Kpmg versus pwc [and deloitte too]

When CNN interrupted its peak time programme “Global Public Square” [GPS] anchored by Fareed Zakaria to announce as “Breaking News” that KPMG had dealt PwC (PricewaterhouseCoopers] a “Kung-fu” blow, the ex-partners of KPMG knew straightaway that the Third World War was imminent.   The first law of combat was to sideline the messenger Isha Sesay and focus on the message:

Headline: BARCLAYS HIRES KPMG AFTER 120 YEARS WITH PwC

Barclays has changed its auditor for the first time in 120 years (since 1896) after the introduction of rules forced banks to change the firms they use more frequently.    KPMG will replace PwC as Barclays’ auditor from 2017.   Barclays has been audited by PwC since 1896 but the accountancy firm which charged £44 million as fees last year was not invited to participate in the tender.   The move to KPMG also severs ties with PwC on account of the fact that Chris Lucas, its former finance director, worked for PwC.

In the days of Sir Ralph Leach as Senior Partner of KPMG, the event would have been celebrated in great style.   That was over four decades ago.   As recently as the 1990’s, Sir Colin Sharman [now Lord Sharman] would have ordered the finest wine in the best restaurant in London.   Of course ex-partners would be invited.  He had a big heart.

In any case those ex-partners of KPMG who were still awaiting their gratuity and pension were already ensconced in Vallauris, on the French Riviera for their annual summer reunion when the news broke.   They immediately spread the word – we are still the champions !!

By an uncanny co-incidence, King Salman of Saudi Arabia was also enjoying his summer holiday nearby- right on the seafront in a huge villa the Saudi Royal family bought from the Aga Khan’s son in 1979.   The rather tiny Mirandole beach was closed to the public in order to ensure that the king and his intimidating entourage of almost one thousand could enjoy exclusive privacy.   Strictly no nude bathing !!

All went well until local bathers started protesting even going as far as insisting that it was against the French constitution.   More than 150,000 signed a petition against the presence of King Salman on the 226th anniversary of the abolition of feudal privileges during the French Revolution which lasted from 1789 until 1799.   Also, the 1848 Revolution in France, sometimes known as the February Revolution [revolution de Fevrier] was one of a wave of revolutions in 1848 in Europe.   In France, the revolutionary events ended the Orleans monarchy (1830-1848) and led to the creation of the French Second Republic.   Following the overthrow of King Louis Philippe in February, the elected government of the Second Republic ruled France.

The long and short of it was that King Salman was sufficiently angry to abort his stay.   Instead he and his entourage took off in their private jets to Tangier, in Morocco.   The French were unrepentant.

“We are Republicans. The King tried to impose his way of life on us.   It was like having an Embassy on your doorstep.”

The ex-KPMG partners did not join the protest because we were the beneficiaries of free luxury hotel rooms in Cannes and Nice for which the King had paid.

In addition, there were 500 chauffeur-driven limousines at our beck and call round the clock.   Our wives were simply overwhelmed by over 20,000 fresh flowers which were delivered daily to our hotel suites.   Hermes, Prada and Channel could not believe their luck.   Neither could the wives of the ex-KPMG partners – thanks be to the King!!

However, unknown to us serious trouble was brewing for KPMG at the Financial Conduct Authority [FCA] where by a cruel irony the chairman is none other than former KPMG SENIOR partner (Chairman and Chief Executive) John Griffith-Jones.    It must be terribly embarrassing for him to find that that his former firm is being investigated over the audit of “mismanaged Co-op Bank, collapsed bank HBOS, allegedly corrupt World Cup organizers FIFA and Quindell.    The worst of it all relates to Quindell as regards which hedge fund Gothan City in April 2014 publicly questioned the accounts audited by KPMG.

FLASHBACK TO 2012, KPMG UK chairman John Griffith-Jones to head Financial Conduct Authority:

Top auditor John Griffith-Jones will head the UK’s new Financial Conduct Authority from next year.

Mr Griffith-Jones currently chairs the UK operations of KPMG, one of the world’s “Big Four” auditing firms.

The Financial Conduct Authority (FCA), along with the Prudential Regulation Authority, are two new supervisors being created to replace the Financial Services Authority (FSA), which is being scrapped as part of a wider reform to shake up supervision of banks and markets.

The choice represents a rare move from the private sector to a regulator as the UK supervisory shake-up has sparked a string of appointments in the opposite direction.

Griffith-Jones will initially join the FSA board in September as a non-executive director and deputy chair and work with Martin Wheatley, chief executive designate of the FCA.

Griffith-Jones will become non-executive chair of the FCA once the FSA, under its current chairman Adair Turner, has been scrapped in early 2013.

Breaking News Again:

The statement of the new chairman of Quindell, Richard Rose, tells a sordid story:

“Revenues at the group for 2014 have been revised down by £290 million and its post-tax profits by a whopping £282 million – so the company actually made a loss.   Also, 2013 stated profits were non-existent.

It was a loss of £68 million according to investigating accountants PwC [PricewaterhouseCoopers].”

