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Directors from Westpac, Dexus, and Optus have raised concerns about audit quality amid KPMG’s data misuse scandal and called for tougher regulation of the wider professional services industry.
Westpac director and former Lendlease chairman Michael Ullmer, who started his career at KPMG, told Friday’s parliamentary hearing that it was time for more regulation of the industry.
Westpac director and audit committee chairman (and former KPMG staffer) Michael Ullmer at the inquiry on Friday expressed his concerns about audit quality. Alex Ellinghausen
“Now’s the time for a complete shift in this because of the matters that have come up in this committee,” he said, and pointed to UK regulations that require audit firms to be rotated every 10 years and put to tender every 20 years.
Ullmer also castigated the trend for professional firms to appoint independent directors, warning anyone asked to serve on such a board to be wary.
“You need to understand that when the chips are down, it’s the partners who run the firm, and if you’re not a partner in the firm … when difficult situations emerge, the partners will naturally come together and say, ‘We own the firm, and we are going to decide how this goes forward,’” he said.
Optus chairman John Arthur said the governance arrangements of listed companies, such as having an independent board, cannot be effectively “grafted” onto a partnership, which are fundamentally different beasts.
“One of the challenges we are seeing in professional firms, and this is not just accountants, is that they are grafting onto a partnership structure … governance arrangements that belong to corporations, and it is not always a happy marriage.”
Arthur said the problems at KPMG are fundamentally related to culture and leadership. “I think they need to remind themselves that they are first and foremost professionals, and that [their] business issues are secondary to those professional responsibilities, and I think that needs to come from the chief executive.”
Former KPMG chairman Martin Sheppard admitted there was tension between “partner directors” and “independent directors”. The inquiry heard that the firm’s partners are paid up to 10 times more than the independent directors.
“We’ve [KPMG] tried independent directors, but it is a difficult tension between partner directors and independent directors,” he said.
The scandal is also not showing any signs of abating.
Inquiry chairman Senator Deborah O’Neill said there are “many, many more” whistleblowers who have raised concerns about KPMG, “and they are talking about a repeat of the same behaviour”.
Greens senator Barbara Pocock demanded KPMG put together a list of any ethical concerns raised by staff members in the past decade in which the firm made a payment.
The scandal is also subject to probes by the federal Finance Department, Australian Securities and Investments Commission, Tax Practitioners Board, Chartered Accountants ANZ, several state governments, and inquiries into the allegations by individual clients.
Earlier, Arthur said KPMG’s use of his company’s confidential information when bidding for work with rival Telstra was “an egregious breach of professional responsibilities” and “a flagrant breach of duty owed to Optus”.
He said Optus was continuing to use KPMG as its auditor for now, but largely because it did not have time to run a process to replace it before its next financial report was due.
The telco had needed to adopt “a much more rigorous control environment” on its audit to allow it to continue using KPMG despite a loss of trust in the firm.
“We have moved from a ‘trust-slash-confidence’ environment, to a ‘trust-slash-confidence and verify’ environment,” Arthur said and that Optus “will be watching like a hawk” over the firm’s work.
Dexus chairman Warwick Negus said his board had similarly been too busy preparing its statutory accounts to decide whether the company will keep KPMG as its auditor, but “this decision should be considered once we have more information, including from the work of this committee”.
He said the firm’s conduct had been “disappointing” and “inappropriate”.
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