KPMG Auditor insider trading – we blame procurement!

Even as a veteran observer of professional services firms, their foibles and misdemeanours (and of course as the co-author of “Buying Professional Services, available here etc etc), I was shocked to read the news of KPMG and the insider trading story that hit the press last week.

“The FBI's Los Angeles office is investigating allegations that a former KPMG senior partner passed inside information to a share trader. The two firms (Herbalife and footwear maker Sketchers) said the claims did not call into question their own integrity”.

Things moved on rapidly, and by Saturday the FT reported that Scott London, the partner in question, had pleaded guilty to insider trading and receiving cash and other gifts in return for sensitive information.

Such a betrayal of trust by a company’s auditor, who by definition has information about a firm’s most precious and closely held secrets, strikes at the heart of the professional services relationship between purchaser and provider. You may remember we talked about “trust” being vital to strategic consultants recently – the same applies at least as strongly to auditors.

And the other shock perhaps is that this was a Partner who is under suspicion. We might tend to be a little more forgiving if it was a junior person, perhaps a struggling trainee or even a secretary or IT technician with the firm, who saw the chance to supplement a relatively meagre salary. But a KPMG Partner?

With profit per partner in the UK of almost £600,000 (I haven’t found data for the US firm), they’re not exactly struggling, although that figure has dropped by over 25% in the last couple of years. So maybe Scott London over-committed himself when times were even better? Or maybe it comes down to simple greed, which appears to afflict a small proportion of people independent of age, sex, race or wealth.

Are there any learnings for procurement people here? Well, obvious ones around having the right confidentiality clauses and so on in your contracts – I would assume the two client firms involved will be seeking some damages from KPMG. Whistle-blowing policies, encouraging other employees to alert the firm to suspicions about colleagues, are now increasingly common and can be relevant to any type of fraud. (It looks like KPMG had those in place already).

However, there are always going to be rare (we hope) events like this that are pretty much impossible to stop. The other positive outcome of this may be added impetus to the idea that firms need to buy audit services more competitively – something for procurement functions to promote within their own organisation, if the idea isn’t already accepted.

But here’s a controversial and interesting thought. There has been an increasing trend (driven by progressive CPOs, amongst others) to tender audit services more regularly and generally buy those services more professionally. Whilst there are clear advantages in doing that, maybe that has contributed to the reduced earnings for partners? And as we said above, maybe that contributed to this case? So is this arguably a “procurement is to blame” headline?!

Just a slightly mischievous thought there. And we certainly don’t want anyone to think that it should stop firms looking to buy and manage the services of their auditors in as professional a manner as possible.

First Voice

  1. RJ:

    A mischievous thought indeed, Peter. Since the number of firms who have actively tendered their statutory audit is still relatively low and those that have used a controlled procurement process is even lower, I think it highly unlikely that Procurement could be blamed in this instance.

    However, it is worth bearing in mind that if and when Procurement is called in to support a retender of audit, this is one of those categories where “value” is far more important to the organisation than “cost”. For most organisations the cost of their audit is (or certainly should be!) a small fraction of their external expenses but the potential impact of a strong or a poor auditor could be dramatic. Having run a few of these processes over the last few years we have almost always saved some money but that has largely been driven by revised and improved processes, increased automation and more stringent controls that require less active auditing than through haggling the partner’s fees.

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