KPMG-BCE: Auditor Conflict in Huge LBO Deal?
As one of the largest leveraged-buy out deals in history verges on collapse, much attention is being paid to a central condition in the agreement, the target’s solvency; little attention has been given to conflicts of interest facing the firm, KPMG, deciding whether the condition is met.
The deal is a $28 billion LBO for BCE, Canada’s largest telecom firm. A principal lender in the proposed deal is Citigroup, the struggling commercial bank. BCE has made clear it wants the deal to close as scheduled on December 11; Citigroup, like other lenders amid the current financial crisis, may prefer that it does not.
The agreement contains a condition to the lenders’ obligation to close that BCE shall have obtained an opinion from KPMG, or another public accounting firm, attesting to the solvency of the post-LBO company. This may be difficult to deliver, given the considerable debt being used in the LBO and terrible market and economic conditions.
Trouble is, KPMG is the outside auditor for both BCE and Citigroup, presenting it with a potential conflict of interest. One arm of KPMG may wish to bless the deal, to promote favorable relations with BCE, while another may wish to scotch it, to promote favorable relations with Citigroup.
Last week, KPMG told BCE that its preliminary analysis of the post-LBO company would prevent it from providing a solvency opinion. BCE management is reportedly in negotiations with KPMG over whether altering some assumptions or analytical methods the auditor used would enable a different conclusion.
If KPMG kills the deal, BCE will be furious but Citigroup pleased; if it green lights the deal, BCE will be delighted, but lenders, including Citigroup, would have to fund it, unless they can identify another condition, such as a material adverse change clause, to let them out.
KPMG may navigate the apparent conflicts by emphasizing that KPMG, although a global firm, is actually a network of scores of separate firms, of which KPMG (Canada) is one and KPMG (United States) is another. They would say that KPMG (Canada)’s decisions concerning BCE’s solvency are taken entirely on the basis of its independent and objective analysis of the LBO’s terms without any influence from or attention to the effects on KPMG (United States) and its clients, including Citigroup.
That argument is difficult to assess because KPMG, like its three sister global accounting firms, are private and disclose virtually noting about how they are organized and what their internal financial or other relationships look like.
Important potential conflicts of interest like this may put to the test such arguments about the large accounting firms’ independence and generate for public disclosure useful information about the internal relations and operations of the four large global accounting firms.