If you're in the
• 1:51
  S2: top 100 in any country, globally, you want to have
• 1:55
  S2: the services of these big four because no one else
• 1:58
  S2: has their aura of credibility.
• 2:00
  S1: For all those people out there who don't know who
• 2:03
  S1: are KPMG, what do their staff do? What do they
• 2:07
  S1: do on a daily basis?
• 2:09
  S2: Well, their jobs as accountants is to be the most
• 2:11
  S2: boring person in the room. So it really starts with
• 2:16
  S2: audit because that was the whole backbone of all of
• 2:21
  S2: these major firms where you're going in and you are
• 2:25
  S2: going through the company accounts and making sure they are,
• 2:31
  S2: you know, everything is in line in terms of the
• 2:34
  S2: meeting or the accounting standards meeting, all the legal standards
• 2:38
  S2: that they are meant to, you know, literally provide assurance
• 2:41
  S2: from all that work. From there, they've branched out into
• 2:45
  S2: other services. So they do tax consulting, tech consulting now.
• 2:50
  S2: But the bedrock of all of these firms is their
• 2:53
  S2: audit work, providing the assurance that the accounts reflect what
• 2:58
  S2: the company is doing.
• 3:00
  S1: In a feature you wrote earlier this month. You described
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  S1: KPMG's financial superpower as a reputation for integrity, independence and
• 3:10
  S1: ironclad confidentiality. But what are they accused of doing here?
• 3:15
  S2: Well, pretty much breaching all of the above, which is
• 3:19
  S2: why they're in such trouble. So it really comes down
• 3:24
  S2: to the really damning thing is that it's from one
• 3:27
  S2: of their own insiders, one of their own auditors, who
• 3:31
  S2: said what they've done is access documents and boardroom documents.
• 3:36
  S2: I mean, this is the problem is, auditor, you have
• 3:39
  S2: to be whiter than white because you have access to
• 3:44
  S2: everything inside the big corporate clients that you audit. And
• 3:48
  S2: in this case, for Lendlease, that included access to boardroom documents,
• 3:53
  S2: incredibly Sensitive stuff. Imagine if they're talking about a merger
• 3:59
  S2: or takeover of another multi-billion dollar business. And as auditor,
• 4:04
  S2: you have access to that. And in this case, there
• 4:07
  S2: was a separate cache of documents because at that stage
• 4:11
  S2: they were looking at potentially putting their audit work out
• 4:15
  S2: to another auditor. So you imagine. And that's why they
• 4:18
  S2: expressly forbade them from looking at those documents to see whether,
• 4:23
  S2: you know, are you about to be replaced as auditor
• 4:26
  S2: of this company with $10 million worth of business a year?
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  S2: And what appears to have been confirmed is that they
• 4:37
  S2: access these documents. They shared it internally, which is just
• 4:44
  S2: breaks absolutely every single rule, but not the law as
• 4:47
  S2: we talked earlier or we're not sure. ASIC is investigating this.
• 4:52
  S2: So basically everything they've told us up until now is
• 4:56
  S2: up for grabs, because even they're saying we're not sure
• 4:58
  S2: what will be uncovered by further investigation, and especially this Friday,
• 5:03
  S2: where they will have to go before the Senate, and
• 5:07
  S2: they will have to answer some pretty brutal questions like,
• 5:10
  S2: why did this take two years to be uncovered, and
• 5:14
  S2: why did it all happen only so quickly after Senator
• 5:18
  S2: Deborah O'Neill revealed it all in Parliament?
• 5:23
  S3: What I want to bring to the attention of the
• 5:24
  S3: Senate tonight is evidence from a whistleblower, a former senior
• 5:28
  S3: executive working at KPMG Australia, that reveals a very different
• 5:32
  S3: reality to that which Mr. Yates was spruiking here in
• 5:35
  S3: the Senate.
• 5:36
  S1: So how much does the federal government rely on KPMG
• 5:40
  S1: for their auditing and other work?
• 5:42
  S2: Well, Greens Senator Barbara Pocock, she put out a, uh,
• 5:48
  S2: I think it was using government figures on Friday saying
• 5:52
  S2: that they currently have about $650 million worth of federal
• 5:56
  S2: government work. Now, keep in mind, that's just federal government. Uh,
• 6:01
  S2: the Victorian government and New South Wales, and I dare
• 6:04
  S2: say every other state government is reviewing their relationships with
• 6:08
  S2: KPMG as we speak. And that would also just be
• 6:12
  S2: a massive amount of business, I imagine.
