CARILLION’s COLLAPSE AND THE ACCOUNTANCY OLIGOPOLY.
This appeared in the July 2022 edition of Scottish Left Reciew
You would have to have a heart of mush not to take some enjoyment from reports early in the year of a tribunal of the FRC (Financial Reporting Council) in which a partner of KPMG – now former – and layers of manager below him shift blame for a forgery onto each other in the case of Carillion’s bankruptcy. It’s with these masters of the universe you get real Not-Me-Guv voices. The forgery, a manipulation of the key to a spreadsheet, the creation of retrospective spreadsheets and the creation of false meetings was an element in the auditing of Carillion aimed at the keeping the client happy. It collapsed in 2018 with 7bn of debts despite being showered with public contracts. In May of this year KPMG as an entity was fined £14.4 million as a consequence and given ‘a severe reprimand’. The individuals involved were also fined and their credentials removed.
KPMG is one of the Gang of 4 global scale auditor/consultants with fingers in pies big and small, private, public and private-public from China to London. It is a worldwide ‘partnership’ with all the tax advantages that brings. In the case of Carillion, all four have taken their slice. It is oligopoly does not need price-fixing, “Everyone knows what everyone else’s rates are.” All four took in around £40 billion last year with partners averaging £600,000. There are no serious rivals to undercut them despite what have been so far ineffectual political noises to do open the business up to smaller entrants. They are rather, ‘too big to fail’, or rather the world they have created is too complex to do without them, Given too that audits are a legal requirement in most countries it’s in effect a state-backed oligopoly. At the same time KPMG has form as long as your arm when it comes to crimes and misdemeanours. They’re not alone, PWC(Price Waterhouse Cooper). EY (Ernst& Young) and Deloitte’s the other three making up this oligopoly whereby they audit close on all the top 100 companies in the UK and China and the USA, they all have form. In the past they have been found out, PWC with Robert Maxwell and Barings Bank; more recently Deloitte for its dodgy audit of Autonomia before its sale to Hewlett-Packard(HP); and EY for the spectacular and criminal collapse of Wirecard and separately NMC Health. Each time the outcome is the same, fines in the millions are paid and no more is said.
In 2009 I looked at these highly profitable intermediaries – Sticky Fingers: KPMG and the Accountancy Oligopoly – which focusing on the global entity in the dock now, 2022, attempted to showed the conflicts of interest at work as auditor and consultant and the cases against them as a consequence. These have continued in the years since including Carillion. It also attempted to show the full extent of the pies it and the other three had their sticky fingers in. They range from carbon markets we know to have little or no impact on global warming emissions to Academy schools and world health schemes that replaced state, let alone community involvement. As auditors with access to senior managements they were and are able to offer ‘bolt-on’ services like consultancy that became a bigger source of revenue than the auditing itself, and tax avoidance services. At the time KPMG had the biggest client list in the UK and offices in 26 tax havens. As described by Sue Bonney the relevant partner at the time ““Tax is a business cost to be managed like any other,” and “tax avoidance is legal.” More insidiously on the grounds that tax and tax schemes were too complicated to be properly understood by outsiders, personnel from KPMG and the rest were seconded to the HMRC tax authority of the UK on these grounds. Real conflict of interest that comes from these ‘revolving doors’ was the case of the 2013 Patent Box, a tax relief to encourage innovation and attract foreign capital and retrospective on anything containing an old patent. ‘Lead policy adviser’? Jonathan Bridges a KPMG corporate tax adviser. Once returned to KPMG he then sold himself as “The Patent Box- what’s in it for you?”
