Accountants are the Rodney “I don’t get no respect” Dangerfield of the professional services industry. I know this because my father was the senior partner of a Toronto accounting firm and I learned about the abuse he took despite his unrivaled knowledge of Canada’s tax code. A former senior partner at a Big Four accounting firm told me my father was the only person he knew who was audited by Revenue Canada and the tax agency decided it was mistaken.
One of my father’s clients was the CEO of one of Canada’s biggest publicly traded corporations. The executive one year realized considerable capital gains and other taxable items. My father took great pride in how he creatively shielded much of that income. Upon presenting the return, the client immediately turned to the final page and saw the taxes he’d still have to pay.
“This is garbage,” the client told my father and ripped the entire return to shreds.
Accounting rules have become as squishy as ESG metrics and more open to broad interpretation since my father was in practice. The line between “generally accepted accounting principles” and fraud is a seemingly fine one, as evidenced by an accounting gadfly named Harry Markopolis recently calling GE “the biggest fraud since Enron.” Leslie Seidman, the head of GE’s audit committee and one of the best credentialed people in the accounting industry, says Markopolis is badly mistaken. (See here for my take on GE’s accounting issues).
The pressures on auditors of publicly traded corporations should be deemed “cruel and unusual punishment.” They must appease high-strung CEOs and CFOs who need their financials prettied up to drive up their companies’ stock prices and fatten their paychecks. If the auditors push back too much on overly optimistic management assumptions, they will hear the dreaded 10 words everyone in professional services fears from a client. “I think it might be time to rethink our relationship.”
Given this background, reading this Wall Street Journal story about the sentencing of David Middendorf, KPMG’s former No. 2 auditor to a one year prison term didn’t bring about the usual satisfaction I feel when dishonest executives are brought to justice. Middendorf was convicted for his role in a scheme to steal the names of the KPMG clients whose audits were going to be reviewed by the accounting industry’s regulator.
Middendorf told the judge before sentencing that “never in my wildest imagination” did he realize he engaged in criminal conduct. There was good reason for him to feel that way. His lawyer told jurors there were 47 KPMG recipients on emails discussing the stolen data “and no one yells fire.” Middendorf isn’t the only person taking the fall. Six other KPMG employees also were indicted, and the head of the firm’s audit practice was fired.
KPMG has some other very serious issues. An SEC probe found the firm’s employees also cheated on training exams. According to the goingconcern accounting blog, KPMG has been losing public company audits these past few years and morale at the firm is low. The industry joke is there’s the Big 3 and KPMG (accountants aren’t known for their comedic talents). And, as luck would have it, KPMG is GE’s auditor.
When a firm has one, maybe two, senior employees engaged in dishonest or criminal conduct, that can be viewed as an aberration. But when a firm has six indicted executives, and dozens of employees knew about their criminal activity, plus a cheating scandal, that represents a culture. And a firm’s culture starts at the top.
Employee behavior isn’t governed by the lofty language in HR manuals about a company’s supposed ethics and morals. Savvy employees know the manuals are merely legal documents that can and will be used against them to justify their dismissals if the corporation wants to get rid of them. What matters are the smoke signals emanating from the corner office. And the evidence is substantial that KPMG employees understood that cutting corners is the firm’s way of doing business.
KPMG’s CEO is Lynne Doughtie, ranked by Fortune as the 38th most powerful woman in America. Doughtie underscores an observation I’ve made in my decades-long career in journalism and public relations: CEOs who crow loudest about their superior ethical standards invariably are the least able to inject those values into their corporations.
Doughtie definitely talks a good game about culture. Here’s an excerpt from a 2019 letter to stakeholders, co-signed by Doughtie:
We are continuously focused on
the systems, tone and governance that promote quality across our organization,
supported by a culture grounded in integrity and values. Earning the public’s
trust requires that every day we live up to the high standards we set
Doughtie emphasized the importance of character and values in an interview last year with Forbes contributor Bruce Weinstein. She said the best way to impress her during a job interview was to ask about the firm’s “values.”
(Character is) more important than ever, because the world we live in now is so complicated. There are decisions to be made that are gray, so you need to be well-grounded in values, ethics and integrity. Looking for future employees who share the values of an organization is really important.
It’s also crucial to know your personal values and how they intersect with the organization’s values. The interview isn’t just about your skills. It’s also about the things that make you uniquely you. Tell us about a time that you faced an ethical dilemma and how you handled that.
Well, we know how dozens of people working under Doughtie handled an ethical dilemma.
Maybe there’s still a benefit, or two, keeping a few old white male farts around.