Chairman of the Financial Conduct Authority, John Griffith-Jones
Number Twenty is an exclusive private members’ club on Grosvenor Street in the heart of London’s select Mayfair district.
Uniformed staff discreetly prowl the five-storey townhouse, making sure they attend to the well-heeled guests’ every whim.
It could be a branch of Soho House or any one of the chi-chi boltholes for the wealthy that have sprung up like mushrooms in the capital, but this is a club with a difference: it is a luxurious lair for some of London’s top accountants and their favoured clientele.
To get past the flunkies and inside the imposing front door, you have to be a partner or customer of the accountancy firm KPMG. That firm, along with its peers, has been at the heart of the financial crisis and other debacles, but the auditors have largely escaped scrutiny.
Now the mask is torn off in an explosive new book, Bean Counters by investigative journalist Richard Brooks. He has set out in unsparing detail how Britain’s largest audit firms have consistently turned a blind eye to scandals and wrongdoing, and not only got away with it, but also charged enormous fees.
An audit – essentially an independent check of the books and systems – is a vital safeguard for shareholders, as well as for employees, customers and society as a whole. It is meant to give reassurance that the company in question is not about to go bust and that its accounts give a true and fair picture of its financial position.
All too often, however, it does nothing of the sort – and when the auditors fail, we all suffer. Taxpayers are forced to foot the bill for bank bailouts. Black holes bloom in company pension funds. Small shareholders lose their shirts. Employees lose their jobs. Corporate tax revenues that could have financed schools and hospitals go unpaid.
Exclusive: The Number Twenty club for KPMG executivesx
And all of these consequences could perhaps have been averted if only the auditors had sounded an alarm in time.
The behaviour of the Big Four auditors – Deloitte, PwC and EY alongside KPMG – has been obscured by the veneer of prudence, even boringness, that they cultivate. Yet every single murky episode of recent years – from the implosion of RBS to the antics of the Crystal Methodist Paul Flowers at the Co-operative Bank to corruption at Fifa – has erupted with no advance warning.
As Brooks points out, the top audit firms are riddled with conflicts of interest. Their huge fees act as an incentive for them to placate, rather than confront company bosses, and senior accountants themselves often go on to hold important roles in corporate Britain where they may stay loyal to their former colleagues.
The failings of auditors came under inspection in the financial crisis but nothing happened. They are in the spotlight again for their role in the downfall of outsourcing firm Carillion. MPs earlier this month criticised KPMG for being complicit in ‘recklessness, hubris and greed’ at the company, which collapsed earlier this year under the weight of its debt. That affair has led to calls for draconian reforms to the audit firms. On past form, the bean-counters will walk away scot-free and continue to enrich themselves with impunity – unless they are finally called to account.
Disgraced: RBS’s Fred Goodwin
KPMG’s audit shame
In the plush, self-congratulatory backdrop of Number Twenty, it seems preposterous to imagine that KPMG has been at the heart of a string of the worst corporate failures of recent times – but that is exactly what has happened.
At the bar, partners sip cocktails overlooked by four Warhol-style portraits. The pop art prints on the walls are not of celebrities, but of the founders, Messrs Klynveld, Peat, Marwick and Goerdeler, whose initials spell out the name of the firm.
One can only imagine what these frugal fellows would make of their firm nowadays. They might be amazed as today’s partners lift a champagne glass to celebrate the billions that pour in every year from clients. They might also feel a sting of shame at the way KPMG’s reputation has taken a hammering.
In the year to the end of September, it pulled in nearly £2.2 billion of revenues. The average UK partner took home nearly £520,000 – and for the top ones, it would have been much more. It is a similar story at the other three top firms. But in KPMG’s case, it has a long and unhappy list of audits for firms that have gone to the wall. Not least of these was HBOS, the former Halifax Building Society, which had merged with Bank of Scotland before pursuing an aggressive lending policy that ended in its ruin. KPMG earned £56 million from auditing HBOS in the eight years before its downfall and a further £45 million in consultancy fees.