In the USA tax avoidance at least was not taken so lightly though it needed a 2003 whistleblower to reveal a set of illegal US tax shelter varieties (Blips, Flips, Opis and SOS) set up by KPMG. These shelters helped wealthy clients avoid paying $2.5bn. This is a criminal offence, and in 2005 the US member firm of KPMG International (KPMG LLP) was accused of fraud. In 2007, by paying a fine of $456m and agreeing to some minor conditions, the criminal charges were dropped. Its instigators were not however low-level employees who could be given the rotten apple treatment, but senior partners but with the help of Judge Lewis Kaplan and the selective application of constitutional rights, as KPMG it was not convicted. The response of KPMG CEO Timothy Flynn echoes the narrative provided by every official wrongdoer in recent years, whether it be failed bank or criticized prison governor: “KPMG is a better and stronger firm today, having learned much from the experience”, shameless, as if doing wrong were motivated only by the desire for improvement.
The government insider role had been even more insidious with the role of consultant. KPMG and PWC have been “‘beneficiaries of the state feeding of consultants” as Prem Sikka described. He pointed to KPMG’s role s consultants to the Ministry of Defence for the development of the RAF’s air-to-air refueling fleet the largest PFI on the UK in the early years of the century a role that ran for years. At the time they had privatization mandates world wide from the UK Ministry of Development (DFID) and for example as consultants to a World Bank backed electricity privatization in Orissa later described as a ‘fiasco’ by the investigating Kanungo Committee as well as a host of advisory roles for electricity contracts in Africa. At the same time, real jokers, they became advisors for reform of existing regulatory systems or the creation of new ones to regulate privatized services. This when Bill Michael -recently resigned as KPMG UK chief after working-from-home-is-for-wimps remarks during the COVID lockdown – had declared regulations were no good he said because “complexity was here to stay. Its 2007 Effectiveness of Operational Contracts on PFI Survey is full of self-praise and pre-empts any criticism with an elitist sneer: “We hope this survey will help to inform the debate – all too easily hijacked by politically motivated and emotive sound bites – about how to deliver the best value for money public services.”
The business of privatizations, PFIs, PPPs and outsourcing and the conflicts of interest it brings when a company’s auditor is in a position as an advisor/consultant to recommend it for contracts brings us goes to the heart of the economic-political culture within which Carillion operated, but it is as auditors that KPMG has form. There are distinct advantages especially in a financialized world for a company’s accounts to look good and strong, it is how to attract more money and puffs up the value of the share options its directors and mangers are paid with. Despite the strength of their oligopolistic position, it would seem these auditors do not like to piss off their clients and so accounts may look better than they are.
Looking at the history the pattern repeats itself. In 2002 KPMG “settled” charges with the US Securities and Exchange commission (SEC) for “improper professional conduct” as auditors for Gemstar-TV Guide International Inc, which had overstated its revenues by $250 million. This settling meant neither admission nor denial, but in the wake of Enron’s collapse such not-proven deals were worth a lot to the oligopoly and have continued to do so. A year later in a case of ‘improperly booked revenues’ for Xerox. KPMG LLP’s CEO complained of a great injustice and fell back on complexity, how it was “At the very worst … a disagreement over complex professional judgments.” Nevertheless when the dust had settled they paid out $80 million in compensation three years later.
The falsification of revenues is one thing, the wishful thinking as to future revenues another when it becomes the kind of strategic wishful thinking auditors are supposed to be checking for. The subprime mortgage initiated financial crisis of 2008 brought all thus home. Many years afterwards KPMG got a Not Guilty in the case of the UK HBOS bank collapse. Not so in the case of New Century a collapsed US mortgage lender with an accusation from liquidators on the grounds that as the FT (The Financial Times) said “it allowed the lender to use inappropriate accounting that led it to underestimate the provisions it needed to cover bad loans. This made its position look better and gave it access to more funds.” Numerous examples were given by the court examiner to demonstrate KPMG’s lack of “due professional care”. While admitting nothing a private agreement was made with the liquidators who had been looking for $1bn.
No-guilt fines have been frequent since, in 2019 in relation to Lloyd’s syndicate 218 and the Co-op Bank in more cases of strategic wishful thinking; of conflicts of interest in the collapsed Dubai-based Abraaj private fund equity. In the UK its work with Rolls-Royce was investigated and recently has been fined in the case of the mis-named Conviviality and its collapse. In China it has refused to co-operate with liquidators in the case the case of China Medical in which “KPMG’s letterhead was used on the audit report and they didn’t do the work.”
