Nene urges ‘good men and women’ to step for­ward and fix au­dit­ing in­dus­try

Chance for re­form as in­dus­try re­builds af­ter state cap­ture cri­sis

Sunday Times - - Business Times - By ROX­ANNE HEN­DER­SON and ASHA SPECKMAN

● Fi­nance Min­is­ter Nh­lanhla Nene has weighed in on the calami­tous state of au­dit­ing in South Africa, call­ing for the in­dus­try to “cleanse it­self” to avoid fur­ther dam­age to the liveli­hoods of those who are in­no­cent of any mis­de­meanour. This comes as an­other two clients said on Fri­day they were re­assess­ing their re­la­tion­ships with KPMG.

Nene will meet with au­di­tor-gen­eral Kimi Mak­wetu in the next two weeks, to ask for an ex­pla­na­tion for ax­ing au­dit firms KPMG and Nkonki Inc and what fur­ther ac­tion his of­fice will be tak­ing.

Nkonki Inc has since ap­plied for vol­un­tary liq­ui­da­tion, while KPMG’s fu­ture has be­come un­cer­tain af­ter Bar­clays Africa, a ma­jor client, sig­nalled in­ten­tions to cut ties.

“The only way the pro­fes­sion in my view can cleanse it­self is for the good men and women to stand firm and do what is right. It’s go­ing to take a bit of time for them to clean up their name. The au­dit pro­fes­sion has taken a beat­ing.”

Nene said it was un­for­tu­nate that when firms go down they take in­no­cent em­ploy­ees with them.

Although he will meet with Mak­wetu, Nene has no au­thor­ity over his of­fice and can­not re­verse the ax­ing of the two firms.

Mak­wetu has al­ready re­ceived a thumbs up from par­lia­ment. On Fri­day the chair­per­son of the stand­ing com­mit­tee on the au­di­tor-gen­eral, Vin­cent Smith, said the fact that Bar­clays Africa had also dumped KPMG strength­ened Mak­wetu’s case.

“The stand­ing com­mit­tees on pub­lic ac­counts and on the au­di­tor-gen­eral feel that what he did was proper be­cause his rep­u­ta­tion is the only thing that an au­di­tor has.”

Ad­dress­ing the two com­mit­tees Mak­wetu said that he would gather all the au­dit firms con­tracted in the pub­lic sec­tor next month to de­cide how to pro­ceed in the face of the in­dus­try’s chal­lenges.

“It is an in­dus­try prob­lem. The in­dus­try is in tat­ters be­cause of the lack of trust be­tween those who are au­dited and au­di­tors,” Smith said.

On Fri­day min­ing firm Sibanye-Still­wa­ter told share­hold­ers it would vote on the fu­ture of its con­tract at its an­nual gen­eral meet­ing at month-end. Re­de­fine Prop­er­ties in­tends to ter­mi­nate its KPMG con­tract in Novem­ber.

Bar­clays Africa’s in­ten­tion to fire KPMG this week may be the fi­nal straw. The bank’s au­dits were es­ti­mated to gen­er­ate around R138-mil­lion in an­nual fees.

KMPG spokesper­son Nqubeko Sibiya would not dis­close what per­cent­age of au­dit rev­enues was de­rived from the Bar­clays Africa ac­count. The 250 staffers who were ded­i­cated to the ac­count — about 7% of its en­tire staff — would be re­de­ployed, he said.

When asked about the num­ber of clients the firm had lost since last year, when it was rocked by scan­dal re­lated to state cap­ture, Sibiya said he was not go­ing to pro­vide run­ning com­men­tary on the state of KPMG’s client list. “We have en­gaged in­ten­sively with our clients and [they] have a good un­der­stand­ing of the firm’s po­si­tion and sta­tus of our re­forms.”

Bar­clays Africa joins a num­ber of smaller for­mer clients, in­clud­ing AVI, Syg­nia As­set Man­age­ment, Wits Univer­sity and Telkom, to have canned KPMG’s ser­vices.

At a brief­ing late last month, KPMG CEO Nh­lamu Dlomu said the firm had lost less than 10% of its clients since late last year.

KPMG’s lo­cal woes join a grow­ing list of crises that face the global au­dit­ing firm, which is one of the big four and has be­come the sub­ject of mul­ti­ple in­ves­ti­ga­tions.

In the US, ad­vi­sory group Glass Lewis called for com­pa­nies to dump KPMG and ques­tioned its role in au­dit­ing cer­tain em­bat­tled com­pa­nies. One of these is Wells Fargo, which is ac­cused of open­ing 3.5 mil­lion fake ac­counts, charg­ing 57 000 clients for car in­sur­ance they did not need and charg­ing un­fair mort­gage fees.

