Big 4

KPMG fires unethical partners

Published on: 18 Apr 2017

Picture the scene – you’re the senior auditing partner of KPMG in America with more than 30 years of experience serving some of KPMG’s most prestigious clients. There are over 9,000 KPMG people in the US who look up to you as the boss.

You receive some leaked information about which of your audits the US audit watchdog is going to examine as part of their annual inspection of how well KPMG perform audits.

Do you:

(a) Disclose this unethical breach immediately, or

(b) Try to keep things quiet and make sure that the audit files of the audits selected are perfect?

Unfortunately for Scott Marcello, the (now ex) head of KPMG’s audit practice in America, he didn’t choose option (a).

The background to the issue is that every year the US audit regulator, the Public Company Accounting Oversight Board (PCAOB) selects a sample of audits to inspect and ensure they have been performed properly.

A former employee of the PCAOB had joined KPMG. A friend of his who was still working at the PCAOB tipped him off about which audits would be selected for inspection this year.

The confidential information was then passed up the KPMG hierarchy until it reached Mr Marcello.

We can only guess what Mr Marcello and 4 other KPMG partners were planning on doing with the leaked information but one thing was for sure and that was they didn’t disclose the leak.

Whilst the 5 partners clearly weren’t very ethical, KPMG as an organisation acted quickly once they found out about it.

The 5 partners were fired and Lynne Doughtie, the chairwoman and chief executive of KPMG was quoted as saying “KPMG has zero tolerance for such unethical behaviour. Quality and integrity are the cornerstone of all we do and that includes operating with the utmost respect and regard for the regulatory process. We are taking additional steps to ensure that such a situation should not happen again”.

The PCOAB publish the results of their inspections and the previous results of the KPMG inspections perhaps give a reason for why Mr Marcello was keen for any help, whether it was ethical or unethical.

In 2014 and 2015, KPMG had more deficiencies in their audits than any of the other Big 4 in America.

38% of their inspected audits in 2015 were found to be deficient whilst in 2014, 54% were found to be deficient.

Can PwC partners sing?

Published on: 14 Dec 2016

Well, what can I say?

I admire them for being brave enough to do it but if I’m honest, by the look on some of their faces, I think a few of them aren’t sure that this will be the high point in their career.

Partners in accounting companies are renowned for being hard working and intelligent individuals.

One thing they are not renowned for is singing.

Now, whilst there are no doubt a number of partners who are good at singing, the PwC partners in Hungary have just released a video of them singing a cover of the famous John Lennon song “So this is Christmas” and it has confirmed that their finance and business skills are far superior to their singing skills (or at least I hope their finance and business skills are better than their singing…)

Congratulations though to them for getting into the festive spirit and their singing skills can be seen in the video below (if you’re viewing this in the office I’d advise headphones so as not to alarm any of your colleagues…)

Does this suit you?

Published on: 01 Nov 2016

What do you wear to work?

If I had asked that question 10 years ago the chances are that a large proportion of answers would have been “a suit”.

Things are different now though. Tastes are changing and so are a number of office dress codes. As a result, fewer people are now wearing suits to the office.

A number of major companies revised their dress codes this year. JP Morgan for example decided to allow their employees to wear business-casual attire on most occasions. PwC also switched to a more casual dress code where employees were allowed to wear jeans as long as there were no client meetings.

Whilst this relaxing of business wear rules can have benefits for individuals who prefer to work in more casual clothing, there are some organisations who will suffer.

Fashion brands focussing on tailored men’s suits are an obvious example of a business which could suffer due to the decline in demand for men’s suits.

Brioni, the Italian menswear fashion house owned by French holding company Kering was founded in Rome in 1945 and is renowned for its high-quality suits. It has had numerous famous faces as its customers including James Bond in the Bond films from Goldeneye to Casino Royale and more recently it was reported that Donald Trump has been wearing Brioni suits during his US presidential campaign.

But things aren’t going well for Brioni.

Earlier this year Bloomberg reported 400 job losses due to a fall in demand and recently Justin O’Shea, the creative director of Brioni who was brought in to modernise the luxury Italian brand, left abruptly after just six months in the job.

