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.
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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