Astoundingly, the audit firm’s boss in the UK at the time, John Griffith-Jones, went on to chair regulator the Financial Conduct Authority, one of the watchdogs charged with investigating the collapse of HBOS. Politicians who gave the green light to his appointment were either unaware of, or untroubled by, the glaring conflict of interest. KPMG also gave unblemished audit certificates to Bradford & Bingley, a former building society that had overstretched itself in the buy-to-let market and which duly disappeared in the credit crisis.
Similarly, the Co-operative Bank, chaired at the time of its disgrace by Paul Flowers, was able to wave an immaculate audit report courtesy of KPMG shortly before its implosion.
Corporate grandee who rose to the top despite scandals
Most people have never heard of John Connolly, but the chequered CV of this 67-year-old accountant-turned-corporate grandee deserves to be better known. For it is an exemplar of how auditors – once humdrum number-crunchers – have turned into a highly paid and seemingly untouchable elite who have aided and abetted in every financial scandal of the past decade.
A former chieftain at Big Four auditor Deloitte, he is just one of the multi-millionaire partners who haunt the pages of Richard Brooks’ shocking exposé. Like his peers at the top of the profession, he is feted as a respected business leader. This is despite the fact he presided for years over a firm that allowed some of Britain’s most appalling corporate offenders to brandish a clean audit certificate and to pull the wool over everyone’s eyes.
A case in point is RBS, which ran into trouble after the reign of Fred Goodwin, a protege of Connolly’s who worked under him at a predecessor firm of Deloitte. When he became chief executive of the bank in 2001, Goodwin’s first act, almost, was to award the bank’s multi-million pound audit contract to Deloitte.
Deloitte’s total earnings from the bank would add up to more than £200 million. Yet in all the time it audited RBS, right up until the collapse in 2008, it sounded no warnings about the build-up of toxic debt on the books.Remarkably, this was not the first time Connolly had been close to a disaster.
If the downfall of RBS was the definitive financial scandal of the first decade of the 21st Century then the collapse of Barlow Clowes in 1988 played the same role in the 1980s. Barlow Clowes imploded at a cost of £150 million to taxpayers who were forced to fund compensation to investors who lost their savings. Connolly’s role was as the senior audit partner who signed off on reports. He was judged to have done so with a lack of professional ‘efficiency, conduct and competence’, for which he was later severely reprimanded.
Yet far from damaging his career, the Barlow Clowes episode caused barely a hiccup in his relentless rise to the top of Deloitte, where he became UK senior partner and chief executive. In 2008, his income hit £5.7 million. Having sailed through Barlow Clowes and RBS with his career and reputation undimmed, Connolly retired as senior partner of Deloitte in June 2011. He went on to bag sought-after roles as chairman of security company G4S, where his latest pay was around £380,000, and engineering group Amec Foster Wheeler where he took home £318,000.
A spokesman for Connolly said at the time of the Barlow Clowes issue he and the firm completely rejected the criticism. ‘He was not the engagement partner to Barlow Clowes. Hence it did not affect John’s career progression.’
Another former client was HSBC, which six years ago was found guilty of widespread money laundering for drug barons and rogue states. In yet another unremarked conflict of interest, the bank’s former finance director turned chairman, Douglas Flint, was an old boy of KPMG. The list of its clients who marched to disaster clutching a clean audit certificate is a lengthy and shameful one. Carillion, which was audited by KPMG for the entire 19 years of the outsourcing firm’s existence, is just the latest disgrace.
The accountants raked in £29 million of fees, before Carillion collapsed under a £1.5 billion debt pile earlier this year.
MPs investigating the disaster, which affected hospitals including an urgently needed new building in Liverpool, declared that: ‘KPMG should take its own share of responsibility for the consequences.’
If past experience is a guide, it seems unlikely. KPMG is not alone. All of the Big Four have handed spotless audit reports to companies that turned out to be riddled with losses and fraud, yet they continue, largely unpunished and entirely unrepentant.
Luxleaks: the tax avoidance factory
In January this year, a bespectacled young man emerged from a Luxembourg courtroom, swathed in smiles. He was Antoine Deltour, a whistleblower extraordinaire, whose revelations had shed an astonishing light on the activities of one of the world’s leading accountancy firms, PwC.