It went a step further with China Forestry whose liquidators claimed that during a pre-IPO(Initial Public Offering) audit KPMG failed to detect that executives had falsified the company’s assets and revenue by submitting forged bank statements and customer records and that KPMG staff had themselves had falsified papers. This time on July 2021 they paid out 84 million. This ‘step further’ has an equivalent in the recent case of the selling of Silentnight to HIG when it was revealed that KPMG had agitated to put Silentnight, a client, into insolvency which allowed HIG, another client, to buy it up without the ‘burden’ of its £100m pension scheme. In most cases we might say So What some investors with all their privileges have lost out, but this was the pensions of low-waged workers just as at Carillion jobs were lost and elsewhere the PWC audited Kabul bank collapse contributed to the Afghan government corruption message of the Taliban. These are real consequences; and, though it was pushed on to a ‘rotten apple’ partner and the fine in August last year the FRC was pushed to talk of the ‘untruthful defence’ of the partner involved in the Silentnight scandal.
With pensions KPMG has form. When Visteon was spun-off from Ford in 2000, workers were given contracts mirroring those of Ford car workers. This would mean that they would get 12-18 months’ wages as redundancy money. When Visteon in the UK was liquidated, KPMG as its administrators started from the position that the workers were not entitled to anything other than a cash payment equal to 16 weeks’ pay, whether you had worked there 15 years or not. Its argument; that Visteon was a separate entity from Ford, and had been so since 2000. Nothing is too small for money to be made, they would ‘”bleed your radiator and your granny with the same self-righteousness.” In the case of Carillion, PWC appointed as administrator on the grounds of being the only one not to have had previous roles with the company and taking £20 million for their initial two weeks work was alleged to have failed to supply axed Carillion workers with basic information, which they required to receive redundancy payments from the Insolvency Service and needed a reminder.
Back in 2015 Simon Collins, KPMG’s head told the FT “I would trade any advisory relationship to save us from doing a bad audit. Our life hangs by the thread of whether we do a good audit or not.” Until now that has manifestly not been the case and given and what sounds like a self-designed version of reform -their ‘submitted plans’ – and given a history of rebukes, non-criminalised fines, the failure of a 2013 directive from the Competition Commission to crack open the oligopoly and the likelihood of it throwing up barriers of complexity we should be wary of significant change. But the flagship nature of Carillion – outsourced public works with its claims of superior efficiency involving real things like hospitals and roads being really made as well as worker livelihoods and pensions – and its collapse might just have this effect .
For one, rather more serious money maybe involved as the Official Receiver acting as liquidator of Carillion is looking for compensation to creditors from KPMG with the figure of £1 billion in the air for its many failures such as allowing £200 million of dividends to be paid even as the company was collapsing. In response its spokesman said, “We believe this claim is without merit and we will robustly defend the case. Responsibility for the failure of Carillion lies solely with the company’s board and management, who set the strategy and ran the business.” At the same appeals have been made to partners to chip in millions should the liquidator succeed.
Secondly the government would appear to have been shamed into not dropping proposed legislation that may impinge on the oligopoly’s powers and privileges from the Queen’s Speech in May. Reports in the Financial Times and Bloombergs that government officials had told them this was so brought some concerted outrage. What is proposed is not high priority but allows for the FRC to be have been largely ineffectual and replacing it with another acronym ARGA (Audit, Reporting and Governance Authority) that would ‘change the culture’. Till now the Gang of Four have told that they must submit plans to separate their consultancy and auditing operations by 2024. Whether the proposed legislation would make any of this enforceable is open to question. For this the ‘embarrassment’ of Carillion has to be the lever. What has not yet arisen are the necessary questions of the invited infiltration of government by the Gang of Four with their own self-interests, a Gang with their arrogant buildings with their arrogant logos still trading on expertise in the complexities they have gainfully contributed to making and the increasingly tired claims of private sector efficiency. Watch this space.