In the UK, the Fi­nan­cial Re­port­ing Coun­cil is look­ing into the prepa­ra­tion of re­ports and other fi­nan­cial in­for­ma­tion be­tween 2014-17 at Car­il­lion plc af­ter the col­lapse of the con­struc­tion firm, which was au­dited by KPMG. The coun­cil is also in­ves­ti­gat­ing KPMG’s con­duct in its au­dits of Rolls Royce firms.

“The ques­tion is whether KPMG is too big to fail. But you only have to look back a lit­tle while at the En­ron scan­dal to see that some­times these is­sues can re­sult in what we would call, in the risk man­age­ment in­dus­try, a cat­a­strophic risk. A lost rep­u­ta­tion can spread like an epi­demic,” said Tara O’Con­nor, ex­ec­u­tive di­rec­tor of Africa Risk Con­sult­ing in Lon­don.

The En­ron scan­dal sank au­di­tor Arthur An­der­sen, for­merly one of the big five firms, in the US in the early 2000s in a mat­ter of days. The au­di­tor’s South African op­er­a­tion was ab­sorbed by KPMG South Africa.

Though banks glob­ally rely on the big four to han­dle large and com­plex au­dits, the dis­ap­pear­ance of one would not pose an in­sur­mount­able chal­lenge, said Kokkie Kooy­man, a port­fo­lio man­ager at Denker Cap­i­tal spe­cial­is­ing in in­ter­na­tional banks. “Most of the [big four] teams that fo­cus on banks are fairly stretched. But if all the banks ditched KPMG its teams would be taken on by other firms.”

● The South African au­dit­ing pro­fes­sion dare not let the cri­sis that has rocked it go to waste, says Bernard Agul­has, CEO of the In­de­pen­dent Reg­u­la­tory Board for Au­di­tors.

“It’s an op­por­tu­nity for us to take a hard look at the ethics of the pro­fes­sion and see if we can get it back to where it was.”

Au­di­tors need to re­fo­cus on what a goodqual­ity au­dit, in­de­pen­dence and ser­vice to the client should mean, he says.

“We need to get our­selves back to hav­ing the rep­u­ta­tion we used to have.”

Un­til last year the South African au­dit­ing pro­fes­sion was ranked No 1 in the world by the World Eco­nomic Fo­rum for its re­port­ing and au­dit­ing stan­dards. Now it is No 30.

“Au­di­tors be­come com­pla­cent. Any pro­fes­sion needs to go through a cri­sis so that it can re­fo­cus its at­ten­tion on where it should be.”

He says the cur­rent cri­sis has high­lighted the need for manda­tory au­dit ro­ta­tion to en­sure that au­dit firms are prop­erly in­de­pen­dent from the com­pa­nies they au­dit.

He be­lieves the cri­sis clearly demon­strates that this is not the case.

Against strong op­po­si­tion from the “big four” au­dit firms the IRBA has ruled that there must be manda­tory ro­ta­tion of au­di­tors ev­ery 10 years from 2023.

Agul­has be­lieves that the lack of manda­tory ro­ta­tion has con­trib­uted to the cri­sis of pub­lic trust in the pro­fes­sion.

The prob­lem is not in­com­pe­tence or ig­no­rance about what a good-qual­ity au­dit en­tails, he says.

Although one hears them ar­gu­ing oth­er­wise, au­di­tors have an obli­ga­tion to en­sure that fi­nan­cial state­ments are a true re­flec­tion of the af­fairs of a com­pany.

They’re not merely re­quired to re­port on the fig­ures sup­plied to them by the com­pany man­age­ment.

“I think they’re fully aware that they shouldn’t just be re­port­ing on in­for­ma­tion given to them, and that they need to be more scep­ti­cal and proac­tive.”

The fact that they’re not is why the board in­tro­duced manda­tory au­dit firm ro­ta­tion, he says.

“Clearly, if you are as­so­ci­ated with a client for 100 years your scep­ti­cism de­creases. The ob­jec­tive is to get au­di­tors to ques­tion their clients.

“They are fully aware they have to chal­lenge and in­ter­ro­gate ev­ery piece of in­for­ma­tion that is given to them by their client.”

It’s not about au­dit­ing stan­dards be­ing too low, he says. High-qual­ity au­dits are about au­dit be­hav­iour, and this goes be­yond mere com­pli­ance.