The court had just vindicated his crusade by overturning a suspended prison sentence he had been given for leaking information to the media. He had discovered the orchestration of tax avoidance on a grand scale by PwC, the world’s largest accountancy firm, in the Grand Duchy.
A former chieftain at Big Four auditor Deloitte, John Connolly is just one of the multi-millionaire partners who haunt the pages of Richard Brooks’ shocking exposé
As a 29-year-old junior auditor in PwC’s Luxembourg office in 2010, Deltour had stumbled across hundreds of secret ‘advance tax agreements’ between his firm’s clients and the Luxembourg tax authorities. In essence these were documents showing how the tax authorities had agreed to complicated schemes cooked up by PwC that would save the firms in question billions in tax.
Sensationally, Deltour had found and copied more than 500 ‘rulings’ involving 350 companies. When he passed the information to a journalist in what became known as the ‘Luxleaks’ scandal, Deltour lifted the lid on one of the biggest ever tax avoidance factories in recent years.
Another former PwC employee, office support worker Raphael Halet told a Luxembourg court in 2016 how the accountancy firm would send applications for approval on a Wednesday afternoon around 1.30pm to the director of the corporate tax office. PwC would draft not only the applications but also the taxman’s agreement letters, under the letterhead of the tax division. The director had only to sign off, and literally rubber stamp the agreements.
Tax avoidance isn’t new. The bricked-up windows still to be seen in old London houses tell of the reluctance in the 18th Century to pay window-tax. But in recent years, it has morphed from a relatively amateurish game into a worldwide industry – and the pioneers were the accountants. In an age of online transactions and globalisation it is easy for big companies to structure their businesses so the most profitable parts could be placed where they were lightly taxed.
Bean Counters by Richard Brooks is published by Atlantic on June 7
Companies such as Gap and Nike sold to customers around the world from tax-friendly locations such as the Netherlands. Drugs companies including GlaxoSmithKline held the rights to blockbuster pharmaceuticals in fiscally efficient locations. Now the big tech companies like Apple and Google save billions of dollars in taxes in much the same way – all with the advice of the Big Four accountancy firms.
Accountancy failure can allow corruption to go unnoticed for years. The canker silently rots business from within, and only occasionally erupts into public view. When it does, however, it can be spectacular. One such case began to unfold at 6am on May 27, 2015. When the sun rose over a serene Lake Zurich, plain-clothed Swiss police officers marched into the five-star Hotel Baur du Lac. Once inside, they woke seven of the world’s top ten football officials with arrest warrants.
Hours later, the then US Attorney General Loretta Lynch unveiled a 161-page indictment against these and other FIFA officials, with offences from bribery to racketeering to money laundering alleged to have taken place over 20 years.
How had the governing organisation of the biggest sport on earth got away with so much corruption for so long? A large part of the answer was that its auditors, KPMG, had allowed it to.
From the start, when KPMG took on the audit in 1999, there should have been red flags. A year earlier, the then new president Sepp Blatter had repaid the Saudi football federation for their support in his election with a sum of 470,000 Swiss francs to an unidentified recipient, without authorisation from the relevant committee. No alarm was raised.
But that was small beer compared with a decade later, in 2009, when payments adding up to $10 million were wired from FIFA accounts in Switzerland to Caribbean Football Union accounts at the Bank of Trinidad and Tobago.
The accounts were controlled by former Trinidadian football executive Jack Warner, who has since been banned from the game for life. This was part of a scheme to bribe Warner into voting for South Africa’s successful bid to host the 2010 World Cup, according to the US Department of Justice.
Again, KPMG raised no alarms, despite well-known question marks over Warner’s dealings. Nor did the audit firm speak out against a co-ordinated attempt by Blatter and two other former top officials in 2010 to enrich themselves through salary increases, World Cup bonuses and other incentives adding up to more than 79 million Swiss francs over five years.
In October last year, Swiss audit regulators said ‘shortcomings’ had been found in KPMG’s work between 2008 and 2014 and one individual was reprimanded.
Bean Counters by Richard Brooks is published by Atlantic on June 7, priced £18.99. Offer price £14.24 until June 3. Pre-order at mailshop.co.uk/books or call 0844 571 0640. P&P is free on orders over £15.