WHO TO SAVE IF KPMG SINKS . . .

Financial Mail - - EDITORIALS -

There is a real risk that au­dit­ing firm KPMG could col­lapse in SA, so dev­as­tat­ing has been the loss of so many of its most lu­cra­tive clients. First, it was au­di­tor-gen­eral Kimi Mak­wetu who axed KPMG af­ter giv­ing it “am­ple time” to ex­plain var­i­ous gov­er­nance prob­lems. Then, last week, Bar­clays Africa ditched it too, snatch­ing away about R138m in rev­enue from the au­dit­ing firm. Prop­erty com­pany Rede­fine was next, fol­lowed by Sibanye-still­wa­ter, and it is un­der­stood that a few oth­ers are on the verge of fol­low­ing suit, which is thor­oughly de­served.

But the prob­lem isn’t just the loss of clients — it’s also the flood of skilled staff leav­ing. Ex­ec­u­tives at other au­dit­ing firms say CVS of se­nior KPMG part­ners are sent to them, un­so­licited.

The fi­nal straw cen­tred around rev­e­la­tions last month that se­nior KPMG of­fi­cials re­spon­si­ble for VBS Mu­tual Bank, the en­tity that lent R7.8m to Ja­cob Zuma to re­pay his Nkandla debt, had loans with VBS that they’d hid­den, com­pro­mis­ing their in­de­pen­dence. The trou­ble is that it came af­ter a slew of other scan­dals — in par­tic­u­lar KPMG’S fail­ure to de­tect ap­par­ent money laun­der­ing at the Gupta-linked firms it au­dited, and a shoddy re­port its foren­sics arm had done on the ex­is­tence of a “rogue unit” at the SA Rev­enue Ser­vice. Com­pa­nies that ex­ist en­tirely by virtue of their in­tel­lec­tual prop­erty can’t af­ford three strikes.

Some se­nior au­di­tors doubt, at this point, whether KPMG’S brand in SA can sur­vive so broad an exodus. If that is so, reg­u­la­tors and the in­dus­try’s po­lit­i­cal lead­ers need to make a plan to en­sure KPMG’S au­dit­ing skills sur­vive.

Con­sider the stakes in the bank­ing sec­tor, which is dom­i­nated by un­wieldy multi­na­tion­als such as Stan­dard Bank, Firstrand, Bar­clays

Africa, Nedbank and In­vestec. These banks are re­quired by the Re­serve Bank to have two ex­ter­nal au­di­tors at any one time — a tough ask in any event, but al­most im­pos­si­ble when the only large au­dit firms left stand­ing are EY, Deloitte and PWC. As In­vestec CEO Stephen Kos­eff puts it: “You have to be at the fore­front of in­ter­na­tional reg­u­la­tion to au­dit banks prop­erly — the smaller firms don’t have that ca­pa­bil­ity and in­ter­na­tional reach.”

So, as much as Sizwent­salubago­bodo might say it is ready to do an au­dit of a ma­jor bank, this isn’t the sort of task you em­bark on with just a dream and fin­gers crossed. A bank­ing au­dit re­quires the work of a well-oiled ma­chine in which each com­po­nent knows its role and can trust oth­ers in the chain to do the same.

As much as KPMG is bleed­ing, jus­ti­fi­ably, from its sins of the past, it still has solid au­dit­ing skills.

Bernard Agul­has, CEO of the In­de­pen­dent Reg­u­la­tory Board for Au­di­tors (IRBA), says: “If you speak to the com­pa­nies who’ve taken this de­ci­sion, they’ll say that, tech­ni­cally, KPMG’S au­dit of their busi­ness can’t be faulted. But they want to be on the right side of his­tory — they don’t want to be as­so­ci­ated with a com­pany that worked for the Gup­tas or made these sorts of er­rors.”

Al­ready, the IRBA has in­ter­vened to as­sist KPMG with its new strat­egy. But one of the de­ci­sions the reg­u­la­tor will have to make in the next few days is whether to launch a more struc­tured in­ter­ven­tion. Al­ready, sev­eral au­dit­ing firms have been hir­ing in­di­vid­u­als from KPMG on an ad hoc ba­sis. But per­haps a plan is needed that would re­sult in en­tire au­dit­ing teams, in­clud­ing part­ners, be­ing trans­planted else­where, if KPMG folds.

Says one au­di­tor: “It can sur­vive, pro­vided the panic dies down and the at­tri­tion of clients stops.”

But if that doesn’t hap­pen, the trick is to en­sure the au­dit­ing skills sur­vive. The reg­u­la­tor, and fi­nance min­is­ter Nh­lanhla Nene, need a con­tin­gency plan to safe­guard SA’S econ­omy.

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