Improving the Quality of ‘Independent’ External Audits

Improving the Quality of ‘Independent’ External Audits

Author ~ Bashorun J.K. Randle

The barman at the New Americana Hotel, Washington D.C. was plying the retired partners of KPMG who are still awaiting their gratuity and pension with exotic cocktails and succulent canapés in mock sympathy following the BREAKING NEWS:

‘’KPMG SLAPPED WITH $6.2 MILLION FINE OVER OIL AUDIT ERRORS’’ – Bloomberg, August 15, 2017

(Hannah Murphy)

‘’Miller Energy Resources had overvalued certain assets by more than 100 times.’’

What followed was even more shocking. There it was on the front pages of the Wall Street Journal, New York Times, Financial Times, Sunday Times, The Observer, The Guardian, Washington Post, and many more leading business journals.

KPMG had been slapped with a fine of more than $6.2m by the US Securities and Exchange Commission (SEC) after it signed off the audit of an oil and gas company that had overvalued certain assets by more than 100 times.

The SEC said on Tuesday that shortcomings in KPMG’s audit of Miller Energy Resources, a Tennessee- based oil and gas company, meant investors were “misinformed about the energy company’s value”.

KPMG was hired as an external auditor for Miller Energy in 2011 and gave a positive “unqualified” report; despite the fact that the company had “grossly overstated” how much some of its oil and gas assets were worth, the SEC said.

The announcement follows a SEC investigation of Miller Energy that found the company had valued at $480m its Alaskan oil wells purchased for less than $5m. The estimate, which the SEC deemed fraudulent, helped transform a penny stock into a company listed on the New York Stock Exchange.

The SEC last year settled accounting fraud charges with the chief executive of Miller Energy Resources’ Alaskan subsidiary, the company’s chief financial officer and its external accountant.

The KPMG case is part of an international push to improve the quality of external audits. The “big four” accountancy firms — KPMG, EY, PwC and Deloitte — have all been hit by accounting scandals in the past 12 months.

According to the SEC order, KPMG did not fully assess the risks of taking on Miller Energy as a client and did not adequately staff the audit.

Their audit failed to take into account the overvaluation of the Alaskan wells and to detect that certain fixed assets were counted twice in the company’s valuation, it said.

“Auditing firms must fully comprehend the industries of their clients,” said Walter E Jospin, Director of the SEC’s Atlanta Regional Office. “KPMG retained a new client and failed to grasp how it valued oil and gas properties, resulting in investors being misinformed that properties purchased for less than $5m were worth a half-billion dollars.”

KPMG did not admit or deny the findings but agreed to be censured and pay a $1m penalty as well as $4.7m in all being the audit fees it had received from Miller Energy plus interest costs. The auditor also agreed to improve its audit quality control, according to the SEC.

“This matter is related to audit work performed in 2011,” KPMG said, adding that the firm was “Committed to the highest standards of professionalism, integrity and quality, and we have fully co- operated with our regulators to reach a resolution”.

John Riordan, the KPMG Partner who was in charge of auditing Miller Energy, also agreed to settle charges against him, the SEC said.

However, consolation was on the way, courtesy of divine intervention…

 

About the Contributor

Bashorun J.K Randal is as a Chartered Accountant (Institute of Chartered Accountants in England and Wales) in 1969 and joined the London office of Peat Marwick Mitchell & Co. in 1970 after a spell with Voluntary Service Overseas (VSO) which took him to Gambia; Cote D’Ivoire; Sierra Leone; and Dahomey (now Benin Republic) as a charity worker. He joined Peat Marwick Cassleton Elliott, Nigeria (which later became Peat Marwick Ani Ogunde; and subsequently KPMG) in 1971. He became a partner in KPMG in 1977. He was appointed as Chief Executive of KPMG Nigeria in 1992 and became the Chairman and Chief Executive in 1993. He was a member of the International Board of KPMG and President of the Institute of Chartered Accountants of Nigeria in 2003/2004 Presidential Year. He was a member of the Professional Accountants in Business Committee of the International Federation of Accountants from 2003 to 2006. He has a practising career spanning more than 37 years during which he has been engaged in the audit and provision of accounting, taxation and management consulting services to small, large and mega companies which included banking and finance; manufacturing; oil and gas; service, distribution and retail as well as Government sectors of the economy. At KPMG Audit he served as Client Service Partner on several audit, tax and consulting engagements in both private and public sectors.

 

The views expressed in this article are solely the views of the Contributor, and do not necessarily reflect CSR-in-Action’s view.

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