Auditor in the firing line
WHAT do the following companies and institutions all have in common? Trendy clothing firm Ted Baker, Fifa, former buy-to-let lender Bradford & Bingley, collapsed bank HBOS and the rescued Co-op Bank.
They are all clients or former clients of the audit firm KPMG.
It has just been revealed that the often tardy Financial Reporting Council, the body responsible for policing accounting and corporate governance in Britain, is launching a probe into the provision of ‘non-audit services’ to Ted Baker at the same time as they were the company’s auditors.
The complaint suggests that the audit firm may have breached ethical standards in their work for the clothier in 2013-14.
The investigation into Ted Baker is unexpected. But it shines a clear light on one of the most common abuses seen in firms and organisations that get into trouble.
In many cases the ‘consultancy’ fees charged by auditors for all manner of services, from pay advice to work on mergers and pensions, is often larger than the basic audit fee.
This presents an obvious conflict of interest for auditors who may be unwilling to challenge the client on questionable accounting practices for fear of killing the golden goose of consultancy fees.
What must be a huge cause of concern is the fresh shadow which the Ted Baker investigation casts over KPMG. As one of the big four audit firms KPMG has a big role in the global accounting market because there are simply too few other audit choices.
One of the great mysteries surrounding KPMG is how the group’s former senior partner John Griffith- Jones, who was at the firm when past mistakes were made, has felt it possible to remain chairman of the Financial Conduct Authority, the body responsible for upholding the highest standards in the City of London.
In almost any other job in the public service Griffith- Jones might have felt compelled to step aside from such a sensitive post until all inquiries were over.
Simply excusing himself from any matters involving former clients looks short of what is required. The potential problems for KPMG are far from over. Eight years have passed since the failure of HBOS (now part of Lloyds Banking Group) and it was not until early this year that the FRC let it be known that it was considering a formal inquiry into KPMG’s audit under its disciplinary scheme. Its intervention came after a review of the report published by the FCA in November 2015.
Previously the FRC had said that it didn’t believe there were reasonable grounds to suspect misconduct.
The Fifa saga goes on, and only last week, after the disclosure of £55m of bonuses to top officials, Tory MP Damian Collins, a member of the Culture, Media and Sports Select Committee, suggested that football’s world governing body and its auditors KPMG have questions to answer. Most recently KPMG’s name has come up again in respect of advice offered to the BHS pension fund.
At the very least KPMG needs to order an investigation of its audit and non-audit work otherwise it risks a loss of trust and future work could drift off to competitors.
Mandarin watch
SIR John Kingman is an able Treasury civil servant who was among those who helped steer Britain through the worst of the financial crisis.
He also gained important private sector experience during a temporary sojourn at bankers NM Rothschild. Nevertheless, his prospective elevation to the job of chairman of Legal & General, one of the largest guardians of savers and pensioners money, might be a little premature.
We normally expect corporate chairmen – especially in the financial sector – to have served some apprenticeships on the boards of several quoted companies.
The main job of the chairman is often described as being willing to sack the chief executive. In spite of a recent lacklustre share price performance, one cannot imagine that chief executive Nigel Wilson is shaking in his boots just yet.
Pay squeeze
THE last gesture of Philip Bowman as chairman of the remuneration committee at Burberry was to slash the awards for chief executive and chief creative officer Christopher Bailey and his top colleagues.
With the luxury goods company’s shares down 35pc in the last year Bailey will have to make do, for the time being, with £1.9m instead of the £7.9m in the previous year.
It is a big 75pc drop but investors may still have questions about the unusually high £464,000 cash payment Bailey receives in the shape of benefits and allowances.
The baton at the pay committee will pass in August to Fabiola Arredondo, a former BBC and Yahoo executive. She spent part of her career at Experian, spiritual home of Burberry chair Sir John Peace, and one of Burberry’s sister companies when it was part of GUS.
So not quite a fresh pair of eyes then.