The proverbial tide is going out as technology stocks and other high-growth assets succumb to a bear market with interest rates on the rise. Will it reveal corporate fraud underneath?
Paul Knopp, the chair and chief executive of KPMG U.S., doesn’t necessarily expect so. “In the United States, Sarbanes Oxley has been incredibly effective, leading to a much better auditing profession,” he said in an interview from the sidelines of the World Economic Forum in Davos, Switzerland.
Companies have to test and certify to their internal controls, and chief executives and chief financial officers have to sign off on their accounts, he noted. Plus, there are regular inspections of the auditors themselves. “We do better work over the last 20 years than we ever have, in my personal opinion,” he said.
That’s not to say there won’t be accounting issues. “In an environment like this, you would be very concerned about the potential for impairment where, possibly, revenues are declining in some industries,” he said. At the outset of the coronavirus pandemic, travel companies were at risk, while other industries may now be under pressure.
He said he’s optimistic the U.S. won’t experience a recession, and if it does, he would expect a shallow one, even as companies navigate supply-chain disruptions and surging inflation. “I think it’s because of the stimulus that has been put to the economy over the last the last two years, almost two and a half now. And then just the increase in compensation that many have experienced, that helps kind of mute some of the impacts of inflation,” Knopp said.
He said companies are doing a better job of navigating the disruptions. “We see them improving supplies, not in all sectors, in all places, but there’s been general improvement,” he said.
Knopp is also optimistic that the trend toward deglobalization will reverse. “My thinking is that globalization and the momentum behind globalization will survive as we work out some of the geopolitical tensions,” he said.
Corporate tax reform may be all but dead, but Knopp said companies are still following the global efforts at a minimum tax. “And so that is certainly creating opportunity, when it comes to how do you scenario plan for the complexity around an agreement that still has to be finalized,” he said. “It’s really complex to just determine what is the interaction between that global taxation regime and your U.S. taxation.”
He said KPMG had no problems reassigning employees after losing General Electric as a client. He points out that in Europe, companies have to rotate their auditors, while in the U.S., the audit team itself has to rotate every five years. “So we’re very fortunate that we have incredible demand for our services right now. So that was not a challenge at all. We we are seeing the demand for our services increase in all three of our functions,” he said. And while GE was one of its biggest clients, he said it represented only a small part of its audit revenue.
The M&A environment, he said, is still pretty strong despite the market downturn, because private-equity firms are sitting on so much cash. “When you do transactions, whether you’re buying or selling, the tax ramifications are crucially important. So we’re seeing real strength of market when it comes to certain companies and helping them plan for acquisitions or dispositions,” he said.