While the government maintains there will be no conflict of interest, and outside experts maintain KPMG is credible and capable, the situation presents a familiar problem for the government. With so few major auditing firms, how are apparent conflicts of interest avoided?
KPMG and the F-35
Last week, the government announced that KPMG LLP has been selected to review cost figures for the government’s new fighter jet secretariat, which has been tasked with overseeing Canada’s purchase of a new fleet of aircraft. But KPMG is an auditor to BAE Systems, a principal sub-contractor for the F-35 program.
BAE’s relationship with the F-35 is multi-faceted. Earlier in 2012, BAE opened a new phase of its F-35 manufacturing facility in Lancashire, which, according to reports, when fully operational, would produce one F-35 aft fuselage set every day, rather than the current pace of one every week. BAE has also been tasked with developing a substitute flight helmet for the F-35, after the initial design from Vision Systems International was delayed due to a raft of technical problems.
According to Public Works, KPMG will be tasked with reviewing DND’s “acquisition and sustainment assumptions and potential costs for the replacement of the CF-18” fleet. Crucially, in its announcement that KPMG had been selected, it notes the firm will also be responsible for developing “a framework to assess the life-cycle cost estimate” for a “fleet of 65 F-35A Lightning II Joint Strike Fighters throughout its expected operational life.” The latter estimate is set to include “aspects such as development, acquisition, sustainment, upgrade, operation and disposal/decommissioning.”
KPMG’s relationship with BAE has been rocky at times.
In 2010, KPMG was investigated in the U.K. for consultancy and tax work it conducted for BAE between 1997 and 2007. The investigation into KPMG was related to a larger one that looked into allegations of corruption against BAE. BAE had set up front companies to funnel money around the world. According to the Guardian, one, Red Diamond Trading, was used “to send cash to many countries,” while another, Poseidon Trading Investments, “made specific payments to senior Saudis.”
KPMG was, at the time, criticized for not ensuring the payments and the companies were properly disclosed in BAE’s accounts.
When asked how it plans to remain objective in its role as auditor for the fighter jet secretariat figures, KPMG declined to comment.
“To maintain our independence as a third party professional services provider, we cannot comment on this engagement and as a matter of policy we don’t make any comments on work we perform for clients,” a spokeswoman told iPolitics.
iPolitics asked both Public Works and the Treasury Board Secretariat for comment as to whether the KPMG contract represented a conflict of interest, and to describe the guidelines that govern a circumstance such as this one. Neither department was able to provide an answer in the two days leading up to time of writing.
A common problem
While there might not be a direct conflict of interest in this case, the task of finding a credible auditing firm is often a tough one for the government, given how few major companies there are, globally, says Andrew Graham, former assistant deputy minister at both the agriculture and corrections departments and current adjunct professor at Queen’s University’s school of policy studies.
“This is one of the curses of the global big five auditing firms, where they have these combined business lines,” he told iPolitics this week. “This does happen, and that’s because the nature of who do you turn to when you’re in government to get sort of, so-called independent costing that has some integrity to it.”
There have to be firewalls built, he said.
“KPMG is probably perfectly qualified to do it, but the question I would have is was this conflict, or perception of potential conflict, ever identified and vetted and decisions made about it? In other words, did they know this going in?” he asked, adding that it’s worth asking about the nature of the walls KPMG puts up between its operations.
But, given the dearth of high-profile, credible global firms, the government is often darned if it does and darned if it doesn’t in these situations.
“There are tons of smaller firms that are absolutely competent and capable of doing (independent costings), they just wouldn’t give that – it’s not just we want the best experts, but also we want something that’s going to stand up to you guys,” he said. “I’m sorry, but they’re very concerned about how this stuff flies with the media.”
‘Whatever number they come up with is wrong’
For Alan Williams, former assistant deputy minister of materiel at DND and longtime vocal critic of the F-35 procurement, the problem with KPMG is less about its ability to carry out a good audit, than it is an issue of what it will be reviewing.
“They’ve been asked to cost the price of 65 aircraft… That number, 65, is not the right number to be costed. That number, as the AG pointed out, excludes attrition aircraft,” he told iPolitics this week.
In his spring report on the F-35 procurement, Auditor General Michael Ferguson noted that DND “considers 65 aircraft the minimum number needed to meet its training and operational requirements,” and that it also expects to lose aircraft at a normal rate. Given this, the AG concluded, Canada “may need to purchase up to 14 additional aircraft over the next 36 years.” The cost of replacement aircraft, the report said, was “not included in the life-cycle estimate for this project.”
“If you go to the AG’s number of up to 79, the total cost will in fact be understated by about 20%. That’s not trivial,” Williams said. When the government constrains the review of costs to only the 65 planes, “you’re understating it,” he said. “Sixty-five, again, if it doesn’t include attrition aircraft, is from the get-go, a totally distorted and understated number.”
That figure is crucial, says Williams.
“It really, really is important. It’s not right… Say to [KPMG], ‘Give us the best accurate reading of the total cost, without any constraint… Look at how we came up with 65.’ If you allow all that stuff, then there’s value added, and there’s openness and transparency,” Williams said. “But if you’re going to constrain them by saying ‘you look at exactly 65’, well, you know, that doesn’t mean anything.”
Original Article
Source: ipolitics
Author: Colin Horgan
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