Red flag for regulator and directors, too

If the audit profession is in trouble, it should be a wake-up call as much for their regulators and for the clients (directors) who hire them as it is for the audit firms themselves.

The profession certainly looks like it’s in trouble. It has lost one of the few black audit firms, Nkonki, which went under immediately after the auditor-general responded to revelations of the firm’s Gupta link by terminating the publicsector contracts that accounted for 80% of Nkonki’s business.

Big-four audit firms such as Deloitte and PwC have come under fire too for their roles in auditing the likes of Steinhoff and South African Airways. But it is KPMG that has been at the centre of the storm for its work for the Guptas and the South African Revenue Service as well as — more recently — the dodgy role its lead financial services audit partner played at the failed VBS Mutual Bank.

KPMG was already losing clients, including the auditorgeneral, as well as partners, despite the far-reaching clean-up it embarked on in September. The decision by Barclays Africa (Absa) to replace KPMG as its joint auditor from June put question marks over the survival of the firm, which has now also lost Redefine and Sibanye as clients from 2019.

But it’s like a train wreck playing out in slow motion, because with the annual general meeting season in full swing in May more boards could come under pressure from shareholders to fire KPMG.

And then there are the firm’s other megafinancial services clients, Old Mutual and Nedbank. Nedbank has said it has to keep KPMG for now because of parent Old Mutual plc. But that will all change with the breakup of Old Mutual plc in late June. Old Mutual plc CEO Bruce Hemphill says the KPMG issue is a concern but it’s up to the boards of the two new companies that will emerge from the break-up to decide on their auditors. Chances are that the new board of Old Mutual Ltd may not keep KPMG beyond the end of 2018, and Nedbank’s board will be also be free to decide once the bank is unbundled from Old Mutual Ltd later in 2018.

Faced with the worst-case scenario that could unfold over the next 12 months despite its best clean-up and communication efforts, KPMG SA clearly has no option but to “readjust its business model”, as CEO Nhlamu Dlomu says it is aiming to do.

What that probably means is that the South African firm will slim down considerably, to a level where it can still service KPMG’s multinational clients and domestic clients that stay but will no longer compete head-on with what will become SA’s big three. It will try to stabilise its platform and wait for the storm to blow over while it rebuilds it reputation and client base.

No one in the profession is celebrating this prospect. The other big-four firms are not licking their lips at the prospect of getting more business. Nor are they even thrilled at the unsolicited CVs from some skilled and experienced KPMG partners that are landing on their desks daily. Those skills are being lost, in some cases not just to KPMG but to SA. And there’s the issue of clerks – as many as a third of KPMG’s 3,000 people are on training contracts and the profession will have to make sure they can complete their training.

KPMG has traditionally had SA’s largest financial services audit practice, and its “readjustment”, assuming it survives at all, will be a severe loss for the sector, as well as for a profession in whom the public trust that should be the bedrock of its business has been eroded.

Independent Regulatory Board for Auditors (Irba) CEO Bernard Agulhas blames the current crisis on “a few errant auditors”. Yet the regulator itself must surely take at least some blame for the profession’s woes. It’s not clear whether Irba had ever looked at Nkonki’s dodgy shareholding structure before the auditor-general fired the firm. It took ages to get around to investigating the audit of failed African Bank. Audit firms and their clients say Irba’s record on doing investigations effectively or speedily is poor.

The regulator clearly does need more resources — it has 150 investigations open at any one time but just five investigators and a total budget that is less than KPMG earned for its half of the Barclays Africa audit. Agulhas says Irba is in talks with the Treasury to get more resources. But money alone surely won’t do it: Irba needs to be a lot sharper, as does the South African Institute of Chartered Accountants, the profession’s voluntary body, whose six-month independent investigation, chaired by Dumisa Ntsebeza of KPMG has yet to yield anything at all.

But if the profession’s regulators haven’t exercised adequate oversight, neither have those who have the ultimate oversight over the auditors — the boards of directors and audit committees who employ their services and are responsible for signing off the audit.

The problem is not just a few errant apples in a fewaudit firms. Rather, it reflects a more profound failure of governance and oversight in SA, where directors might be more likely to focus on ticking compliance boxes than on applying their minds to what’s really happening outside or inside their organisations; where there isn’t a solid core of integrity and values that underpins doing business.

These are not just audit issues: they are broader issues for leaders in SA’s private and public sector to address.

BUT MONEY ALONE SURELY WON’T DO IT: IRBA NEEDS TO BE A LOT SHARPER, AS DOES THE SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS