‘Break the shackles of big four auditors’
New rules could result in little more than companies rotating their audits between dominant players
SECOND-tier audit firms need help to break into a market that is still dominated by the big four, says Victor Sekese, CEO of the largest black-owned audit firm Sizwe Ntsaluba Gobodo.
“Second-tier firms like us are battling,” he says.
The Independent Regulatory Board for Auditors has announced that it will implement a rotation rule forcing companies to change auditors every few years.
Sekese, 50, a chartered accountant from the University of the Witwatersrand and Deloitte who has been with SNG for 22 years, hopes that this will allow “newcomers” to get a bigger slice of the action in the private sector, which has been largely the preserve of established global giants Deloitte, PwC, EY and KPMG.
However, he is not convinced the rotation rule will do this.
“It could end up being a rotation of audit firms within the big four.
“It is not going to achieve its purpose if clients simply exchange one big four company for another. It could very easily end up being like that.”
This would be of no benefit to new entrants, he says.
“It should be an opportunity for new entrants to start having conversations about new appointments.”
As things stand they struggle to get a look-in, he says.
“Clients say: ‘We’ve been with this audit firm for 70 years, it took care of us when things were bad, we’ve grown with them.’
“When you look at the development of large accounting practices it’s on the back of longterm support from long-held clients.”
SNG was started 30 years ago, labouring under the considerable twin disadvantages of being a relative newcomer and, to exacerbate its outsider status, black.
The only hope it has had of surviving, let alone growing, is through government contracts.
“Our growth got impetus as a result of the public sector,” Sekese says.
It was a deliberate BEE strategy to grow black auditing firms. It gave SNG the necessary resource base to invest beyond the public sector.
Establishing and then growing an audit firm demands enormous investment. And for this a firm must have scale.
“On the basis of that exposure you can go to the private sector and show them that we can deliver a professional service.”
Some companies are starting to listen and “open their doors a little bit”, says Sekese.
“They have an awareness that there is a need for transformation and for appointing someone outside the big four. But we have to offer a value proposition. We don’t expect to be appointed just because we’re black.”
He says it is not enough for the big four to say they have black partners, a black CEO or even a black chairman.
“The need is to encourage home-grown, black-established, black-owned firms that are thriving and can compete with everyone else.”
Needless to say, the new rule has not been welcomed by the big four.
“The current big players want to protect their market,” Sekese says.
“I suspect that is one of their motivations for not supporting rotation. They are saying: ‘We’ve been with these clients for 90 years, please don’t come and disturb the model.’ Because they want to protect their client base.”
He says the government already applies mandatory audit firm rotation in the public sector — “the auditor-general requires that audit firms be rotated after five years” — and the same rules should apply in the private sector.
Otherwise, firms that rely on the public sector get rotated out but are not rotated in anywhere else because the private sector doesn’t require a change of audit firms.
“We don’t mind being rotated out after five years, but at least then we must have an opportunity to be considered in terms of rotation by a client in the private sector.
“As things stand, this is not the case and this makes it very unfair,” he says.
He makes the point that the big four also play in the public sector space.
“It’s not like it’s reserved for us. They are dominant in that space as well.”
On the consulting side they are even more dominant in the public sector than the black firms, Sekese says.
The independent regulatory board has made it clear that rotation is not just about promoting transformation. The primary aim of the rule is to ensure that auditors are properly independent from the companies whose accounts they sign.
The big four have responded by arguing that they rotate their partners so that no partner forms too cosy a relationship with a client.
Sekese says that in spite of this these relationships are commonplace. The evidence is the number of partners in audit firms who move into top positions in the companies they have been auditing.
“You need to be independent and be seen to be independent also. The fact that my former senior partner is now the financial director for my client does not in itself say my independence is impaired, but there could certainly be that perception.
“Issues will arise where you may have to confront your former partner and say: ‘I don’t agree with this or that and I am going to have to qualify your account.’ ”
Sekese strongly denies that the independence of his own company has been compromised by its dependence on government contracts.
“Our professionalism comes first at all costs and we will never compromise on that. That is a commercial risk that we manage proactively.”
Does that include complying with government demands to fire Vusi Pikoli?
Pikoli, who was suspended by then president Thabo Mbeki after refusing instructions to lay off prosecuting the then national police commissioner, Jackie Selebi, for corruption, and then fired by Mbeki’s successor Kgalema Motlanthe, claimed in his biography that SNG fired him in 2012 after being leant on by the ANC.
This was shortly after SNG head-hunted him because it said his experience was “vital” to the firm’s forensic capacity.
According to Pikoli the ANC told SNG CEO Nonkululeko Gobodo that if she didn’t get rid of him the firm would lose out on government contracts, more specifically a R350-million fiveyear Transnet contract she was hoping to land.
“I want to put that to bed,” Sekese says. “Vusi wrote what he wrote, but he didn’t get our side of the story.”
The regulator investigated and “we were cleared of any wrongdoing”, he says.
“We have an independent risk management committee that looks at issues from a professional risk point of view, independent of commercial issues. Professional risk takes precedence over anything else that we do.”
Which is why many observers ask why SNP took on Oakbay Resources, which is owned by the Gupta family, after its auditors, KPMG, terminated their contract with immediate effect in March this year.
“Do you know that audit was put out on tender and other firms tendered for that audit?” he asks.
Far from coming under pressure from President Jacob Zuma or the government to save Oakbay’s bacon, SNP won the tender from other firms that were bidding for it, Sekese says.
What about reputational risk?
“I wouldn’t want to speak about that. We’ve got signed confidentiality issues that I need to protect and my clients are going to be irritable if they see their issues being put out in the media.”
Why pick on his firm, he asks.
“Look at the construction sector that has been found to be rigging prices. Criminally charged. They are still in business. Their auditors are still in business with them. But the professionals that are servicing those clients have, and continue to look at, their risk processes and systems.
“They cheated. They were found to have rigged prices, they did bad things. Audit firms have to consider these things, factor them in and take a decision. It’s not unusual, it happens all the time.”
Things went rather further with Oakbay of course. SNG came to the rescue after the banks and its JSE sponsor and then its auditors dumped it.
How much sense does it make for a firm concerned about its reputation not only to agree to a professional relationship with a company in such bad odour but actually bid for the privilege?
Sekese, who sounds distinctly uncomfortable whenever the name Oakbay is mentioned and immediately cites client confidentiality, says he won’t comment further on the matter. “My response hasn’t changed,” he says, when pressed.
We must offer value . . . We don’t expect to be appointed just because we’re black The Oakbay audit was put out on tender and other firms tendered for it Look at the construction sector . . . they cheated. Audit firms consider these things and then decide