• 6:15
  S1: And we're talking about big bucks here, aren't we? So
• 6:18
  S1: how much does KPMG itself stand to lose as a
• 6:22
  S1: result of this?
• 6:23
  S4: Well, we know just.
• 6:24
  S2: Looking at what happened to PwC and it's different. But
• 6:29
  S2: there are a lot of things similar. So PwC when
• 6:33
  S2: that tax scandal happened and remember that was using their
• 6:37
  S2: consultations with government on sensitive tax changes and peddling it
• 6:42
  S2: to their clients, their business, they lost more than $1
• 6:46
  S2: billion in revenue in the two years that followed that,
• 6:50
  S2: and they lost roughly 4000 staff over the same period,
• 6:55
  S2: which includes spinning off the government business because they were
• 6:58
  S2: banned from any further government business. So when you look
• 7:02
  S2: at KPMG, with more than $2 billion in revenue and
• 7:06
  S2: 9000 staff, it will be it is almost certainly going
• 7:10
  S2: to be devastating because it's hard to imagine them not
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  S2: following a similar trajectory to PwC.
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  S1: After the break.
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  S2: The victims that we know so far are some of
• 7:30
  S2: the biggest corporations in Australia.
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  S1: And why did Labor Senator Deborah O'Neill raise these allegations
• 7:48
  S1: in the Senate earlier this year.
• 7:50
  S2: Pretty simply, she raised it because it appeared that. And remember,
• 7:54
  S2: by this stage we're talking about 22 months after the
• 7:58
  S2: whistleblower first raised it internally, after a year where the
• 8:02
  S2: whistleblower we don't know when the whistleblower appears to have
• 8:06
  S2: been forced out of KPMG. But more than a year afterwards,
• 8:12
  S2: the whistleblower tried going to KPMG international to get them
• 8:16
  S2: to intervene, and they refused. Went to the board, including
• 8:21
  S2: Cricket Australia chairman Mike Baird, and kudos to them. They
• 8:25
  S2: appeared to have tried to have done something from August
• 8:29
  S2: last year, but between August last year and March this year,
• 8:33
  S2: still nothing publicly from KPMG. So finally, the whistleblower went
• 8:39
  S2: to Senator O'Neill as the final way of trying to
• 8:44
  S2: get some action on this.
• 8:45
  S3: Why does it all matter? Well, I'll leave it to
• 8:47
  S3: the last words here from the actual whistleblower. If ethical
• 8:52
  S3: walls are breached, confidential audit information is misused, and independent
• 8:56
  S3: safeguards become performative rather than substantive if evidence given to
• 9:00
  S3: Senate inquiries is inaccurate or incomplete. Parliamentary oversight is undermined.
• 9:05
  S3: The regime falls in practice. Is this the really the
• 9:09
  S3: best that the public can expect from the new so-called
• 9:12
  S3: leader of the pack?
• 9:14
  S1: What can you tell us about the whistleblower in this case?
• 9:16
  S1: Because their identity at this stage is anonymous, isn't it?
• 9:19
  S2: Yeah. We know very little about the whistleblower other than
• 9:23
  S2: that they were a senior auditor within KPMG and that
• 9:29
  S2: it appears that they were forced out. But we don't
• 9:31
  S2: know the details for sure because KPMG is refusing to
• 9:35
  S2: say anything. What we do know is that KPMG refused
• 9:38
  S2: to recognise them as a whistleblower, possibly until the end
• 9:43
  S2: of last month, So that there were no legal protections, nothing.
• 9:49
  S2: And there's been even very interesting reports out of the
• 9:54
  S2: Financial Review, because KPMG is saying, well, we couldn't really
• 9:59
  S2: do too much because we just didn't have the information
• 10:01
  S2: from this whistleblower. But according to these reports, they were
• 10:06
  S2: secretly accessing this person's laptop, who they refused to recognize
• 10:11
  S2: as a whistleblower. So one would imagine they would have
• 10:14
  S2: had access to all of this information. And it looks
• 10:17
  S2: like they didn't really interview any of their own staff,
• 10:21
  S2: let alone the external companies on these allegations.
