Conjuring fears of systemic risk from KPMG disgrace delays the remedy
In view of big-four audit firms’ spectacular failures, mid-tier local firms should be afforded a space at the table
As the crowd in the Colosseum bays for KPMG’s blood, some voices in the arena are advocating mercy by arguing that the demise of KPMG as joint auditor at four of the big five commercial banks could pose “systemic risk” to SA.
Advocates favouring KPMG draw attention to the specialised nature of bank auditing; the capacity only the large audit firms seem to possess and the wellbeing of its 3,200 employees (excluding partners).
KPMG SA’s new CEO, Nhlamulo Dlomu, argues that “it would not be good for the country if KPMG folded”.
It is as unnecessary and unproductive to twist the knife further as it is unnecessary and unproductive to support KPMG for reasons that fail to pass muster. The arguments supporting KPMG should be closely examined and measured against the firm’s performance with respect to its core values, read with the requirements of the Audit Professions Act and the Rules of Professional Conduct.
Some of KPMG’s core values published on its website include “we respect the individual; we are open and honest in our communication; we seek the facts and provide insight, and above all, we act with integrity”.
It is quite clear that KPMG failed dismally to uphold any of these core values, resulting in the imbroglio engulfing the firm, its leadership and the audit profession. It is equally clear that KPMG’s failures were not a once-off aberration — these were recurrent failures over an extended period.
International Standard on Auditing (ISA) 200 demands what is known as professional scepticism. Is the crowd in the arena with thumbs pointing downwards expecting everyone to believe that the 200-odd partners at KPMG SA were either not concerned or unaware of the modus operandi of companies linked to the Guptas and the questionable South African Revenue Service report? At best, it can be argued that the partners were not sceptical — which raises questions about their competence and whether a responsible audit committee of a listed company would want any of these partners to sign off their company’s audited financial statements.
The rules of professional conduct are a function of the Audit Professions Act and a contravention is a breach of statute, not a breaking of private club rules. That these rules were so blatantly breached by a big four audit firm with all the resources to ensure compliance makes the situation more damning.
Fundamental principles in the rules require that a registered auditor perform work with integrity; objectivity; professional competence and due care; and professional behaviour that doesn’t discredit the profession. It seems apparent that KPMG, with all its reputed capabilities and vast partnership experience, has not even come close to satisfying these nonnegotiable requirements.
The notion that the big four audit firms have specialised banking knowledge has a hollow ring when none of them raised any concerns in their audit reports before the 2008 banking crisis. EY audited Lehman Brothers; Deloitte audited Bear Stearns and Royal Bank of Scotland and PwC audited Goldman Sachs. Deloitte gave African Bank a clean audit the year before it went into liquidation and EY was the auditor for the failed Regal Bank. Audit firms experience high turnovers of staff as graduates serve articles, write their professional examinations and leave to gain wider experience. Those who remain become audit managers and, more often than not, use their senior positions to move onto the higher rungs of the corporate ladder outside of the profession. The notions of “institutional memory, unique training methodology and intellectual capital” seem vastly overrated.
The audit “donkey work” is done by what can best be described as greenhorns. At large audit firms, the partners are far removed from the coalface as their priorities tend to involve the usual corporate Machiavellian machinations prevalent in big organisations.
Despite several spectacular audit failures, supporters of the big four audit firms continue to argue their perceived superior audit capabilities. Does the large body of contrary evidence not demand that mid-tier local firms, some of which have international links, be afforded a place at the table? Perhaps firms with more hands-on partners would deliver better audit quality. In a country in which public and private corporate malfeasance occurs with apparent impunity, is it not time for business leaders to draw a line in the sand if SA is to ever be taken seriously by the international business community?
It cannot be that senior KPMG partners resign and disappear without any consequence for their professional standing. Surely, the investigations committee of the Independent Regulatory Board for Auditors (Irba) should be gathering evidence to support a charge sheet advocating the removal of registered auditor status of the senior partners at KPMG?
Moreover, should the South African Institute of Chartered Accountants not be investigating the removal of the CA (SA) designation these partners enjoy? Can we soft-pedal on such colossal and flagrant violations of ethical codes of professional conduct? How can we be justified in pointing a finger at Gupta entities, state capture and corruption while giving established “too big to fail” businesses a get-out-of-jail-free card?
There are ethical and skilled employees at KPMG who must be furious at the way their partners let them down. In the event that more listed companies dispense of KPMG’s services, the first to suffer retrenchments will be employees, who make up 94% of the headcount.
The piecemeal migration of former KPMG clients to other audit firms will see new audit assignments allocated to existing audit teams and any new hiring will be at a far lower rate than the value of new work obtained.
Following the collapse of Arthur Andersen in 2002, its clients were quickly absorbed without systemic risk, but the urgency with which former clients had to find a new audit firm resulted in almost all ethical and competent Arthur Andersen employees being employed by rival firms.
Rival firms will employ the vast majority of the 3,200 KPMG staff almost immediately to satisfy their new audit assignments in the event of the demise of KPMG SA.
Never before has corporate SA been presented with such a clear opportunity to do the right thing as regards its choice of external auditor, and never before has Irba and the South African Institute of Chartered Accountants been presented with the choice to take the decisive steps necessary to restore the integrity of chartered accountants in the audit profession as well as in business.