Lessons from KPMG
TIES SEVERED: FIRMS OUGHT TO BE CAREFUL WHO THEY WORK FOR
In the court of public opinion, you may be found guilty by association.
When Barclays Africa announced it would sever ties with its external auditor, KPMG, it said it could no longer support its reappointment in light of “ongoing and more recent developments”.
After KPMG admitted its processes failed when it conducted work for Gupta-owned companies and had to withdraw parts of a forensic report into the “covert” SA Revenue Service unit, recent admissions that partners didn’t fully declare their interests while auditing VBS Mutual Bank seem to have been the last straw.
Barclays said it was “satisfied with the quality of the audit of the 2017 annual financial statements”. And in case this wasn’t enough to allay fears, it added: “[The audit] was conducted jointly with EY.”
Reputation is of utmost importance to any bank; banking is built on trust, said Professor Jannie Rossouw, School of Economic and Business Sciences head at Wits, in a recent radio interview.
When Redefine Properties announced its separation from KPMG a day after, CEO Andrew Konig was more frank: “Redefine’s reputation is everything and our decision was made for this reason.”
Yet, KPMG is a large organisation with several branches in various cities, and unfortunately certain practices in some offices have tarnished the whole firm’s reputation, Rossouw added.
The firm should take responsibility for its transgressions and deserves a lot of the criticism it has received. But one has to feel for the many hardworking employees who have devoted years (sometimes decades) of their careers to KPMG and whose credibility and capability have been called into question, even though they had nothing to do with the transgressions.
What complicates matters in the financial services realm is that there’s often a difference between what the public expects professionals to do and what they’re actually paid for.
The public mandate is often much broader and sets the bar much higher.
How could Deloitte have missed the accounting irregularities that led to Steinhoff’s demise, people ask.
If this was a case of serious fraud, it would have been highly sophisticated and well concealed, Karl Leinberger, Coronation Fund Managers CIO, wrote in a note to clients in January.
“David Young, a professor of accounting and control at graduate business school INSEAD, who analysed Steinhoff’s financial statements post the events of December, concluded that these off-balance sheet structures could not have been uncovered using the group’s annual financial statements or other publicly available information.”
With reputational risk, right or wrong isn’t necessarily straightforward.
Firms with strong consumer brands (banks and retailers especially) run significant reputational risk if they find themselves on the wrong side of public opinion.
Had KPMG declined to do work for politically-exposed parties years ago, much of the damage could probably have been avoided.
In walking away from KPMG – even though there’s currently no reason to believe the auditing work it has done for Barclays Africa is anything but of the highest standards – Barclays Africa is perhaps pre-emptively doing what KPMG should have done years ago: carefully weighing up who it gets into bed with.