Media mauls KPMG after spin over VBS
When KPMG invited journalists to a hastily called press conference on Sunday, it seemed to think it could spin its way out of the trouble it was in, yet again.
Two of its audit partners had resigned on Friday after the firm instituted disciplinary action against them for their conduct and role at failed VBS Mutual Bank. And this happened under the new leadership and new clean-up regime the firm put in place late in 2017 after its reputation was wrecked by its audits for the Guptas and its “rogue unit” report for the South African Revenue Service.
In the event, KPMG SA’s newish chairman, Wiseman Nkuhlu, and CEO Nhlamulo Dlomu faced something of a media massacre. Their efforts to steer around the VBS issue and instead highlight all the extraordinary things the firm had done over the past six months to reassure clients and restore public trust simply looked like spin. And their coyness about disclosing any facts, especially about VBS, simply prompted ever-more aggressive questioning.
Luckily for KPMG, the tone of the media coverage the firm received was much milder than the hostile tone of the media conference. But the firm, which has already lost clients and partners, will surely not be so lucky with those clients who were prevailed on to stay.
One of the largest of these, Nedbank, has now made it quite clear that KPMG’s days as the group’s audit partner are numbered. And auditor-general Kimi Makwetu has said the government’s auditing contracts with the firm will be terminated.
Dlomu rather plaintively described the VBS debacle as “incredibly disappointing” on Sunday, saying it was “a pity VBS had come at this time”.
Perhaps she and some of her colleagues haven’t yet grasped just how damaging the failure of so small a bank could prove for the firm. VBS may have been a tiny bank, but the social impact of its failure will arguably be larger than that of African Bank, which had only R58m in retail deposits at the time it failed, whereas VBS had 22,700 retail customers, including stokvels, with up to R390m in deposits and R1.5bn in municipal deposits.
Added to that was supposedly more than R900m in corporate deposits — except that it now turns out those may not in fact exist. It turns out, too, now that the VBS curator, Anoosh Rooplal, has started trying to get a grip on the bank’s book, that much of its loan book is rotten to the core, with a much higher proportion of nonperforming loans than the bank ever disclosed in its monthly returns to the banking regulator.
It’s now emerging just how rotten the bank’s financial position was, and just how badly it must have been misstated. An affidavit from registrar of banks Kuben Naidoo has revealed that the rot runs a lot deeper than anyone realised when VBS was put under curatorship on March 12 amid a liquidity crisis. “The facts of this matter demonstrate that VBS Mutual Bank has been severely mismanaged,” Naidoo says in the affidavit, which goes on to say that the curator “is of the view that there may have been considerable manipulation of the bank’s financial information” and that initial assessment suggests there may have been fraudulent reporting and fraudulent transactions to extract money from the bank for individuals and companies.
This certainly sounds like the kind of thing auditors should notice. So were the auditors of VBS Mutual Bank fast asleep? Even if the KPMG audit partners who signed off on the failed bank’s audit were blameless, the firm’s reputation would be severely dented. Clients and the public rely on auditors to show probity and judgment and to raise red flags; these auditors clearly failed to do so.
The firm itself clearly failed too: VBS may have been a small client, but its 2016 loan to Jacob Zuma should surely have put it in the high-risk category and the firm should have been looking out for trouble.
But it gets worse, because the two audit partners, Sipho Malaba and Dumi Tshuma, evidently weren’t blameless. KPMG charged them with misconduct, following an investigation by law firm Bowmans. The audit firm has revealed that Malaba failed to disclose loans he had from VBS. It’s not yet clear just how many millions of rands these loans ran into. However, Malaba, who headed KPMG’s financial services audit practice and was on the firm’s executive committee, was one of SA’s most senior auditors, signing off the Nedbank audit, for example. It’s unclear why a man like that would need an undisclosed loan from a bank such as VBS.
Is KPMG reporting him to the regulator or law enforcement authorities? The firm hasn’t said.
The prospect that Malaba and Tshuma may not be held accountable now that they have resigned will surely spook clients of the audit firm.
Whether KPMG will survive is a question. So far, according to Dlomu, it has lost only 10% of its client base. More will surely follow, as no doubt will partners who are horrified by the VBS story. The firm has done much to tackle its quality and integrity issues but the VBS debacle, and even the ducking and diving at Sunday’s press conference, suggest its fundamental culture hasn’t changed nearly enough.
SA needs its “big four” audit firms, and a failure of KPMG would not be good in an already concentrated market. But the firm may need to be rebuilt from scratch.
THE CURATOR IS OF THE VIEW THERE MAY HAVE BEEN CONSIDERABLE MANIPULATION OF BANK’S FINANCIAL INFORMATION Kuben Naidoo Registrar of banks