The collapse of KPMG would be a ‘tragedy’
Banks would suffer if number of big audit firms reduced
● If KPMG South Africa, counted among South Africa’s big four auditing firms, were to collapse because of its most recent scandal, the banking sector would be left in a precarious position.
“It’s very difficult when you have [audit] rotation and there are only four firms you can rotate to,” Investec CEO Stephen Koseff said this week.
If the number of big audit firms was slashed to three, banks would find it almost impossible to retain the services of two auditors with the scale and expertise required to deal with their complexity for a rotation period of five years, as required by the Reserve Bank.
“Banks are complex animals and many of them operate internationally, so 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,” Koseff said.
“If something were to happen [to KPMG] it would be a tragedy for the profession and would make rotation for the banks difficult. The regulator will have to think carefully about how we deal with it.”
The Reserve Bank said this week that it was engaging KPMG and the banks which use it as their auditors.
“As stated last year, the SARB’s interest in the KPMG matter stems from a public policy perspective, arising from the SARB’s mandate to ensure the soundness and stability of South Africa’s financial system. The SARB’s view is that a capable and competitive audit and auxiliary services industry is essential for the maintenance of a healthy business environment,” it said in a statement.
It also stressed that it does not interfere in the banks’ choice of auditors.
Investec, along with Nedbank, Standard Bank and Barclays Africa, had sought additional assurances from KPMG on its processes and was assessing its relationship with the firm.
The Independent Regulatory Board for Auditors (Irba) CEO Bernard Agulhas has proposed splitting up auditing firms in the wake of resignations by two KPMG partners, Sipho Malaba and Dumi Tshuma, who faced charges relating to their audits of VBS Bank, which was last month placed under curatorship.
The pair, who failed to disclose loans they held with VBS Bank, have put the firm at the centre of another scandal, just months after it was implicated in state capture.
The office of the auditor-general, Kimi Makwetu, this week terminated its auditing contracts with KPMG and Nkonki Inc, saying it was concerned about breaches in professional competence, independence and ethics at the two firms.
Makwetu said more firms could be on the chopping block as it awaited the outcome of several disciplinary probes by Irba. KPMG and Nkonki accounted for R90-million out of the R450-million worth of audit work in the public sector.
Losing the auditor-general as a client was a big blow to KPMG, which had already lost about 10% of its clients since last year.
KPMG’s CEO Nhlamu Dlomo said she hoped the decision was temporary.
Previous KPMG employees, who left the company last year, said morale was low among their former colleagues at the company, particularly in the regional offices which relied heavily on government work.
Azar Jammine, chief economist at Econometrix, said he did not believe losing its public audit work would sink the company, but agreed that it could threaten certain units.
“You’ve got to realise that they've got many very big contracts . . . [and] the beauty of an organisation like KPMG is that [while] it may have a very substantial structure, if it loses clients it can always retrench the relevant departments who are involved in that operation. It can cut its cloth to fit the level of its business,” Jammine said.
He said there was an advantage to splitting the structure of audit and advisory firms. “The advantages are that you don't have any conflict of interest because these businesses have made a lot of money through their audit fees and so they piggybacked consulting onto this and found that this was even more profitable. It does throw up a conflict between the two.”
Nirupa Padia, a professor and head of Wits Accountancy School, said this about industry conduct: “What we are seeing today I would put down to greed. There’s so much about how to please the client, to get the maximum outcome,” instead of considering the importance of public trust in the business.
Should the proposal by Irba — for advisory services to be stripped out of auditing firms — be implemented, it could threaten the stability of the already troubled profession. Audit firms use the fees earned from advisory and audit services to maintain cash flow throughout the year.
Deloitte Africa CEO Lwazi Bam said profits from advisory services were essential to the firm’s investments in its audit quality. Without this cash injection, firms would struggle to service larger audit clients.
Deloitte, which audits approximately 20% of the companies listed on the JSE, last year derived 45% of its revenue from its advisory arm.
“An appreciation that advisory services contribute greater profit with less risk than an audit has contributed to the growth in advisory services,” said BDO South Africa CEO Mark Stewart.
“But this begs the question as to whether audit committees are giving auditors the appropriate fee for the risk that auditors are exposed to — and more importantly that the public is demanding.”
Nicqui Galaktiou, a Nkonki director, said the feasibility of a split would have to be considered carefully as firms were built on multidisciplinary models.
John Ford, a professor at the University of Pretoria’s Gordon Institute of Business Science, said: “The problem with auditing today is that there is a fee and a time pressure. People need to understand that business today is much more complex, global and interlinked than it’s ever been before.”
The regulator will have to think carefully about how we deal with it Stephen Koseff Investec CEO