KPMG’s 40 years auditing for one asset manager is plenty, thanks

KPMG audited Aberdeen Asset Management for 32 years before its client merged with Standard Life. Now, the Big Four accounting firm is in its eighth year on the vowel-phobic money manager the deal created, Abrdn.

A short interlude between the two gigs does little to change the impression that the asset manager is setting a bad example here on the serious issue of auditor independence.

The Edinburgh-based company’s latest annual report does set out the lengthy relationship more transparently than in previous years. KPMG was auditor to the Aberdeen of old from its client’s founding in 1983 through 2015. Standard Life, then a separate company, decided to hire KPMG in 2016 following a review. The Standard-Aberdeen merger came in 2017. The board duly considered whether KPMG’s independence was undermined by its previous work and concluded, no.

While this was explained to shareholders shortly after the tie-up, the narrative did not explicitly say the KPMG relationship went back to the 1980s, and there was no further mention of the topic until this year.

Common sense takes a dim view of lengthy audit terms. Auditors are meant to challenge their clients’ management. The risk of a cosy relationship developing with those being audited can only increase with tenure. The counter-argument is that investors in large or complex businesses benefit from having a long-standing audit team that really gets the moving parts.

Today’s UK financial regulation aims for balance by requiring major companies like Abrdn to tender their audit every 10 years, and by capping continuous service at 20 years. The fact that the failed Silicon Valley Bank had the same auditor for nearly 30 years (KPMG, coincidentally) is hardly a great advert for the longer terms permissible in the US.

Abrdn has regularly reviewed the situation and is comfortable. It points out that KPMG became auditor to the company in its present form over a year after finishing work at the pre-merger Aberdeen. “Since then, we have been rigorous in ensuring the appropriate independence of the auditor has been maintained, provided comprehensive disclosure on the subject and made clear that we will follow the relevant guidelines and review that arrangement towards the end of the prescribed 10-year period,” it says.

KPMG has likewise reviewed its independence, concluding that “its objectivity is not impaired”. Well, it should know.

The view of Abrdn’s audit committee, with a new broom since 2022, is straightforward: KPMG’s tenure started in 2016, not 1983. This position is, of course, technically correct. And, yes, the merged company is a different animal to what went before. But the substance of the situation is that the client-auditor relationship – the central issue – is decades old, and the gap between KPMG’s stints for Aberdeen and what is now Abrdn was pretty narrow.

Abrdn’s authority to push for governance improvements in its portfolio companies is undermined if it is vulnerable to criticism itself. Moreover, the key function of an auditor – interrogating the numbers, fearless of upsetting what may be a major fee payer – becomes more important when companies are not performing, as here. The Standard-Aberdeen deal was about helping address the threat of cheap passive funds on one side and alternative investment strategies like hedge funds and private equity on the other, a challenge facing all active managers. Yet it has come to exemplify the accepted pitfalls of M&A in this industry, with clients pulling funds as executives struggled to make two distinct cultures coalesce.

Change has been underway in the C-suite, with post-merger chair Douglas Flint and chief executive officer Stephen Bird. The pressure to give the market good news is nevertheless as intense as ever. Flint being a former KPMG partner does not help the overall look.

The next audit tender at Abrdn is scheduled for 2026. KPMG would be entitled to pitch for 10 more years. There isn’t much choice, but there must be alternatives to letting KPMG’s run extend to half a century. The head of the UK Financial Reporting Council, Richard Moriarty, last week told lawmakers he was “sheriff for only half the county” due to having fewer weapons than fellow regulators. When companies follow the letter but not the spirit of the rules, you see why he needs a full arsenal.