Temasek uses scandal-ridden audit firm accused of fraud, corruption and improper practices by governments around the world

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Singapore sovereign wealth fund Temasek’s recently released 2018 financial report was notable for more than one reason. One, the fund announced that it has achieved a record high net portfolio value of $308 billion.

Secondly, and perhaps more curiously, the group’s 2018 financial summary revealed that the fund has been audited by global professional services firm KPMG LLP for nearly a decade since 2009.

This is in spite of the fact that the scandal-ridden audit firm has been accused of fraud, corruption and improper practices by governments around the world since the early 2000s to date.

One of the Big Four auditors – along with PricewaterhouseCoopers, Deloitte and Ernst & Young – KPMG has courted controversy for decades in several nations and has been slapped with hefty fines costing millions, a plethora of court cases as well as outright criminal charges.

Last month, the Financial Reporting Council (FRC) – a prominent watchdog that independently regulates the UK and the Republic of Ireland and plays a vital role in enforcing UK corporate governance standards – found that KPMG’s audit work had shown an “unacceptable deterioration”.

The firm’s practices were found to be so unacceptable that for the first time in its history, the FRC said that it would investigate 25 per cent more audits conducted by the firm in the 2018-19 financial year.

Financial analysts believe that the FRC’s close scrutiny over KPMG is more than overdue given its past. After all, the firm even caused the FRC’s reputation to be criticised when it was revealed in 2013 that seven senior members of the council that was to investigate KPMG’s role in a controversy that year were current or former employees of the accounting giant at the time.

Closer to home, KPMG retracted its audit reports of troubled Malaysian state fund 1MDB for FY2010-FY2012, after Dr Mahathir and the Pakatan Harapan won the last General Election and toppled the Barisan Nasional.

As the new government launched a probe into the state fund following the election, 1MDB reported that KPMG told it not to rely on its reports over the three years as it does not reflect the “true and fair” assessment of the fund’s finances.

Besides this, KPMG has been embroiled in countless scandals in various countries over the years, with the latest controversy occurring as recently as this month:

2003 & 2004: After the US Justice Department commenced a criminal inquiry and accused KPMG LLP of fraud in marketing abusive tax shelters, KPMG fired or forced the retirement of over a dozen who were involved and admitted criminal wrongdoing in creating fraudulent tax shelters to help wealthy clients avoid $2.5 billion in taxes between 1996 and 2002. It then agreed to pay $456 million in penalties to avoid indictment.

2003: KPMG agreed to pay $125 million and $75 million to settle lawsuits stemming from the firm’s audits of Rite Aid and Oxford Health Plans Inc., respectively.

2004: KPMG agreed to pay $115 million to settle lawsuits stemming from the collapse of software company Lernout & Hauspie Speech Products NV.

2006: The US Federal National Mortgage Association sued KPMG for malpractice for approving years of erroneous financial statements.

2007: KPMG Germany was investigated for ignoring questionable payments in the Siemens bribery case.

2008: KPMG was accused of enabling “improper and imprudent practices” at New Century Financial, a failed mortgage company. The firm agreed to pay $80 million to settle suits from Xerox shareholders over manipulated earnings reports. Also in 2008, two funds audited by KPMG had $2.37 billion invested with the Madoff “Ponzi scheme. Class action suits were filed.

2010: KPMG made headlines after the Swedish Financial Supervisory Authority reported to the Swedish accountancy regulator that KPMG client HQ Bank was forced into involuntary liquidation after the Financial Supervisory Authority revoked all its licences for breach of banking regulations.

2011: KPMG conducted due diligence work on Hewlett Packard’s $11.1 billion acquisition of the British software company Autonomy. In 2012, HP announced an $8.8 billion write off due to “serious accounting improprieties” committed by Autonomy management prior to the acquisition. 

Also in 2012, an independent panel formed to investigate irregular payments made by KPMG client Olympus found that KPMG’s affiliate in Japan did not identify fraud at the company.

2013: A corruption scandal emerged as a former KPMG LLP partner in charge of KPMG’s US Los Angeles-based Pacific Southwest audit practice admitted passing on stock tips about clients, including Herbalife, Skechers, and other companies, to a friend in exchange for cash and gifts. The ex-partner agreed to plead guilty to one count of conspiracy to commit securities fraud and pay around $1.3 million in restitution in a plea deal but the scandal caused KPMG to resign as auditor for Herbalife and Sketchers.

2015: KPMG was accused by the Canada Revenue Agency of tax evasion schemes: “The CRA alleges that the KPMG tax structure was in reality a ‘sham’ that intended to deceive the taxman.” In 2016, the Canada Revenue Agency was found to have offered an amnesty to KPMG clients caught using an offshore tax-avoidance scheme on the Isle of Man.

2017: KPMG terminated five partners in its audit practice after an investigation of advanced confidential knowledge of planned audit inspections by its Public Company Accounting Oversight Board. This followed criticism about KPMG’s failure to uncover illegal sales practices at Wells Fargo or potential corruption at FIFA.

Also in 2017, KPMG paid a $6.2 million fine to the US Securities and Exchange Commission for inadequacies in its audit of the financial statements of oil and gas company, Miller Energy Resources.

Also in 2017, 91 partners of KPMG faced contempt proceedings in Hong Kong High Court, as China Medical Technologies (CMED) liquidators investigating a $400 million fraud took action against KPMG with regard to its refusal honor a February 2016 court order to produce Chinese working papers, correspondence, and records to the liquidators.

Also in 2017, the FRC opened an investigation into KPMG’s audit of the accounts of aero-engine maker Rolls-Royce.

Also in 2017, KPMG became embroiled in the South African corruption scandal involving the Gupta family. KPMG faced calls for closure, and an uncertain future, as a consequence of the damage done to the South African economy as a result of revelations of corruption and collusion in 2016.

The firm’s activities in 2015, when it issued a controversial report that implicated former Finance Minister Pravin Gordhan in the creation of an illegal intelligence gathering unit of the South African Revenue Service (SARS), also came into scrutiny. This report was seen by elements of the media to be part of a wider Gupta-linked state capture conspiracy, with the aim of forcing Gordhan out of his post. KPMG withdrew the report in 2017.

Numerous South African companies either fired KPMG in the immediate aftermath of the scandal, or were reconsidering their relationships with the firm.

2018: The FRC examined KPMG’s role in the case of collapsed UK construction firm Carillion after it was reported that KMG and the other ‘Big 4’ accountancy firms collected fees of £72m for Carillion work during the years leading up to its collapse. KPMG was singled out for particular criticism for signing off Carillion’s last accounts before a profit warning in July 2017. It was also found that two out of three former Carillion finance directors had also worked for KPMG.

The final report of the Parliamentary inquiry into Carillion’s collapse, published on 16 May 2018, criticised KPMG for its “complicity” in the company’s financial reporting practices. The authorities accused the big four accounting firms of operating as a “cosy club”, with KPMG singled out for its “complicity” in signing off Carillion’s “increasingly fantastical figures”.

KPMG was also recently fined a hefty £3.2 million by the FRC over its audit of insurance firm Quindell.

This month, the FRC started an investigation into KPMG’s audit role at collapsed drinks merchant Conviviality.