As confirmation of the old English adage that revenge is best served cold, PwC quietly delivered its verdict:

“Accounting practices at the firm were aggressive and unacceptable.”

The bandwagon effect soon took over as both the Serious Fraud Office [FSO] and Financial Reporting Council [FRC] entered the fray.

From the website of the Financial Reporting Council we have the following extract:

“FRC is investigating KPMG and RSM Tenon, its predecessor as auditor in connection with the accounts of Quindell.  The investigation commenced in March 2014.  RSM Tenon was acquired by Baker Tilly in 2013 and KPMG took over as auditor in October 2013 after questions were raised about Quindell’s disclosures. It signed off on the insurer’s 2013 accounts including pre-tax profit of £107 million.  Quindell has revised that figure down to a loss of £64 million.”

The statement issued by Serious Fraud Office [SFO] was as follows:

“The Serious Fraud Office has launched an investigation into insurance company Quindell over business and accounting practices with KPMG also facing an inquiry for its work as the company’s auditor.”

As for KPMG its statement was limited to a carefully worded cryptic declaration:

“KPMG is co-operating fully with the probe.   We raised a number of concerns with management about the proposed inclusion of certain transactions in the company’s interim results.”

However, following a vigorous protest by ex-KPMG partners who are still awaiting their gratuity and pension, KPMG was compelled to issue a more detailed explanation.

“The annual report we signed off was heavily caveated.   We were concerned about a number of previously undisclosed related party transactions …..with former directors and there may be more in the woodwork.   Several sales of businesses to Quindell ought to have been accounted for as post combination vendor remuneration rather than business purchases in 2012 and 2013.   [Apparently, Quindell had been buying companies that were effectively shells to pay or incentivize certain individuals who acted as consultants to the group].

We have serious doubts over the truthfulness of information given to us by former directors regarding the related party and share transactions.   In a number of respects this [new] information  contradicts representations previously made to us by former directors as well as information contained in the group’s and parent company’s accounting records.”

It was a thoroughly exasperated Richard Rose, Chairman of Quindell who confided in Richard Quest on CNN:

“Without a doubt these are the most complex accounts I have had to deal with.   And I hope I never have to do it again.”

However, that was not the end of the story.   The contagion had spread beyond KPMG and PwC to Deloitte who appeared to be in danger of being tarnished by its alleged involvement in the audit of Afren, the scandal-hit oil explorer that has entered administration (the first step towards receivership/liquidation).   Afren does not own its underlying assets.   Rather, it controls them through service contracts or “farm-in” agreements.    In Nigeria, Afren’s holdings in assets such as the Ebok and Okoro Oilfields would be forfeited to the Nigerian government or to the indigenous partners who have the licence.

In the official statement posted on its website, Afren announced that it had commenced insolvency proceedings.  However, what it did not add was that it is not the only oil and gas company that is tottering on the verge of collapse on account of falling oil prices (from US$115 a barrel in July 2014 to the current US$53) and corporate governance abuses compounded by huge mountain of debts.

Going back to July 2014, the Board of Afren announced that it had suspended the Chief Executive, Osman Shahenshah and the Chief Operating Officer, Shahid Ullah over “unauthorized payments” that had come to light following an independent investigation by a law firm,Willkie, Farr and Gallagher.   

Three months after they commenced the assignment, the investigations reported that Messrs Shahenshah and Ullah had struck a secret financing deal in October with Oriential (not to be confused with Orient Petroleum), one of Afren’s Nigerian partners.    It was alleged that Oriental had undertaken to pay 15 per cent of cash flows from the Ebok field over four years to an off-shore company (registered in British Virgin Islands).   The ownership and control of the company were traced to Shahenshah and Ullah who according to the investigators used the company as a conduit to pay themselves “extraordinary bonuses”.   The Board did not waste time on deliberating on whether this was a case of “money laundering” or “dry cleaning”.   It fired both of them for gross misconduct.

In an interview with Richard Quest on CNN, Patrick Hosking of “The Times” did not pull any punches.   He bluntly declared:

“Farewell to Afren, the Africa-focused oil driller that has sunk irrevocably beneath the waves after the administrators were called in.   For the record, the advisers to this can of worms, who were happy enough to extract fees in the good times, were the sponsor Bank of America Merrill Lynch, the broker Morgan Stanley, whose analysts over the years eagerly puffed its shares, and the auditor Deloitte.”

Richard Quest did a smart flash back to his interview with Afren’s new Chief Executive, Alan Lin who delivered his very frank verdict when he was appointed:

“The company is like a dog that has been dragged through the hedge backwards.”

It was left to Quest to draw the curtain:

“Afren was worth £1.2 billion last summer.  Its shares have now lost 99 per cent of their value.”

J.K Randle

Bashorun JK Randle is a former President of the Institute of Chartered Accountants of Nigeria (ICAN) and former Chairman of KPMG Nigeria and Africa Region.  He is currently the Chairman, JK Randle Professional Services.    

Email: [email protected]