TOO CLOSE FOR COMFORT
KPMG, the joke goes, is no longer just an auditor; it’s now a wedding planner, too. But it’s no laughing matter for auditors fighting new rules
Revelations that KPMG apparently checked its dignity at the front door and fawned over the Guptas could hardly be any more embarrassing for the auditing firm. It’s also a scandal that couldn’t have come at a worse time for the wider profession, which has argued fiercely in recent months that there’s no need for new rules stipulating that companies must change their auditors every 10 years.
These rules, imposed by the Independent Regulatory Board for Auditors (IRBA) and set to take effect in 2023, are necessary because of a drop in auditing standards, says the regulator. The IRBA says steps must be taken to bolster auditors’ “independence” from their clients to ensure greater public trust in financial accounts.
As luck would have it, one firm that fought the IRBA’S plan was KPMG. In January, KPMG’S Michael Oddy said “no empirical evidence has been produced to support the suggestion of a perceived lack of independence”. No informed audience would “believe that auditors in SA are not independent of their clients”, he argued.
It’s an argument that would be much harder to sustain after the past week. In particular, last Friday the IRBA launched a probe into whether KPMG broke any rules by failing to detect how R30m in taxpayer funds, given to a dairy project in the Free State, ended up paying for the wedding of the Guptas’ niece at Sun City.
The story is that in 2014, the Free State government gave a company called Estina a 99-year lease to that dairy farm, along with a promise of R114m. But in a convoluted web exposed by Daily Maverick, Estina transferred R84m of this to a Dubai account controlled by Gupta-owned company Gateway. Some of this cash was then laundered back to an SA company called Linkway (owned by the Guptas) to pay for the wedding.
KPMG, as Linkway’s auditor, didn’t catch that the money came from government; it didn’t pick up that it came from a “related party”, and then allowed Linkway to write off the wedding costs as “business expenses”.
That’s bad enough. But more embarrassing are leaked e-mails in which KPMG’S EX-CEO, Moses Kgosana, raves to Atul Gupta about the wedding, saying: “I have never been to an event like that and probably will not because it was an event of the millennium.”
During a radio interview this week, Kgosana said his role as CEO was to “have a relationship” with clients, while the audit partner signed off accounts. (That KPMG partner, Jacques Wessels, also attended the wedding.)
If the barometer is Oddy’s test — whether the public believes there’s a “breakdown in independence” — then Kgosana’s reply unfortunately just doesn’t cut it.
IRBA CEO Bernard Agulhas told the Financial Mail that “even if Kgosana was totally independent, the fact he appears to have a cosy relationship could cast doubt on the rigour of the audit. And it becomes more serious if an auditor overlooks something material”.
What weakens Kgosana’s argument further is that one of KPMG’S other auditors had flagged the issue, saying: “We are of the opinion that these [wedding] costs are most probably not in the production of Linkway’s income.” Yet the top brass evidently ignored this.
Speaking to the Financial Mail, Trevor Hoole, KPMG’S local CEO, says his firm stands by the audit: “We acted in absolutely good faith. We didn’t contemplate any illwill. In 2013, we didn’t know what we know today about the Guptas and state capture.” (Fortuitously, KPMG quit as the Guptas’ auditors in April 2016.)
Hoole says: “Does going to a wedding impair our independence? While it has been speculated that it doesn’t look good the way this has come out now, I’d have to say the answer is categorically ‘no’.”
But for Agulhas, this case is exactly the kind of disaster he’s been worried about. It’s why the regulator has been almost obsessed with independence.
“Unless you’re totally independent, you’re not going to apply the proper level of scepticism you would otherwise. It’s a human trait you can’t ignore,” he says.
This is the key issue. The truth is, only a fraction of accounting disasters are due to blatantly unethical conduct from auditors. The bigger problem is honest auditors who make mistakes due to unconscious bias they develop when they get too close to their clients.
There are many reasons why this happens. These include the unconscious effect of incentives (consider that Sasol paid auditor PWC R87m last year), an unwillingness on the part of auditors to disappoint or hurt people they know, and the fact that accounting standards can be interpreted in many different ways. But it won’t cheer KPMG that it has, unwittingly, become Agulhas’s strongest argument for audit rotation.
As a postscript, there is another intriguing dimension: during an audit, a client is required to sign a representation that all related parties have been declared. Hoole says Linkway signed that disclosure, but, tellingly, it did not declare that any of the entities through which the money flowed were “related parties”. This means that if the IRBA’S investigation proves Linkway lied, there’s the juicy prospect of a potential fraud charge for the Guptas added into the bargain.
If Guptaowned Linkway did not declare money came from a related party, fraud charges could follow