KPMG International has recently announced that it will review the work carried out on FIFA by its Swiss branch, even though an official regulatory enquiry has not yet been announced. The proactive approach has probably been deemed necessary due to the widespread media coverage of the case and the ensuing press speculation about potential shortcomings in KPMG’s audits.
An audit can add value to an organisation but unfortunately many staff in contact with the auditors sees it as a hindrance to their day to day activities and an unnecessary addition to their personal workload.
Subsequently, auditors can become seen as an unnecessary interference along the lines of a financial traffic warden. This creates a difficult position as the auditors are also in the unenviable position of relying on payment of their fees from the client. A key principle of auditing is that the auditor must demonstrate professional scepticism and avoid actual or perceived conflicts of interest.
Perceived conflicts of interest
Receiving fees from the subject of the audit undoubtedly give a degree of at least perceived conflict, as the auditor has to be commercial regarding the clients’ viewpoints while still complying with the relevant audit and accounting frameworks. A qualification in the audit report will be the last resort for the auditor who will be aware of the damage to the ongoing client relationship which can be caused by a qualification of the audit report.
Auditors are often open to further perceived conflicts of interest in relation to the sometimes substantial fees arising from non audit services. These fees can be far greater and more profitable than the audit fee.
In the case of KPMG and FIFA the supplementary services it reported that KPMG was auditing 40 of the member associations and one confederation each year on a cyclical basis. This presumably generated further fees for the KPMG organisation. Potentially the FIFA work has been a substantial component of the individual audit partners fee income. KPMG and FIFA have so far refused to release any information regarding the level of remuneration paid for audit and non-audit services to any KPMG firm or affiliated KPMG firm.
A bigger potential issue is that KPMG is reported to have independently overseen the last world cup bidding process, while also performing the role of official advisors to both Russia and Qatar as their bids for the 2018 and 2022 world cups both of which succeeded in a storm of controversy. Although KPMG will presumably have applied whatever safeguards it deemed necessary, the overall circular nature of the situation risks a perception that independence was jeopardised.
Interestingly, FIFA have used another Big 4 firm recently. EY were used to oversee the ticketing function for the 2014 world cup. Presumably this was due, at least in part, to wanting to avoid a prominent black market which would allow touts to profit from FIFA’s event.
This again gives the perception that FIFA wanted a more independent review of these external systems, while maintaining the status quo for internal operations.
Mandatory rotation of RI’s to limit the familiarity threat is already in place in some jurisdictions but its effect is often reduced by a transition period whereby a relationship is built with the new RI before changeover, while the outgoing RI is still likely to remain in contact with the client.
It has been suggested that mandatory rotation of audit firms is necessary to aid the transparency and independence of audit firms. An added advantage would be that incoming auditors will review their peer’s working papers, giving an additional safeguard against long term misstatements. The handovers would effectively become an additional level of cyclical review which could encourage a culture of continuous improvement. Those against mandatory rotation will correctly point out it will create additional costs in year one due to the need for a new firm to get up to speed. However the competitive tender process may result in a reduction to fees.
KPMG have served as FIFAs auditors since 1999, a year after Sepp Blatter was appointed head of the organisation in 1998.
Maybe it has all became too familiar? We wait to see if KPMG will publish the results of its internal review.