It was hardly the venue for violence, the Joint Parliamentary Inquiry into Regulation of Audit in Australia. The Committee transcripts have now dropped and we can report on an extraordinary day in the history of audit, the day when, finally, there were calls for violence. Michael West reports.
Mr Jeffrey Knapp: Frankly, the audit partners at KPMG should take themselves outside and give themselves an uppercut.
Chair, Senator James Paterson: Mr Knapp, that’s not really an appropriate contribution to a parliamentary committee.
Mr Knapp: The last paragraph of my presentation was unscripted.
Chair: I gathered that.
Mr Knapp: But it was based on evidence.
Chair: Mr Knapp, we’re interested in your observations based on evidence. We’re not interested in recommendations for people to do harm to themselves, to put it bluntly.
Thank heavens Mr Knapp did not advocate that partners of the Big Four accounting firms “Go and jump in the lake”. It may have invited a rebuke from Senator Paterson for incitement to mass drownings.
Quis custodient ipsos custodes? Senatoris custodiet ipsos custodes. Who guards the guards? The Senator guards the guards.
Setting the scene
The scene was the Joint Parliamentary Inquiry into auditors which is investigating slipshod audit standards and rampant conflicts of interest by the Big Four. Deloitte, EY, KPMG and PwC are Australia’s largest political donors; they now earn $700 million a year for Government consulting and enjoy firm-wide double digit revenue growth while they audit the same multinational companies for which they provide tax dodging and other advisory services.
In lay terms, if this were a board game, the Big Four would be holding all the chips.
The testimony for retired UNSW accounting academic was refreshing, coming hard on the heels of some fairly dry witness stuff from other academics.
Knapp, unlike other witnesses spruiking technical wares and generalities, was naming names, the biggest corporate names in the world. And here is his actual evidence of reckless and compromised accounting, which includes the biggest corporate names in the world.
Knapp segued into his call to arms with this:
“One final example (of falling transparency and audit quality): KPMG. KPMG allowed Ansett to prepare special purpose financial statements when it had 15,000 employees. KPMG allowed Pfizer Australia to recognise dividend income directly in equity. KPMG allowed Fresenius Medical Care Australia to prepare general purpose financial statements that did not consolidate subsidiaries.
“Frankly, KPMG is not acting in a professional manner in these audits, and it’s high time that they considered their role as a leader in the profession, as an educator to the accounting profession. If I can just conclude on this note: frankly, the audit partners at KPMG should take themselves outside and give themselves an
uppercut.”
Then this on one of the companies in the bidding duel for the privatisation of Australia’s visa system:
“It’s baffling to me that you can have a large company like Oracle in Australia that hasn’t filed its annual financial report on time nine years in a row and sometimes with a very lengthy delay — six months or a year — and the auditor is not in some sense following up on that and saying, ‘You’ve got to comply with your legal responsibilities for lodging your financial reports’. It’s also baffling to me (that) ASIC, as the custodian of these financial reports, should know when a company like Oracle hasn’t filed nine years in a row”.
There were other memorable moments at the Committee hearing in Canberra on Friday. One of these was the grilling of Financial Reporting Council (FRC) chair Bill Edge for being paid by PwC at the same time as being in this key oversight role of the accounting profession. Senators Peter Whish-Wilson, Steve Georganas and Deborah O’Neill were suitably energetic in questioning Edge on this one, besides trying to get to the bottom of what the FRC actually did, and why taxpayers should have to finance an agency which apparently did so little.
Who Guards the Guards? Big Four prepare for war as beach-side senator brings corporate inquiry
A simple and efficient outcome from this inquiry would be to compel multinationals and their auditors to file proper General Purpose financial statements, instead of the skimpy Special Purpose variety. This would ensure more tax, and more accountability for the public and for creditors.
Knapp: “Unfortunately, there are many multinational companies preparing inappropriate special purpose financial reports with impunity. The Big Four audit firms signing off on these special purpose accounts have abused the law with reckless indifference to the reporting entity definition. For example, KPMG audit failures include JBS Holdco Australia Pty Ltd, special purpose accounts for 2013, $3.6 billion of revenue, 7,721 employees; Ernst & Young audit failures include Apple Pty Ltd, special purpose accounts for 2016, $7.5 billion of revenue, 3,729 employees; Deloitte audit failures include Anglo American Australia Ltd, special purpose accounts for 2015, $2.8 billion in revenue, around 2,000 employees; and PricewaterhouseCoopers audit failures include Johnson & Johnson Pty Ltd, special purpose accounts for 2016, $1.3 billion of revenue, 1,180 employees.
“The significance of the multinational economic activity concealed in special purpose financial reports is non-trivial. My limited sample totals $63 billion of revenue. Multinational companies with dominant positions in Australian markets, or those with hundreds of employees or an array of unsecured creditors, are most likely reporting entities. In the absence of compelling evidence to the contrary it is reasonable to expect the existence of users dependent on general purpose financial statements for these companies.”
Accounting expert and inquiry observer Tom Ravlic, whose submission is worth a read, has an equally simple reporting remedy on a broader scale:
“The simplest and most elegant solution for those entities that are obliged to report under the law to the corporate regulator is to require full compliance with accounting standards. No exceptions should be entertained”.
Amid the squabbling over audit standards and the fineries of interpretation, it is always open to government to simply insist all companies over a certain size report fully and uniformly. This might do the Big Four out of some business but it would bring the tax dollars in. After all, if business people wish to enjoy the protection of the corporate veil, with that should come accountability and transparency. Otherwise, just don’t incorporate.
Knapp: Big Four failed Australia for their multinational clients
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Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.