PwC’s involvement with VBS under scrutiny

For the past three years, embattled VBS Mutual Bank outsourced its internal auditing function to PwC, one of the big four accounting firms.

Besides the anger directed at the bank’s external auditors, KPMG, questions are being asked about PwC’s role in the collapse of the bank, particularly following the allegations of major governance failings and maladministration that emerged shortly after the bank was placed under curatorship last month.

According to Fulvio Tonelli, PwC’s chief operating officer, its mandate at VBS, which was determined by the bank’s management and approved by its board audit committee, “generally concerned the consideration of VBS’s risk management, internal control and governance processes”.

It was not part of the firm’s scope or engagement to consider, review or provide assurance on the financial statements for the past three financial years or to identify fraud, he said.

But court papers presented by the registrar of banks, Kuben Naidoo, reveal that issues such as internal controls and governance processes had caught the regulator’s attention. In a February letter written to former finance minister Malusi Gigaba, detailing several liquidity crises at the bank, Naidoo also highlighted other supervisory concerns.

These included inadequate corporate governance practices, inept risk management functions and practices, and significant growth in the balance sheet and new product offerings without a commensurate enhancement of internal controls.

According to Claudelle von Eck, the chief executive of the Institute of Internal Auditors South Africa, internal auditors do not prepare financial statements.

“Internal audit is not primarily a financial discipline, unlike its counterpart, external audit,” she said. “Internal audit … focuses more on the operational and governance activities of the organisation rather than ensuring that the financials are a true reflection of the state of the organisation, which is a requirement for statutory external audit.”

The responsibility lies with the leadership of the organisation, primarily the chief financial and executive officers, and the audit committee of a firm’s board of directors.

The key question that should be asked was whether the internal auditors picked up any red flags and whether they notified the audit committee.

“Then the next questions should be: What did the audit committee do about it?” said Von Eck.

Internal auditors were expected to comply with a number of international codes of practice and to consider all laws, standards and regulations impacting on the work they executed, she said.

But because the internal audit profession was not regulated, membership of the institute was not compulsory, unlike external auditors, she said. External auditors, which express an opinion on a company’s financial statements, must be registered auditors with the Independent Regulator for Auditors (IRBA) and are governed by the Auditing Profession Act.

Although the institute has an investigations and disciplinary committee to adjudicate complaints brought against individual members, it does not have any power to subpoena any information that belongs to an organisation, including internal audit reports.

Von Eck said PwC had advised the institute that it was doing its own internal investigation and it was “awaiting the outcome thereof”.

The VBS curator, Anoosh Rooplal, has suspended PwC’s work because of the financial position of the bank.

“I will be assessing the scope of their work that was done,” he said. “If the bank is to receive value from allowing the completion of certain assignments that PwC was still busy with, this will then be considered.”

If the internal audit was carried out by an auditor registered with the IRBA, however, it has the power to investigate. It is investigating KPMG lead partner, Sipho Malaba, in relation to his work on VBS.

But apart from an inquiry by the IRBA about the names of the engagement partners responsible for the internal audit engagement at VBS, PwC had not received any notice of any investigation involving PwC or any of its partners regarding VBS, said Tonelli.