• 10:26
  S1: So who are the victims at the center of these allegations?
• 10:30
  S2: The victims that we know so far are some of
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  S2: the biggest corporations in Australia. So Lendlease, you know, which
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  S2: appears to have confirmed that it had the auditors access
• 10:42
  S2: and share some of its, you know, sensitive boardroom documents.
• 10:46
  S2: But it goes as far as, you know, all of
• 10:49
  S2: these corporations, which try to follow a very set process
• 10:54
  S2: to make sure they got a proper auditor in place and,
• 10:58
  S2: you know, went through all the checks and it may
• 11:00
  S2: have been compromised by the behavior of the KPMG staff.
• 11:05
  S2: So this includes Westpac, which I think they're all at work,
• 11:09
  S2: is worth north of $35 million a year. And with
• 11:15
  S2: access to sensitive information, which meant that there wasn't a
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  S2: level playing field with other auditors. Now that that's all
• 11:22
  S2: within the audit community, and that doesn't really matter too far.
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  S2: But I guess the issue for your average person is
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  S2: that what this says about the credibility of the audit work,
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  S2: which is done because remember what we really rely on,
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  S2: whether you own shares directly or Superannuation, as Senator O'Neil
• 11:44
  S2: pointed out, is the credibility of the financial accounts which
• 11:48
  S2: are presented, which can change dramatically a company's valuation. Now,
• 11:56
  S2: the company, of course, you know, they have the incentive
• 12:01
  S2: to present themselves in the best light, which is why
• 12:03
  S2: you're meant to have an independent auditor going through the
• 12:07
  S2: numbers and assuring everyone that, yes, they have followed the
• 12:12
  S2: accounting standards, they have reported things as they should, their
• 12:16
  S2: numbers are credible and you can see what goes wrong.
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  S2: One of the companies I mentioned as an example is
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  S2: corporate travel, and they've they were doing very well for years.
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  S2: And then in August last year, they had to suspend
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  S2: their shares with the company worth roughly $2.3 billion because
• 12:38
  S2: there were anomalies in its accounts, which the new auditor
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  S2: had picked up. That anomaly was that they had received
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  S2: hundreds of millions of dollars from the British government, of
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  S2: which they had not actually given any services. Now the
• 12:55
  S2: company may be worth zero. That is probably the starkest
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  S2: example of why auditors are important and their credibility, independence,
• 13:05
  S2: all of these things. You know, it just goes to
• 13:09
  S2: the bottom line. So if you're a super fund or
• 13:11
  S2: if you own shares in corporate travel, you're you know,
• 13:15
  S2: those shares may now be worthless. It's just it's the
• 13:19
  S2: starkest example you can have of why their work is important.
• 13:24
  S1: So how does this scandal differ from what happened to
• 13:28
  S1: the other big four firm, PwC?
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  S4: Well, PwC.
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  S2: That was a major tax scandal in that there were
• 13:36
  S2: meant to be helping the government Advising them on new
• 13:41
  S2: laws that would help tax their, you know, your big
• 13:44
  S2: tech giants. Now, what appears to have happened and we
• 13:48
  S2: haven't got to the bottom of it even now, is
• 13:51
  S2: that this information was being shared internally and used to
• 13:56
  S2: set up tax structures that would help circumvent these laws,
• 14:01
  S2: and were being marketed around to try and pick up
• 14:04
  S2: fresh business. So that was just a massive lapse on
• 14:11
  S2: their part. And clearly that's what led to them being
• 14:15
  S2: banned from government work. So they had to sell off
• 14:18
  S2: their whole government business for $1 because the whole thing
• 14:22
  S2: was going to implode anyway. And it absolutely destroyed their
• 14:26
  S2: credibility with corporate Australia because their brand was so badly tarnished.
• 14:32
  S2: It carried over even into their audit business. So they
• 14:36
  S2: lost a lot of business like Westpac and they lost
• 14:39
  S2: it to firms like KPMG. So I mean, that's the
• 14:45
  S2: real irony where all of that was playing out. PwC
• 14:52
  S2: was losing business as a result of that scandal. And
• 14:56
  S2: we're hearing of some of this misbehaviour that is alleged
• 14:59
  S2: from KPMG staff happening at exactly the same time. And
• 15:05
  S2: as they're watching PwC lose accounts like Westpac. And it's
• 15:11
  S2: like they the lesson they learned is don't get caught.
