Views on improving the integrity of global capital markets
12 April 2013

KPMG Scandal Strengthens Case to Disclose Lead Partner in Public Company Audits

Will the alleged insider trading scandal involving ex-KPMG partner Scott London compel the Public Company Accounting Oversight Board (PCAOB) to finally require disclosure of the lead partner on public company audits? For many investors and regular readers of the financial press, it has been impossible to miss the news that London resigned from KPMG amid accusations that he disclosed insider information about KPMG client Herbalife and other companies to a friend. KPMG was the auditor of Herbalife’s financial statements. And because London was the lead partner, he was responsible for the audit and maintaining independence.

It took less than a day for the press to unearth London’s name from behind this veil of secrecy. But it would have been quicker if he were required to disclose his name for the audits under his responsibility. With the information highway including social media, it was inevitable that London’s name would surface. At issue is mainly the behavioral change that comes with taking personal responsibility for one’s work.

Lead Partner’s Name Not Disclosed for Public Company Audits

Under the current audit rules, only the auditing firm’s signature (i.e., KPMG) appears on the audit opinion. However, the PCAOB nearly two years ago proposed a requirement to disclose the audit partner to improve audit accountability and quality. The U.S. audit profession has strongly opposed disclosing lead partner names fearing it would increase their personal liability and damage their reputation in the event of an audit failure

Many jurisdictions across the globe — including the United Kingdom — already require disclosing the lead partner. In fact, a study conducted by Joseph Carcello of the University of Tennessee and Chan Li of the University of Pittsburgh found that audit quality improved in the U.K., possibly because naming the lead partner may increase accountability. The study indicated that this disclosure came with increased costs, however. But it is investors who ultimately pay that cost. Given the choice of increased audit fees or greater risk of a sub-standard audit, we think investors are willing to pay for audit quality.

Investors Deserve to Know

For the Herbalife audit, investors paid KPMG $3.8 million in 2011 and $3.9 million in 2012 in audit fees. Shouldn’t these investors know London’s name? What other public company audits was he responsible for? Right now it’s difficult for investors to know. The PCAOB should make it easier for investors by requiring the lead partner’s name to be disclosed. It will increase audit quality and accountability — both of which are well worth the price.

Related Articles

For more on this issue, here are some articles worth reading:

KPMG affair highlights fight for change (Financial Times)

Herbalife’s KPMG Auditor Was a Cheerleader, Too (Bloomberg)

Looking for KPMG’s Mystery Man (Wall Street Journal)

KPMG and the Pain That Comes of Breached Trust (The New York Times)

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About the Author(s)
Matt Waldron

Matt Waldron was a director of financial reporting policy at CFA Institute. He drafted position papers and comment letters, representing membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others.

10 thoughts on “KPMG Scandal Strengthens Case to Disclose Lead Partner in Public Company Audits”

  1. GRH says:

    If auditors are worried about personal liability or damage to their reputation, there may be a fundamental problem – independence.

    1. Matt Waldron, CPA says:

      Thank you for your comment. The PCAOB and the IASB are proposing to expand the information provided to users, including investors, on their audit. This initiative, along with disclosing the engagement partner, are aimed at enhancing the auditor’s independence, objectivity, and professional skepticism.

  2. Obaidullah says:

    Well, we already disclose it here in Pakistan 🙂

    1. Matt Waldron, CPA says:

      Thank you for your comment. Of course we support disclosing the name of the lead partner, similar to Pakistan, which we feel would contribute to audit quality.

  3. Narayanan says:

    We all know what happened in post Satyam scam- partner who is signing and who signed both were held responsible and the profession went to the low in 1999. We in India are already way-ahead in our profession and US is just now surfacing the loopholes…far better to practice in India and invest in India right..

    1. Matt Waldron, CPA says:

      Thank you for your comment. It is CFA Institute’s position that, similar to India, the lead partner’s name should be disclosed. This should enhance audit quality in our view.

  4. Olumuyiwa Ajibade says:

    The Financial Reporting Council (FRC) of Nigeria may just be ahead of the US PCAOB in this matter. It currently requires the lead partner in the audit to disclose his/her FRC registration number on the audit opinion page. The FRC Act requires all professionals in the financial reporting process to register with the Council. It is believed this will increase the level of accountability/transparency in financial reporting and audits in the country.

  5. Matt Waldron, CPA says:

    Your comment is consistent with the view of CFA Institute in that accountability/transparency would be increased through disclosure of the lead partner which will lead to enhanced audit quality. Thank you for your comment.

  6. Fernando Sanchez says:

    The only problem that I find is that if London’s name was disclosed on his audits, other companies he audited would pay the price. Investors would not trust his audits and stock price may decrease.

  7. Matt Waldron, CPA says:

    Yours is an interesting observation and could result under the existing rules. However, once the lead partner name is disclosed on all engagements, audit quality and accountability should be enhanced which adds further integrity to the markets.

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