The KPMG Scandal & Beyond

The news of KPMG receiving a record £21 million fine for its inadequate auditing of Carillion seems almost insignificant, when compared to the devastating financial and societal repercussions caused by Carillion’s eventual demise. Carillion's downfall left nearly £1 billion in debt, over £500 million in pension deficits, and approximately 30,000 unpaid subcontractors. You can read more about this in the following link: BBC News Article.

For IT Asset Management (ITAM) practitioners, this situation serves as a valuable discussion point regarding the necessity of independence and objectivity within our own industry.

As the BBC article goes on to discuss, in addition to the £21 million fine imposed on KPMG, members of the audit team have been personally fined hundreds of thousands of pounds for a notably high number of errors, some of which were "intentional, deliberate, or reckless".  The Financial Reporting Council (FRC) also highlighted a significant "risk to their objectivity" with regards to KPMG due to Carillion's status as a vital client. This phrase, "risk to their objectivity" is especially significant for the ITAM and FinOps industry.

Software Resellers and their objectivity risk

In the ITAM and software industry, a similar level of risk from a lack of objectivity and impartiality emerges when software resellers provide advice to clients on their software purchases, as the reseller is set to gain financially from the software procurements. The level of risk is heightened further by the software market's displaying the key characteristics of a mis-selling industry, with complex pricing and high sales incentivisation.

In short, highly incentivised sales operations can manipulate complex pricing to drive software deals that may not be in the client's best interests. These characteristics can be identified in other mis-selling markets like pensions, mortgages, and mobile phone contracts. It's worth noting that the era of hyper complexity (driven in part by the convergence of FinOps, ITAM and GreenOps), ever increasing price complexity further exacerbates this risk for end users.

The KPMG scandal bares similarities to the Enron scandal, in which Arthur Andersen (a top-tier consultancy firm) had secured lucrative non-audit consulting work from Enron. As a result, Arthur Andersen was hesitant to raise valid "Red Flags" about Enron's true financial health, as this could jeopardise their relationship and, by extension, their potential revenue.

Lessons need to be learnt from these examples, comparisons can be made to when software resellers are providing advice on software that the reseller will directly earn revenue from, in these situations there is clearly a "risk to their objectivity". It’s curious that in most other commercial interactions with consultancies, this situation is specifically and contractually prohibited.

The Top 4 & vendor independence

In the software and ITAM industries, there's a similar objectivity risk when the top tier audit firms provide advice on software licensing and asset management, while simultaneously conducting audits on behalf of software vendors. They rely on "walls of confidentiality," which, as history and the Enron scandal suggest, can be rather porous and flimsy. The Enron collapse was so significant it prompted the United States Government to take this issue seriously, resulting in the Sarbanes-Oxley Act, which bars auditors of publicly traded companies from providing most consulting services to audit clients in order to prevent any serious conflicts of interest.

Many ITAM experts are well aware of the serious implications of this "risk to objectivity". Whilst many experts may use resellers for procurement transactions, they will often refrain from seeking advice from the same reseller to remove related risks and any conflicts of interest. They seek advice from a different third party, ideally an independent one who will not benefit financially from the software transaction.

Magic Quadrant vendors & their independence

This leads me to reflect on the fact that almost all participants in the recent SAM Magic Quadrant are either resellers, owned by resellers, or conduct audits on behalf of software vendors. This suggests that they are subject to some level of objectivity risk too.

I can't help but think that this situation is not only detrimental to end-user organisations, but is one of the primary hindrances to the progression of ITAM as a discipline.  ITAM (converged with FinOps/GreenOps) should be fully integrated into an organisation's IT capabilities and the discipline should have a much greater influence and acceptance than it currently enjoys. I believe that it this "risk to their objectivity" that pervades the industry at present that plays at least some role in preventing ITAM from ever reaching its full industry changing potential.

It isn't a coincidence that the most innovative and disruptive companies in the marketplace are all independent organisations. In the era of convergence and hyper complexity it is the organisations that are separate to the software sales industry that are going to have the answers to modern challenges in software and cloud contributing to the progression of this fantastic industry and community.

Recent acquisition activity set to amplify the problem

In recent years there has been a dramatic increase in resellers acquiring ITAM and FinOps consultancies worldwide, most notably Trustmarque’s acquisition of Livingstone, this week has been was reported that SoftwareOne is closing in on the purchase of the Crayon Group of companies (see https://www.reuters.com/markets/deals/softwareone-weigh-deal-crayon-apax-closes-bloomberg-news-reports-2024-09-13/). Whilst the continuing cuts to reseller margins from major vendors might be driving some of these moves to consultancy services, it is interesting to know if these resellers are considering the potential damage that a perceived "risk to their objectivity" or a perceived "lack of independence" could do to the valuation of that organisation and its future position in the market.

Who should you turn to for independent advice?

Despite the consolidation, there are still a small number of reputable and independent consultancies that remain.  I set up Synyega with a real desire to make a real change in how the IT industry works and believe that our clients should receive independent and unbiased advice on software licensing and cloud services as a “standard practice” rather than the “exception”.

My team and I strongly believe that every organisation should have access to expert impartial advice that is not governed or influenced by a Reseller or a Software Vendor, in order to deliver value for money and return on their software and cloud investments.  For more information and to contact us visit www.synyega.com or email us at [email protected].

This blog was originally published on linkedin and prompted a lot of discussion. If you wanted to join that conversation, it can be found here