Major accounting firm KPMG has received a rare rebuke from the Australian Securities and Investments Commission, with three Partners involved in the firm’s audit of collapsed property company, Westpoint, agreeing to be banned from auditing companies for between nine months and two years. The partners, Brett Fullarton, Robert Charles Kelly and Jonathan Grant Robinson, agreed to the enforceable undertakings after ASIC alleged that the firm had conducted inadequate audits of the disgraced property group. In addition to the bans, the three auditors also agreed to pay ASIC’s legal costs and to undertake ten hours of professional education.
Perth-based Westpoint collapsed in 2006, with investors losing more than $390 million after the group used mezzanine finance to bankroll property investments, predominantly in Melbourne and Sydney. Upon the advice of conflicted financial planners (who received generous trailing and upfront commissions from Westpoint), often unsophisticated investors sunk millions of dollars into the schemes for promised returns of upwards of ten percent.
The ASIC action alleged that Fullarton conducted inadequate audits of Westpoint between 2000 and 2004 while Kelly was accused of signing “unqualified audit opinions in connection with various entities within the Westpoint Group” in 2004.
KMPG vigorously defended its banned Audit partners, claiming that the undertakings provided did not contain any admissions of wrongdoing by the audit partners involved or of any deficiencies in the audit work performed by KPMG, with the embattled partners “retain[ing] their status as Registered Company Auditors [while continuing] to have the firm’s full support.” One suspects that KPMG’s defense is slightly hollow — given the ramifications of the ban, in both a practical and reputation sense are significant.
In a completely separate action, ASIC is pursuing a civil claim against KPMG in relation to its audit of Westpoint, seeking compensation of $200 million for investors. In that matter, ASIC is alleging that “KPMG negligently carried out audits of the plaintiff companies by failing to identify issues related to the continuing solvency of the companies and failing to qualify audits of the companies.”
ASIC is also claiming that “KPMG should have notified ASIC that it had grounds to suspect that breaches of the Corporations Act were taking place within the plaintiff companies, including breaches of directors’ duties and rules against insolvent trading.”
The links between Westpoint and KPMG ran deeper than a series of allegedly faulty audits. A former KPMG consultant, Richard Beck, was a senior director of Westpoint. A 2006 Four Corners report suggested that Beck, who joined Westpoint in 1998, only months after leaving KPMG, collected more than $9 million in fees from Westpoint investors. The report also alleged that Beck was head of Corporate Governance at KPMG prior to joining Westpoint, but that claim was later disputed by the firm.
Unfortunately, the Westpoint collapse is one of a series of calamities to hit KPMG’s audit division in recent years. Through bad luck or incompetence, KPMG was involved in auditing MFS (and also the MFS Premium Income Fund), Allco, City Pacific and Bill Express. In the cases of MFS and Allco, former KPMG partners and auditors readily switched from auditing to being employed by their former client. At City Pacific’s subsidiary, CP1, KPMG’s auditors infamously failed to detect several basic arithmetic errors in the company’s financial reports. In all instances, the financial reports of those companies prior to their collapse appeared to bear very little resemblance to reality.
Crikey contacted the Institute of Chartered Accountants (of which, KPMG is a key member) to enquire as to whether the Institute would take any disciplinary action against KMPG or the specific partners involved with the firm’s audits of Westpoint. The CA Institute’s website claims that “Chartered Accountants meet the high academic, professional, and ethical standards for membership of the Institute of Chartered Accountants in Australia — the most-respected national professional accountancy body”. Pippa Whittaker, the Institute’s Communications Manager, told Crikey that the Institute was considering at the issue, but was unable to respond to Crikey prior to publication.
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