Ethics Lapses Rears Its Ugly Head, Yet Again…
Ethics is a crucial aspect of management consulting, as it affects the trust, reputation, and value of the profession. Management consultants are expected to adhere to high ethical standards and principles, such as those set forth by the Institute of Management Consultants USA (IMC USA) in its Code of Ethics1. However, not all consulting firms follow these principles, as evidenced, once again, by the recent case of KPMG and Microsoft.
According to a report by ProPublica2, KPMG, one of the Big Four accounting and consulting firms, helped Microsoft design and implement a complex tax avoidance scheme that shifted billions (~$29bn) of dollars of profits from the U.S. to low-tax jurisdictions such as Puerto Rico. The scheme involved creating subsidiaries that licensed Microsoft’s intellectual property rights to other subsidiaries, and charging high fees that reduced the taxable income in the U.S. and increased it in the low-tax countries. The report also revealed that KPMG received a percentage of the tax savings as its fee, possibly creating a conflict of interest and an incentive to maximize the tax benefits for Microsoft. [Note: Microsoft is currently appealing the IRS’ $28.9bn charge for back taxes].
The report prompted a group of U.S. senators to question KPMG’s role in the scheme and to call for an investigation by the Internal Revenue Service (IRS) and the Treasury Department3. The senators expressed their concern that KPMG’s behavior violated the ethical and professional standards of the consulting industry, and that it harmed the U.S. taxpayers and the public interest.
From my perspective as a management consultant and one who has written previously about these ethics lapses, how does KPMG’s behavior exemplify the need to follow an enforceable Code of Ethics? The Code of Ethics of the Institute of Management Consultants USA (one of 49 constituent country members of the International Council of Management Consulting Institutes) consists of three sections, parts of each are applicable in this situation: My Commitment to My Clients, My Commitment to Fiscal Integrity, and My Commitment to the Public and the Profession. Each section contains several standards of conduct that provide basic principles in the ethical practice of management consulting. Based on the report by ProPublica, KPMG’s behavior appears to be in violation of several of these standards, such as [the numbers in parentheses reference the applicable element of the Code]:
I will serve my clients with integrity, competence, independence, objectivity, and professionalism (#1.0). KPMG’s behavior raises doubts about its integrity, independence, and professionalism, as it helped Microsoft design and implement a tax avoidance scheme that exploited loopholes and lacked transparency. As reported, KPMG also had a financial stake in the outcome of the scheme, which potentially compromised its objectivity and created a conflict of interest.
I will avoid conflicts of interest or the appearance of such and will immediately disclose to the client circumstances or interests that I believe may influence my judgment or objectivity (#6.0). Even if KPMG disclosed to Microsoft that it received a percentage of the tax savings as its fee, it influenced its judgment and objectivity. KPMG also likely did not disclose to the IRS and the Treasury Department that it was involved in the scheme, which created the appearance of a conflict of interest.
I will agree in advance with a client on the basis for fees and expenses and will charge fees that are reasonable and commensurate with the services delivered and the responsibility accepted (#9). It is perhaps questionable that KPMG did not charge fees that were reasonable and commensurate with the services delivered and the responsibility accepted. KPMG charged Microsoft a percentage of the tax savings, which amounted to hundreds of millions of dollars, and which likely created an incentive to maximize the tax benefits for Microsoft regardless of the legal and ethical implications.
I will respect the profession with integrity and professionalism in my relations to clients, colleagues, and the general public (#13.0). KPMG did not respect the public interest in its work and did not consider the social consequences of its professional activities. KPMG helped Microsoft avoid paying billions of dollars of taxes in the U.S., which deprived the government of revenue that could have been used for public services and programs. KPMG also contributed to the erosion of the corporate tax base and the unfair distribution of the tax burden, which harmed the public interest and the social welfare.
KPMG’s consulting behavior is just one of several ethics lapses exemplary of consulting behaviors that are not ethically grounded. I believe this a clear example of unethical and unprofessional conduct that violates the IMC USA Code of Ethics and undermines the trust, reputation, and value of the management consulting profession. I’m angry and disappointed once again about these behaviors that tainted my professional reputation. Whether it was in KPMG, or McKinsey, or PwC (all which have been publicly covered by the media), these malevolent behaviors could have been prevented with an understanding and acceptance of a long-standing, professional standard enforceable Code of Ethics. These large firms, and indeed all management consulting firms, should also review and revise its policies and practices to ensure that they are aligned with the ethical and professional standards of the consulting industry, and that they serve the best interests of its clients and the public.
What about it? What can you do to improve the ethical posture and position of this noble profession?
