KPMG’S Ethics Crisis — and the Lesson It Teaches Leaders About Accountability

By Sam Silverstein

KPMG is one of the “Big Four” accounting firms, a global audit, tax, and advisory network of service firms that has made big news in recent years for a slew of controversies about serious ethics lapses. Such controversies are problematic in any industry, but they are particularly troubling in the world of high-profile accounting. Why? Because an unshakeable commitment to ethics, impartiality, and high professional standards is the true “product” KPMG sells its clients and their stakeholders. Accountants are supposed to be impartial. If an accounting firm’s practices are not driven by high professional and ethical standards, how much is its audit really worth?

There are too many of these ethics lapses to summarize here, but you can search on “KPMG ethics controversies” if you feel like reviewing the details. Most recently, the firm agreed to pay the SEC a fine of US$50 million for a particularly brazen scandal in which KPMG employees cheated on critical internal training exams and used stolen information to alter the details of audits that had already been completed, all in an unsuccessful attempt to mislead regulators and the public about KPMG’S capacities and day-to-day operating standards. It is important to point out here that the SEC fine punishes a systemic problem, a broad, years-long pattern of carefully coordinated deception at KPMG, and not the decisions of a few “bad actors” in a few isolated situations.

The SEC, using unusually blunt language, insisted in a press release that “KPMG’s ethical failures are simply unacceptable.” Following the announcement of the SEC fine, the issue of whether the firm is capable of providing reliable audits of public company financial statements has become an open, and hotly debated, question.

So: How did it get this bad?

I believe the ethics meltdown at KPMG points to a pervasive corporate culture problem, one that expresses itself first and foremost in top management’s unwillingness to tell the truth to employees or the world at large.

A commitment to the truth is one of the critical components of accountable leadership. The truth may hurt, but it is the truth. Once an employee senses leadership is not telling the truth about one topic, there is going to be an assumption that leadership is not telling the truth about other topics. Good people will leave. People who mislead and deceive will stay on. Truth must be the starting point for any accountable working culture. But it has clearly been hard to come by at KPMG.

Open up the document entitled “KPMG Code of Conduct,” available via the firm’s website, and you will encounter this message from the CEO :

“At KPMG, we are proud of our commitment to ethics and integrity, and the way we have embedded our core values and ethical decision making into all aspects of our business.”

That statement is a lie. Even before the current scandal, this sentence could not possibly be seen as an accurate reflection of KPMG’s day-to-day operations. I suspect it generated only cynicism and dysfunction within the company’s workforce. At the time KPMG’s “Code of Conduct” document went to press, KPMG had experienced publicly reported “ethics malfunctions” in relation to:

• a 2003 tax shelter fraud scandal for which it had been fined $456 million in penalties to avoid indictment;
• the 2008 enablement of “improper and imprudent practices” at New Century Financial, a failed mortgage company, according to an independent report commissioned by a division of the Justice Department;
• the 2011 failure to identify fraud at Olympus Corporation, according to an independent investigative panel;
• the 2013 admission on the part of a former KPMG partner to passing along stock tips in a securities fraud scheme involving the companies Herbalife and Sketchers, and KPMG’s subsequent resignation as auditor for those companies; and
• a 2014 fine from the SEC, totaling $8.2 million, for violations of the Securities Exchange Act of 1934.

This is just a brief sampling of the known ethics problems. All of these events were known to KPMG leadership at the time of the publication of the Code of Conduct document!

Bottom line: What the CEO said that document was simply not true. Sound core values and ethical decision making had not yet been embedded in all aspects of the company’s business, as the SEC fine just levied proves. Why say that they had? Who wants to work for, or with, a liar?

The lesson in all of this for accountable leaders is a simple one: Start with the truth. If you have a problem, say what it is and say what you are doing to fix it. Do not lie about having already solved it. Do not pretend the problem does not exist and never has existed. That will only deepen cynicism on the part of your workforce…and spread the corporate culture of deception throughout your organization. The only way to turn this cycle around is for top leadership to tell the truth about what is going on, even when (especially when!) the truth hurts.

Accountable leadership is personally committed to the truth. Accountable leadership parts company from employees who prove that they do not share that commitment. KPMG’s leadership has failed the truth test, which has led to a cancer in that organization. It remains to be seen whether KPMG will recover from that cancer.

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Sam Silverstein speaks and writes on accountability. He can be reached at http://www.IAmAccountable.com