In the early 1990s, KPMG established a separate company named KPMG Baymark as an investment banking unit to secure millions of dollars in deal fees otherwise beyond the grasp of the firm when it acts as a sideline advisor.'' It was formed with a group of Wall Street investment bankers to provide private placement debt and equity financing to KPMG’s middle-market corporate clients, many of whom will make initial public offerings. Some CPAs were shocked at this bold maneuver around independence issues.

Baymark acted as a broker/dealer in raising capital and completing transactions.

It did not underwrite securities issues, but it was not barred from doing so.

KPMG is the leading advisor in merger and acquisition deals, but because of auditor conflicts of interest, cannot participate directly in the high-margin, money-raising end of those deals.

KPMG Baymark was an independent company owned by some of its investment banker principals. Neither KPMG nor any of its partners owned any of Baymark.
KPMG franchises the use of the “KPMG” name and logo to Baymark just like many fast food companies, such as McDonald’s, franchise the use of their name to others.
Baymark had to adhere to KPMG-imposed procedures and standards designed to safeguard the KPMG reputation.
KPMG Baymark received referrals from KPMG. It also hired KPMG to perform additional work that KPMG could not accept if it were hired directly by an audit client. Therefore, in addition to earning royalties from the deal fees that Baymark collected, KPMG was able to expand its income from additional assignments in such areas as tax planning, due diligence, executive compensation, cost control, financial structuring, strategy, and implementation.
KPMG has previously rejected some alliances when they threatened to interfere with audit relationships. Several years ago, for instance, KPMG reportedly cut its ties to an executive recruiting firm to keep as an audit client a company with a top official chosen by the headhunter.
KPMG’s move to launch the investment bank franchise came at a time when the roles and responsibilities distinguishing CPA firms from other financial services providers were becoming increasingly ambiguous and muddled. H.D. Vest has 5,000 investment representatives, many of them CPAs. But Vest has had to defend many of its CPA representatives in court against state charges of ethical breaches. One of its representatives recently won his first battle against the Louisiana State Board of CPAs when the state district court ruled that he could continue as a CPA and stockbroker.
The state board maintains that accepting commissions as stockbrokers would or could impair a CPA’s objectivity. Many investment bankers provide due diligence audits as a routine part of their transactional services, treading into territory jealously guarded by CPA firms.
KPMG was not the first accounting firm to offer broker/dealer services. Local CPA firms have long spun off affiliates to handle ancillary activities from computer consulting to commission-based sales of securities or insurance products.

Required:

Meet in your group and discuss the following questions:

a. What is the business issue; that is, what are the business objectives and strategies of KPMG and KPMG Baymark?

b. What is the motivation to license the KPMG name, logo, and so on? How does this differ from marketing Chicago Bulls merchandise or the Nike swoosh on other products?

c. What is the apparent conflict in performing both investment banking services and auditing services for the same client? Would there be such a problem if KPMG Baymark performed investment advisory services for non-audit clients? Explain the rationale for your conclusion.

d. What are the ethical issues? Should the AICPA or SEC prohibit the KPMG Baymark service? Use the ethical framework in the chapter to help analyze the issues?