He chairs an in­ter­na­tional com­mit­tee look­ing at the be­havioural com­pe­ten­cies of au­di­tors. It was started be­cause of the lack of scep­ti­cism, in­de­pen­dence and ethics in the pro­fes­sion, which are all be­havioural is­sues, he says.

The cri­sis is about au­di­tors be­hav­ing in cer­tain ways. They be­came too close to their clients, didn’t ques­tion them and didn’t look at their own in­de­pen­dence.

“Stein­hoff is a clear ex­am­ple of the is­sues we’ve iden­ti­fied play­ing out in the mar­ket. We’re not say­ing that was the rea­son for the Stein­hoff fail­ure, but clearly if you look back at the re­la­tion­ships, those are the kinds of things we warned about.”

Au­di­tors need to be crit­i­cal and have

Au­di­tors be­come com­pla­cent. Any pro­fes­sion needs to go through a cri­sis so it can re­fo­cus its at­ten­tion on where it should be

ques­tion­ing minds, but au­dit com­mit­tees do too. “The au­dit com­mit­tee must pick up on the kinds of is­sues we see caus­ing big com­pa­nies to fail. That is why the au­dit com­mit­tee is there. They have to ques­tion the au­di­tors and ques­tion the di­rec­tors.”

Ex­pe­ri­ence shows that they don’t do this with the nec­es­sary vigour if they’re too cosy with each other.

The cri­sis also high­lights the need for sep­a­rate au­dit and con­sult­ing firms, he says.

“You don’t now have au­dit firms gen­er­at­ing 80% of their in­come from au­dits and 20% from con­sult­ing, as pre­vi­ously. It’s the other way round.

“Clearly, if you have most of your ca­pac­ity fo­cused on other ser­vices the chances are you’ll ne­glect the au­dit qual­ity. We’ve seen so many au­dit fail­ures re­cently, and the qual­ity of au­dits has de­clined.”

As with manda­tory au­dit firm ro­ta­tion there is huge re­sis­tance to the idea of en­forc­ing au­dit-only firms.

Agul­has says there is still a long process to be fol­lowed be­fore sep­a­ra­tion be­comes manda­tory, but this is the in­ten­tion.

“Cer­tainly the con­cept is solid. There’s a lot of re­sis­tance so it might take some time. But clearly with the au­dit fail­ures and crises we’ve had, we need to im­ple­ment it as soon as pos­si­ble. And we need au­dit firms to sup­port us be­cause that could re­store con­fi­dence in their pro­fes­sion again.”

Agul­has says the sink­ing of black-owned au­dit firm Nkonki high­lights the need for manda­tory au­dit firm ro­ta­tion.

Nkonki an­nounced it was go­ing to liq­ui­date its Sun­ninghill op­er­a­tion af­ter au­di­tor­gen­eral Kimi Mak­wetu said it would no longer work for his of­fice be­cause it was im­pli­cated in state cap­ture.

“Nkonki is in this sit­u­a­tion be­cause they’ve re­lied for around 80% of their in­come on the work from the AG,” he says.

This high­lights the need to deal “de­ci­sively” with the fact that the big four still do around 95% of all pri­vate sec­tor work.

An im­por­tant rea­son for manda­tory ro­ta­tion was to ad­dress this. “If that had be­gun to play out in the mar­ket then black-owned firms would not be in this sit­u­a­tion where they rely largely on one client,” he says.

In ad­di­tion to af­fect­ing their in­de­pen­dence, it makes them fi­nan­cially vul­ner­a­ble and threat­ens their sus­tain­abil­ity.

“So the is­sue of mar­ket con­cen­tra­tion needs to be looked at again very se­ri­ously, be­cause what has hap­pened to Nkonki could hap­pen to any firm that has 80% of its in­come com­ing from one client.”

This clearly has im­pli­ca­tions for trans­for­ma­tion, he says. And although this is not part of the IRBA man­date, it can­not af­ford to ig­nore them.

This is also why it wants to en­force au­di­tonly firms. “Aside from en­hanc­ing au­dit qual­ity, the au­dit-only ini­tia­tive we’re look­ing at is also to in­crease ac­cess of other firms into the mar­ket,” he says.

Pic­ture: Robert Tsha­bal­ala

Bernard Agul­has, CEO of the In­de­pen­dent Reg­u­la­tory Board for Au­di­tors, has long mo­ti­vated for ro­tat­ing au­dit firms among clients. This will be the rule for South African au­dit­ing firms from 2023.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.