Hello, I'm Amy Bainbridge and welcome to

the Bloomberg Australia podcast. This

week, what happens when the big end of

town is called to account?

>> We need to understand why decisions we

find egregious and inexplicable

happened in one of the largest audit

companies in this country.

I I've taken accountability for the

things that didn't go right.

>> At a fiery parliamentary hearing last

Friday, the former CEO of KPMG's

Australia business, Andrew Yates, was

among a string of current and former

executives grilled about claims that the

firm misused client information. The

scandal claimed more senior figures this

week with national chairman Martin

Shepard among those set to step down.

Meanwhile, the firm's work for some of

the biggest companies in Australia faces

scrutiny on multiple fronts. To help us

make sense of what's happening at KPMG

and what it means for corporate

Australia and all of us, I'm joined by

Melbourne-based finance reporter Richard

Henderson. Rich, welcome back to the

podcast.

>> Thank you very much.

>> Rich, KPMG has been in the headlines for

a few months now, and this week, of

course, we've heard more senior staff

will leave. Can you give us a brief

recap of the main allegations against

KPMG?

>> Yeah, this is broadening to a huge

scandal. So, at the center of it is the

inappropriate use of confidential

information. So, the companies involved

here are Lendley, a property company.

Now the allegations are that uh senior

uh KPMG staff accessed confidential

information from Lendley's board

documents in this case and they were

used to help bids for audit work from

companies including Dexus and Westpak.

So you know there are there are a bunch

of allegations here. Uh you know that's

one of the key ones. you know that

they're also kind of calling into

question um bids that were successful

for McQuary Group. Uh KPMG was awarded

audit work from Mcquary Group taking

that from PWC. Uh that's one of the most

lucrative uh audit contracts uh in the

country and also Optus the telecom uh

provider. You know the allegations there

are that staff at KPMG again access

confidential information that was used

to help ar a bid for rival Telra. So

really it's uh it's folks using

information they shouldn't have to

ultimately benefit KPMG economically uh

which is a really breach of the the

standards that support this industry.

>> And this all of course culminated at a

marathon parliamentary hearing on

Friday. There were about 30 witnesses

called. And what stood out for you from

that hearing? So there were a few broad

kind of themes uh and there were some

really important specifics.

Broadly speaking, KPMG former

executives, current executives got a

real grilling by some very angry

parliamentarians who are seeing a

massive case of deja vu after the PWC

scandal that came to light 3 years ago

where PWC was using confidential

government information, not company

information, government information

around tax policy and they were leaking

that to their corporate clients. Some of

the specifics to come out were quite

notable. Uh there's a there's a huge

amount of information. It's very dense

series of allegations and it's kind of

broadened to become how the company's

dealt with the whistleblower involved.

But on Friday, some of the standouts for

me was um a partner at the law firm

Ashurst saying that they actually were

never asked by KPMG to investigate the

whistleblowers claims. And that's

something that KPMG has been saying for

weeks now. They were actually asked for

a very narrow request regarding the

whistleblower him or herself. Um, you

know, which was more of a contextualized

more as a HR issue, not a full-blown

investigation of whistleblower claims.

That to me, you know, was another

example of KPMG Australia not quite

clearly saying what's going on here and

trying to paper over this broadling

scandal. And there was a few other

things. You know, there were there was

another allegation put to a former KPMG

executive by an Australian politician

basically saying that the whistleblower

was pressured to sign a deed of

separation. Basically, the terms that he

or she would leave the company,

pressured into signing this under the

threat of dismissal, uh, which was

denied, I should add, but uh, but yeah,

there some of the the things that

emerged, but really it was this very

heated exchange and again a sense of

disappointment and dja vu. I really got

that sense too and you know from

watching on it just felt like the volume

was at maximum for most of the day. But

you know on the face of it consulting

firms can sound a bit dry especially

compared with everything else going on

in the world right now. Why is it

important to investors and of course the

millions of us who are invested in some

of KPMG's biggest clients via our super

funds.

>> Well this really strikes uh at the heart

of the sanctity of the Australian

financial system. audit work is vital

for ensuring that what companies,

especially public companies, what they

say and the numbers they put to those

claims are correct. And so we need audit

companies to be doing the right thing,

to be doing their job very well and to

have appropriate guard rails and

oversight for those companies. And we're

seeing time and time again, it seems

that the um the behavior of these

companies has, you know, there's a lot

of shortcomings here. there's a lot of

issues. So really, we're talking about

the robustness of the Australian

financial system. And then that does

also bleed over into government. These

these firms not just do audit work, they

do consulting work. And there's massive,

you know, contracts for for the federal

government, you know, in the hundreds of

millions of dollars. Um, you know, KPMG

Australia's, you know, annual revenue

for the most recent financial year was

in the region of, you know, it's above

two billion. I think it was something

like 2.3 billion, 2.4 billion. So these

are very large companies and you know

there's a reasonable expectation that

they should be doing the right thing

especially with confidential information

they have access to

>> and it does feel a little bit like we've

been here before doesn't it? I mean just

3 years ago you know PWC another big

four firm was under fire for the misuse

of sensitive information. Rich, how do

the two cases compare?