Mr O’Shea is well respected in the fashion industry and has a reputation for being a very straight talking person. He told Vogue that “First of all, I would change the shitty logo. I would change the campaign. I would change the clothes. In fact, I would change pretty much everything.”

When it comes to change though, one thing seems certain and that is that the fall in demand for men’s suits is unlikely to change given the relaxing of more and more office dress codes.

High heels at PwC

Published on: 29 May 2016

Let me ask the men who are reading this a quick question – how would you feel if you had to wear uncomfortable high heels during a 9 hour working day?

My guess is that unless you have a pretty unusual job, as a man you wouldn’t feel too happy wearing high heel shoes. There would also probably be some fairly blunt discussions with your employer if they made it compulsory that you wore high heels.

If you’re a woman though, then it’s a different matter.

Nicola Thorp, a 27-year-old lady was temping at PwC’s office in central London as a receptionist. She turned up for her first day of work at PwC in flat shoes but she was told she had to wear shoes with a “2 inch to 4 inch heel” (5 cm to 10 cm).

According to the BBC, when she refused and complained that male colleagues were not asked to do the same, she was sent home without pay.

To be fair to PwC though, they had outsourced the reception duties at their London office to outsourcing firm Portico and the dress code was not a PwC policy. A PwC spokesman told the BBC that “PwC does not have specific dress guidelines for male or female employees.”

Portico said that Ms Thorp had signed the appearance guidelines but would now review them.

Ms Thorp however has taken the matter further. She has launched a petition on the UK Parliament website calling for it to be illegal for companies to demand that women wear high heels.

The UK Parliament website works in such a way that if a petition receives more than 100,000 signatures the matter will be considered for debate in parliament.

As at the time of writing, the petition has received over 140,000 signatures so it’s likely that the matter will be debated in Parliament.

My guess is that being debated in the UK parliament was the last thing on her mind as Ms Thorp put on her shoes to head into her first day of work at the offices of PwC in London…

Who audits the auditors?

Published on: 22 May 2016

The Financial Reporting Council (FRC) has just published its audit quality inspection reports for the 6 largest auditing companies in the UK. The job of the FRC’s Audit Quality Review (AQR) team is to monitor the quality of the audit work of those UK audit firms that audit public interest and large entities.

The AQR team have been busy over the last year and have now released lengthy reports for BDO, Deloitte, EY, Grant Thornton, KPMG and PwC.

Overall, the quality of the audits has improved during the last year with the number of audits that required “significant improvements” dropping from 10 to 2 for the Big 4. There were no audits that required significant improvements at BDO or Grant Thornton.

Unfortunately for KPMG though, they were the company that undertook the two audits that were highlighted by the FRC as needing significant improvements.

The FRC reviewed 22 KPMG audits and out of those there were 2 that required significant improvements.

The first one involved a change of systems and a 3rd party IT provider. The FRC identified that the KPMG audit team did not “design and perform procedures to obtain sufficient audit evidence in response to the migration risk”.

In the second audit where there were problems the FRC highlighted that insufficient audit work had been performed in relation to revenue and inventory.

Details of the scope of the reviews can be found here and are the full reports on the individual companies are on the following links:

BDO
Deloitte
EY
Grant Thornton
KPMG
PwC

Would a good liar make a good accountant?

Published on: 21 Jan 2016

Do you have children? Have they ever told you a lie? Even a small teeny weeny lie?

Well, if they have then although you may not be particularly pleased with them, it may actually mean that they have good memories and excellent thinking skills.

Psychologists at the University of Sheffield tested 135 children and found that those children that lied performed much better than the honest children in the group.

The children in the study were aged between 6 and 7 years old and during the study they were given a trivia game. The answers to the trivia game were on the back of the card which they had been given. Initially, each child was in a room accompanied by one of the researchers but the researcher then left the child alone with the card with the answer on the back.

Before leaving the room the researcher told the children not to look at the answer but what the children didn’t know was that when they were alone in the room there were hidden cameras which were monitoring whether they would look at the answers on the back.

25% of the group subsequently cheated and looked at the answers on the back of their cards but claimed that they hadn’t cheated when the researcher returned to the room.

