Image Crisis: The tragic romantic tale of KPMG and Herbalife.
It’s been while since we have heard of anything remotely as “scandalous” a tragic romance as the uncovering of dirty skeletons between an external auditor (KPMG) and publicly traded company (Herbalife). Evidently, the Herbalife-KPMG fiasco is still in its early stages and probably will not end up like Enron but one can only wonder what happens if the SEC starts digging and uncovers … more laundry? Whoops.
Over the past few days, the only things that have flooded news and other media outlets are such headliners as “FBI probes trading as KPMG quits Herbalife, Skechers audits” and “The Herbalife saga is practically a made-for-Hollywood script” Herbalife’s potentially questionable business model (a “pyramid scheme” as declared by activist William Ackman), the two players in the game are all suffering at the moment from an image crisis — albeit, at different rates.
Let’s start with KPMG. Oh what a tale. The Wall Street Journal is not normally that interesting or sensational — it really isn’t the Journal’s fault, businesses have vamped up their internal controls significantly over the past decade and so while countless professionals would love to break some rules, SEC has been pretty good at cracking down on the big ones (think Raj and the Galleon Group?). Here’s the situation: a particular “rouge” partner gave away some juicy information about their client, Herbalife, which was used in some sort of inside trade. There are a couple of concerns for KPMG given the facts that are consistently being released at the moment and one point that most press has left out is the impact of this faux pas on KPMG’s corporate image. Yes, I agree that the mistakes of this one partner (head of audit practice, also) is in no way indicative of the wider Los Angeles/global KPMG culture, its people and professionalism but unfortunately, when someone represent a firm at such a high level, there is no denying that the accounting firm will have to deal with the aftermath of this slip for at least a few years.
At the financial level, there is something sad about what has happened. While the $3.4 billion dollar company is not immensely huge given the greater universe of Wall Street and finance, it would still nonetheless deliver quite a substantial number of billable hours — which is one of the prime revenue streams for professional services industry, eg. accounting and consulting. Now, let’s assume that KPMG has been acting ethically, professionally and given their most “objective” analysis of Herbalife in the past few years — as the accounting firm has declared publicly, those audits were accurate — and that Herbalife now needs a new accounting firm, we can start to see why this is a sad situation. KPMG, due to the poor decision of one particular person, is effectively serving Herbalife on a silver platter to its competitors — one of the remaining three perhaps? I hear PricewaterhouseCoopers is getting a makeover in Los Angeles soon and this would be a nice freebie. Otherwise, I am sure Deloitte and Ernst & Young would love the chance at this particular client.
At the corporate image level, we have several issues that are troubling. KPMG’s image has been failing in the past few years against its fellow accounting firms. At the client level, now company management are asking themselves “if I give my business to KPMG, what are the chances of my information being leaked?” and at the professional recruitment level, people would wonder “do I want to work a firm that is unethical?” or “do I actually want to work for a firm that looks unethical and has a tainted reputation?” As I mentioned earlier, I do not think this particular saga reflects the overall culture of KPMG. However, you cannot deny that from the other side of the table, this incident shows a lack of integrity, credibility and trust. At the end of the day, beyond the numbers and financial engineering, business is a place where handshakes and breakfasts still continue to rein in more deals than impersonal facts. The firm promised to deliver an independent expert recommendation but failed dramatically. Would you shake KPMG’s hand? In fact, it appears they spat in their client’s face. In a few months, a few years. There is much work to be done to recover the media scrutiny.
There is saving grace to this whole story and that lies in the fact that KPMG is taking drastic measures to reduce the damage. As Ira Kalb (@irakalb) speaks passionately about, the firm appears to be trying hard to contain the situation: admit to the wrongdoings, frame the problem and provide a solution. The firm has admitted and confirmed that pertinent confidential information was leaked out; and with the removal of the partner, they are trying to frame the situation and reduce the damages. Moving forward, stakeholders and interested people would be waiting to see what kind of solution package the firm will put together. Perhaps increased internal controls? The solution, at a high level, is about tweaking with the culture at the upper management. When the word culture is thrown around in business school and news analysis, we rarely talk about the management. We pitch culture as this corporate dogma that people instill from the top to make employees “feel” happier, more committed and work harder. The question, with regards to solving the issue at the top of the food chain, is how do we get the partners and CEOs, the individuals with the highest stakes and the front-liners for the companies, to make “good” decisions — they do represent themselves, their firm and their whole industry. Incentivization, obviously is not the key to this. At the lower level of the chain, it seems to work (to some extent, at least) — pay employees to make good decisions on behalf of the company. It is said that if you give people more responsibility and interest in a project, they would be more invested — but when partners, who essentially own a stake of the firm, make mistakes, we start to wonder how invested they truly are. It is not an easily solvable business problem.
Regardless, I think KPMG will bounce back. Good luck.