>> It's a great question and it really just

overshadows this whole episode. you

know, everyone's thinking, didn't we fix

this problem? This was such a massive

blow up for PWC. They lost a huge number

of clients. You know, they ended up

jettisoning their business uh for a

dollar to a private equity firm, their

consulting um I believe their government

consulting arm, which was really the

focus of that, you know, scandal. Uh but

basically, yeah, as I said, they they

leaked um tax government confidential

government tax information to their some

of their corporate clients. This

obviously is we're dealing with

companies here and we're dealing on the

audit side, but again it's confidential

information being used to KPMG

Australia's benefit to try and gain more

business in this case.

>> Rich, PWC faced police investigations

and there were Senate inquiries back

then and then the firm was temporarily

banned from bidding on new Australian

government contracts. How is it that so

little progress has been made in the

industry since that happened? There have

been reports commissioned. There have

been findings. There have been

recommendations.

Reading through some of them.

Ultimately, there hasn't been much meat

on the bone in the changes that have

taken place. But a lot of these

recommendations, they were very

localized to tax because that was the

sort of context of the scandal. It was

confidential government tax information

being leaked to corporate clients. But

it really didn't get to the heart of

what Senator PCO and you know a few

others out there are calling for which

is really the the broader settings of

the audit/ consulting industry you know

because it's quite a unique it's a very

unique uh industry or sector. These are

large companies. They operate as

partnerships. That means they fall under

a different tax and legal settings

relative to other large businesses.

Ultimately, these are very large

businesses. KPMG has around 9,000 staff

in Australia. Yet, it's not under the

purview of the Corporations Act.

>> It is surprising, isn't it? when you

think about it and you think about that

that lack of change,

>> it seems like a massive failure and uh

it makes you think why um and I imagine

you know there is a huge sort of army of

lobbyists who are you know trying to

push back against change and just

thinking about this broadly you know

let's say there was some sort of huge

overhaul for this sector well that

actually might make their services more

expensive and that you know the taxpayer

might end up paying more and and and the

companies might end up paying more for

audit and that's passed on to c

customers. So that, you know, there

might be unintended consequences of

tightening things, but seeing this

scandal play out, you know, very

similar. They're echoing each other so

strongly, it does suggest that some

change needs to happen.

There've been some short-term

consequences, right? You know the

government has has put a stop on the

bidding of KPMG for work for a couple of

months and there's been state government

ramifications as well.

>> Exactly. Yeah. An ASICH investigation.

So we don't know what um is going to you

know follow through from that. There may

be also one would expect more corporate

clients putting their hands up and

saying you know we don't want to work

with KPMG anymore because they've

misused um allegedly confidential client

information. there haven't been many

clients to come forward and and notably

lend lease on Friday one of their

executives or I think it was their

chairman he said you know he was very

disappointed he couldn't have been

clearer he was upset he was disappointed

he was angry and he basically said yeah

we're changing um we're going to change

audit firms but it could take up to a

year or longer so they're stuck with

KPMG and so the way they're managing it

is they've got a guy who's doing their

audit or leading the work um that does

that audit and they're really happy with

him. He was nowhere near this. Um so

yeah, I find that interesting that

you're kind of saddled with them.

>> Yeah. Yeah, that is interesting. Rich,

are we seeing similar scandals play out

at consulting firms overseas or is there

something unique about the Australian

market that makes it especially

susceptible to these kinds of issues?

>> It's a great question. It does appear to

be, you know, more localized. Yes, there

are issues overseas with these

companies. They're are very large

companies. They deal with, you know,

scores, hundreds, potentially thousands

of clients all around the world. But the

fact that we're seeing the same issue,

the misuse of confidential information

with very little in the way of

penalties, you know, it's allowing this

bad behavior to um to sort of occur, to

fester in Australia in a way that's

different from other places. And there's

also in the consulting side of these

businesses, there's a sort of reliance

almost like a structural reliance now

for federal and state governments on

these companies.

>> You know, a lot of the institutional

knowledge is kind of shifted out of

government departments in some cases to

these companies. And so there's a weird

sort of reliance on them that that

entrenches their role here. And that

reliance then can lead to the lack

settings we're seeing that that can

allow bad behavior to um to happen as

we're seeing.

>> Okay. So we know that there's these

allegations of confidential information

used to win business among other things.

Of course there's huge lucrative

contracts at stake both public and

private sector. What happens next Rich?

Are we likely to get more fireworks in

parliament or is anything really going

to change?

>> It's a great question. So KPMG have come

out with a a long list of reviews that

they will conduct, reassessing sort of

ethics and refreshing their leadership.

Um they have an interim CEO. They're

they're in the process of looking for a

new CEO who will um you know have a

greater focus on ethics etc. So there's

a sort of you get the sense that it's

like a a lastditch effort to try and fix

the issue, draw a line under it so we

don't get added scrutiny, new regulatory

and legal settings for the sector.

Does that happen? Do they sort of get

out get through this? Uh I'm not sure.

Do we see more action from the

center-left Labor government on this

after not really seeing a huge amount in

the wake of the PWC scandal? These are

the key questions that we'll have to

keep an eye out uh in in the following

months

>> and I know you'll be watching it very

closely. Rich Henderson, thanks so much

for your time.

>> Thank you very much.

>> Thanks for listening to the Bloomberg

Australia podcast. I'm Amy Banebridge.

This episode was recorded on the lands

of the Warandre people of the Cooland

nation. It was produced by Paul Allen

and edited by Chris Burke and Aninsley

Chandler. Please follow and review the

show wherever you get your podcast. You

can sign up to Bloomberg's free weekday

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