At a later stage, all of the children had to perform a separate memory test and the research found that the children who had lied performed significantly better than those children who didn’t lie.

Dr Tracy Alloway, project lead from the University of North Florida was also involved in the research and said that “this research shows that thought processes, specifically verbal working memory, are important to complex social interactions like lying because the children needed to juggle multiple pieces of information while keeping the researcher’s perspective in mind”.

This has got me thinking as a lot of the readers of this blog are accountants or studying to be accountants.

“Thought processes”, “verbal working memory”, “juggling multiple pieces of information” and “keeping other people’s perspective in mind” are all skills which many accountants need.

Does this mean that you would make a good accountant if you were a good liar when you were a child?

Whatever your answer is, I’m not sure I would believe you…

Improving productivity or big brother surveillance?

Published on: 08 Oct 2015

Is this a clever way to improve productivity or a big brother surveillance system creeping into corporate life?

Humanyze, a technology company, produces devices which monitor the activity of employees and one of the more well known companies that has used it recently is Deloitte in Canada where volunteers in their St John’s, Newfoundland office wore the devices which are like oversized ID cards.

According to Humanyze their “social sensing platform” uses a variety of sensors and is capable of capturing face-to-face interactions, extracting social signals from speech and body movement, and measuring the proximity and relative location of users.

They combine these with other data sources such as electronic communications, objective productivity metrics, and spatial analysis to provide insights on how complex work gets done in the modern organization.

CBC Canada reported that the Deloitte team in Newfoundland were changing from a traditional cubicle office layout to an open concept space and the Humanyze badges were used to measure how well employees were performing in the new layout.

The participation by the Deloitte staff was optional and they were provided with contracts that made them the owners of the data.

All the information was collected anonymously and the employees were given personalised dashboards that showed their performance benchmarked against their colleagues.

Silvia Gonzalez-Zamora, an analytics leader at Deloitte said that “The minute that you get the report that you’re not speaking enough and that you don’t show leadership, immediately, the next day, you change your behaviour. It’s powerful to see how people want to display better behaviours or the behaviours that you’re moving them towards.”

So, is this a clever use of technology or the first step towards big brother monitoring?

Either way, I guess it may help identify the office winner of the “who spends the most time in the toilet award”…

How much would you really take?

Published on: 05 Oct 2015

How much holiday would you take in a year if your boss said you could take as much as you liked?

If it were me, I’d become a virtual stranger in the office given the number of days I would be lounging about on holiday.

In reality though the few companies who are offering their staff unlimited time off are actually finding that their employees are taking fewer days holiday when they are given the option of taking as many days off as they like.

Bloomberg has reported that Grant Thornton, the 6th largest accounting firm in the US has just announced that they will be offering their US staff unlimited time off.

GT has launched a video of some of their staff being told the news and perhaps unsurprisingly they seem happy (possibly also, a little unsure as to whether the person behind the video camera had been drinking and was making the whole thing up…)

Bloomberg reports that When it comes to the Big 4 accounting firms in the US, KPMG LLP offers a maximum of 30 days, Deloitte LLP has a maximum 35 days and PwC has a maximum of 22 for management level staff, according to the companies. EY has a minimum of 15 days with additional days added with years of service.

GT though are no doubt hoping their new holiday policy will make them a more attractive employer and Pamela Harless, chief people and culture officer for GT said “This is a modern move for an industry where these types of benefits aren’t really common”. GT are “convinced it will help us to be far more attractive in retaining talent as well as attracting talent.”

What is perhaps surprising though is that for the very small percentage of companies who already offer their employees unlimited holiday entitlement, their experience has been that the number of days taken as holiday as actually fallen since unlimited time off was introduced!

Haje Jan Kamps, the founder of Triggertrap identified this problem and highlighted that “Because we weren’t explicitly tracking, people felt guilty about taking time off. It also turns out that there was a difference in the patterns for how people took time off: Some were taking a week here and a week there, but others were just taking the odd day.