• 15:15
  S2: You know that that appears to be, you know, the
• 15:19
  S2: only thing they picked up. It's don't misbehave. It's don't
• 15:22
  S2: get caught. And now they've been caught. And this Friday
• 15:26
  S2: they face some really brutal questions in Canberra with this
• 15:31
  S2: Senate inquiry.
• 15:32
  S1: Tell us what you're looking out for at the Senate
• 15:35
  S1: inquiry this Friday. And what would you like to learn
• 15:37
  S1: about this scandal?
• 15:39
  S2: There is just so much to learn because they've given
• 15:42
  S2: us so little information. So, you know, the former CEO
• 15:48
  S2: was there and they kind of said, oh yes, well,
• 15:51
  S2: he had to resign because ultimately he had to take
• 15:55
  S2: responsibility for this. Well, is he directly responsible for this?
• 16:00
  S2: When did he learn about the whistleblower? Why did he
• 16:04
  S2: not recognize the whistleblower as a whistleblower? And we're hearing
• 16:08
  S2: from all of the firms involved. You know, it's not
• 16:10
  S2: just KPMG that's implicated in this. You've got two major
• 16:15
  S2: law firms and an internal investigation which apparently found no
• 16:20
  S2: evidence of wrongdoing for two years. How is that possible?
• 16:26
  S2: How was it that the first internal investigation found no
• 16:29
  S2: evidence of wrongdoing? How is it that it was only
• 16:33
  S2: after Deb O'Neill stood up in Parliament and aired all
• 16:37
  S2: these allegations that KPMG went back to one of these
• 16:41
  S2: clients and said, oh, you know how we said there
• 16:43
  S2: was these allegations from a former staff member and there
• 16:47
  S2: was nothing to it? Well, there was something to it.
• 16:50
  S2: So that only came out after Deb O'Neill stood up
• 16:54
  S2: in Parliament. Why was that the case? What does that
• 16:58
  S2: say about the credibility of KPMG? There is just so
• 17:01
  S2: much to unpack on Friday, and I just think it's
• 17:06
  S2: fascinating what it says about the culture inside these big firms.
• 17:10
  S2: And the problem is when you've only got four of
• 17:13
  S2: them that you're relying on, you know, as a top
• 17:17
  S2: corporate in Australia, PwC has tarnished its name to the
• 17:22
  S2: point where you wouldn't you would still hesitate to lose them.
• 17:26
  S2: KPMG appears to be going through the same process. It's
• 17:30
  S2: great news if you're at Deloitte or e y. But clearly,
• 17:36
  S2: if you've got half of the industry with a name
• 17:40
  S2: that's tarnished to the point that corporate Australia would hesitate
• 17:44
  S2: to use them, this is a real problem for Australia
• 17:50
  S2: and something really needs to be done.
• 17:56
  S1: Thanks so much for your time, Colin.
• 17:58
  S2: It's been a pleasure.
• 18:01
  S3: I say to the partners almost 700 at KPMG. Very
• 18:04
  S3: many of you are honest, ethical, intelligent, professional people. What
• 18:08
  S3: will you now do to redress the matters that I
• 18:10
  S3: have raised here tonight?
• 18:26
  S1: In other news today, Opposition Leader Angus Taylor's plan to
• 18:30
  S1: slash income taxes and link immigration rates to housing has
• 18:33
  S1: been backed by voters, according to a new poll. The
• 18:37
  S1: daughter of one of the so-called ISIS brides has begun
• 18:40
  S1: attending public school in Victoria after arriving back in Australia
• 18:43
  S1: from Syria with her mother earlier this year, and former
• 18:47
  S1: labor leader Mark Latham is selling his sprawling family home
• 18:51
  S1: as mounting legal bills and defamation damages threaten to cost
• 18:55
  S1: the rogue MP more than $1 million. You'll find these
• 18:59
  S1: stories and more on our website. The age or smh.com.au.
• 19:06
  S1: Today's episode was produced by Josh towers. Our executive producer
• 19:10
  S1: is Tammy Mills, and our podcasts are overseen by Lisa
• 19:14
  S1: Muxworthy and Tom McKendrick. If you like our show, follow
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