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Responding to setbacks, KPMG adds outside directors

Tammy Whitehouse | April 30, 2018

After some major hits to its reputation, KPMG has decided to add outside directors to its board.

In an open letter, Lynne Doughtie, KPMG’s U.S. chairman and CEO, said the firm regularly evaluates ways to improve how it manages the business. “In 2017, certain events, and the actions of a few former colleagues, caused us to take a deeper dive into examining our culture and values and to assess with fresh eyes how we could improve and best position our more than 100-year-old firm for future success,” she wrote.

Questions about audit outcomes at Wells Fargo and General Electric have dogged the firm, but the U.S. Department of Justice and the U.S. Securities and Exchange Commission delivered the biggest blow when they brought charges alleging fraud and conspiracy related to regulatory inspections. The Justice Dept. and SEC say former audit leaders at KPMG hired inspection staff members away from the Public Company Accounting Oversight Board to leverage their confidential knowledge of inspection plans so as to subvert the inspection process. KPMG had delivered some of the worst inspection results among major firms leading up to its audit leaders’ alleged plot to beat the inspection process.

At Wells Fargo, the financial institution is accused of creating fake accounts to achieve otherwise unachievable sales targets. Responding to a Congressional inquiry about whether the firm knew of the activity and how it responded, KPMG indicated it was aware and didn’t regard it to be material to financial statements.

At GE, proxy advisory firms recommended the company jettison KPMG as its audit firm after revelations the company was under investigation by the Securities and Exchange Commission for accounting problems. KPMG has served continuously as GE’s audit firm for more than a century, and it has faced scrutiny for its work at GE before. Investors ultimately voted to retain the firm, but only by a lukewarm majority.

In her announcement that the firm would hire outside directors, Doughtie wrote: “We have been reminded of the cardinal rule in our business, namely that trust is paramount and, as such, must inform all that we do.”

KPMG’s U.S. governance structure permits up to 18 board members, according to a firm spokesman, and the firm is now looking at adding three members who are not partners within the firm.

PwC added two outside directors in 2017, and a spokesman there said it was the first Big 4 firm do so. EY said it had no comment on whether it has given any consideration to adding outside directors, and Deloitte did not respond to a request for comment.

KPMG is counting on the addition of outside directors to contribute “immediate and substantial value” to the board, adding independence and objectivity to boardroom deliberations, Doughtie said. They will also add diversity to the dialogue, complementing the firm’s internal expertise.

“Importantly, they will reinforce our stakeholders’ sense of trust in our organization,” said Doughtie. “While our firm faced challenges last year, I believe strongly that we have an exceptional culture and shared values at KPMG—and we are using the lessons of the recent past to become even stronger.”