The problem with the latter is that it seemed like they were always away. That’s OK, of course, but if other members of the team feel as if someone’s taking the piss, that’s bad for morale all around.”
In summary though, an interesting development for GT and well done to them for launching such an initiative with the aim of incentivising and motivating their staff.

One interesting final question though – if you could take as much time out of the office as holiday without it affecting your career prospects, how much would you take?

A very forward thinking leader…

Published on: 01 Jul 2015

She is the first female boss of a major accountancy company in the UK and Sacha Romanovitch is doing things differently.

At 47, Sacha who heads up Grant Thornton in the UK is one of the youngest leaders of a major City firm and has certainly got some innovative views in terms of how she plans to run Grant Thornton.

She has just announced a profit share scheme for the whole business which could boost salaries by 25%. She will oversee a “shared enterprise” scheme which will allow future profits to be shared between all of its 4,500 staff instead of being restricted to the most senior staff.

Ms Romanovitch was quoted as saying “The benchmark that we are working to is that in great organisations that do this, it ends up being between 10 and 25 per cent of a person’s salary. That is what they can potentially earn as a profit share. John Lewis [a prestigious UK department store] does it, Arup [an engineering firm] is the other one that does it really well.”

She has also announced plans to “crowd source” new business ideas and to consider allowing lower ranked staff to join board meetings.

In a move which will no doubt endear her to the team at Grant Thornton she has also agreed to cap her own salary. She has stated that her salary will be limited to a maximum of 20 times the average salary in the company.

This is an admirable move, especially when you consider that bosses of FTSE 100 firms (the largest 100 stock exchange quoted companies in the UK) have on average a salary which is 149 times the average salary in their respective firms.

In a recent newspaper interview Ms Romanovitch, who is a married mother of two and who works from home in the beautiful county of Devon on Fridays, said she was a fan of social media and thinks firms that restrict staff use of social media are wrong.

She said “A lot of firms don’t let their people use social media because they’re worried that they will say something they shouldn’t.

I find that a bit scary. I employ great people. If I was worried that they were going to say something on social media that they shouldn’t, I’d question whether I should employ them at all.”

Congratulations on a great start Sacha and if you’re interested, the marvellous photo of Sacha at the top of this article is from her twitter page which can be found here.

Who audits the auditors?

Published on: 29 Jun 2015

It’s a great life being an auditor. You visit your clients and can ask as many questions as you like.

After all, your job is to confirm the accounts are showing a “true and fair view” or to be more precise, your job according to “International Standard on Auditing (ISA) 700, Forming an Opinion and Reporting on Financial Statements”, is to “form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.”

So, that’s the job of the auditors.

Who checks the quality of the audits though?

In the UK, the Financial Reporting Council (FRC) undertakes annual quality inspections of the largest auditing firms in the UK including Deloitte, EY, KPMG, pwc and a number of mid tier firms.

The latest annual report has been released and whilst there has been an improvement in the performance compared to previous years with 67% of all audits inspected in 2014/15 being assessed as either good or only requiring limited improvements, 33% of the audits inspected fell below the highest standards set by the accounting regulator and were classified as either requiring improvements or significant improvements.

Let’s just pause there for a moment.

What this is saying is that one in every three audits undertaken by the leading accounting companies in the UK have been classified as needing improvements or even worse, needing significant improvements.

Three of the more common issues identified in the report were:

  • Insufficient scepticism in challenging the appropriateness of assumptions in key areas of audit judgement such as impairment testing and property valuations.
  • Insufficient or inappropriate procedures being performed. This is common to many areas including revenue recognition.
  • The failure to adequately identify the threats and related safeguards to auditor independence and to appropriately communicate these to audit committees.

The FRC do however appear to be trying to improve things and have introduced various initiatives.

For example, they now “require firms to develop action plans to address the weaknesses identified in individual audit engagements and firm-wide procedures”. In conjunction with the development of these action plans they now require firms to undertake a detailed rootcause analysis of the factors contributing to the issues arising from the inspections and those action plans together with the related analyses will then be subject to follow-up inspections.

A copy of the report can be found here.

The FRC also prepared individual reports for the Big 4 and they can be found on the following links:

Deloitte

EY

KPMG

pwc

The ExP Group