April 23, 2013 5:55 pm

KPMG chief dismisses ‘one-day wonder’ scandal

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Michael Andrew©FT

The chairman of KPMG has dismissed as a “one-day wonder” the insider trading scandal involving the former head of the firm’s Los Angeles audit practice.

Michael Andrew downplayed the global prominence of the controversy involving Scott London, a senior audit partner who has admitted leaking client secrets to a golfing partner who traded on the information.

He told the Financial Times that the story grabbed headlines “because it was a slow news week”.

However, he conceded that the scandal “will probably hurt” the firm’s business in China, where Mr Andrew is currently on a visit to Shanghai.

KPMG has already lost two clients in California as a result. The accountant was forced to resign as auditor to Herbalife, a nutritional supplement maker, and Skechers, the footwear maker, because of Mr London’s actions.

The KPMG chairman commended Mr London for taking public blame for what happened.

“To his credit, he did go on TV and take full responsibility for it,” he said. Mr Andrew added: “It is very difficult to deal with one rogue guy”.

“What other controls could you have in place [to deal with such a situation]?”

KPMG itself was not in a position to benefit from Mr London’s actions but its global reputation has been harmed by the fact that such a senior figure breached his duty to clients.

Mr Andrew said KPMG is prevented by confidentiality requirements from revealing what other companies’ audits were led by Mr London. The head of the US audit regulator, the Public Company Accounting Oversight Board (PCAOB) has called for senior auditors to be stripped of the anonymity which currently shrouds the identity of the auditor in charge of vetting the accounts of public companies in the US. It may also examine KPMG’s internal controls, said a former board member.

Meanwhile, the firm may face a UK government inquiry into its audits of British bank HBOS, which avoided collapse after being rescued by Lloyds TSB. Earlier this year, the US Securities and Exchange Commission sued two KPMG auditors for an allegedly failed audit into TierOne, a Nebraska bank that allegedly hid losses during the financial crisis and landed in bankruptcy. The auditors have denied any wrongdoing.

In 2005, KPMG paid a $456m penalty and admitted wrongdoing to settle what was then the largest criminal US tax case filed related to the marketing of illegal tax shelters.

Mr Andrew also played down the significance of the battle between US and Chinese regulators over whether the SEC should have access to audit work papers from the China units of US auditors. “No one treats this as a burning issue, we assume it will be sorted,” he said, adding that the dispute is not affecting the decision of Chinese companies over whether to list in the US.

The SEC has sued the Chinese affiliates of KPMG and the four other top US auditors to gain access to work papers used to audit nine Chinese companies listed on US exchanges.

“This is an issue between the two governments,” Mr Andrew said, noting “they will sort it out and we will comply”. The SEC argues that it needs access to working papers of auditors in China, to protect investors against frauds at China-based companies listed in the US.

Mr Andrew also said he expects a resolution of the dispute between US and Chinese regulators over whether the US PCAOB can inspect Chinese auditors jointly with local authorities. He does not expect that the US regulator would resort to widespread de-registration of Chinese audit firms as part of the dispute.

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