It’s an essential principle in British justice that a person is to be considered innocent until proven guilty. But unfortunately the adage ‘there’s no smoke without fire’ also has a lot of currency with a lot of people, and reputations can be materially damaged by accusations alone. This isn’t just an issue for individuals – it can affect companies too.
Take the example of the KPMG arrests in Northern Ireland on Wednesday. For legal reasons, you’ll only ever read a few unadorned facts about this case unless or until further action is taken:
Four senior KPMG partners in Belfast were arrested on suspicion of tax evasion by HMRC and subsequently placed on ‘administrative leave’. They are Jon D’Arcy, Arthur O’Brien, head of corporate finance in Ireland Paul Hollway and head of tax in Belfast Eamonn Donaghy.
Aside from being the four most senior KPMG partners in Belfast, they are also all directors of property firm JEAP Ltd, but it’s unknown whether that’s connected with the arrests. KPMG won’t comment further on the ongoing case but added that there wasn’t ‘any indication that this investigation relates to the business of KPMG or the business of our clients’.
There have been no convictions or indeed charges at this point and absolutely no indication at all that it directly affects KPMG itself, so in the eyes of the law both the partners and the partnership should be treated entirely without prejudice. All fair and proper, right?
But try telling that to KPMG’s current or potential tax clients, particularly in Northern Ireland. If you had the choice to go to an accountancy with a cloud of suspicion hanging over it (however ultimately justified it is) or one that doesn’t, all other things being equal, which would you go to?
Research from Drexel University in the US demonstrated an apparent link between news breaking of senior executives’ indiscretions (ranging from affairs and lying to arrests) and their firms’ share prices dropping.
Looking at scandal-hit executives at 219 companies, it found stock fell between 9% and 11% over the 12 months after the story broke. Clearly KPMG is a partnership and doesn't have a share price, but the research found wider ranging problems - if it was the CEO’s personal reputation that was tarnished, the company’s return on assets fell 1.7% as well. Whether that’s because of distraction, disruption or suspicion by association is impossible to know, but it’s certainly food for thought.
For now, KPMG will just have to keep a low profile and make reassuring noises until the case is concluded one way or another, taking solace in the fact that at least it hasn’t been grilled by Margaret Hodge’s select committee, like rival PwC has.