KPMG and auditing: the good, the bad and the ugly

THE recent KPMG auditing saga in South Africa has reignited a perennial debate as to who audits the auditor.

It seems that it was only yesterday that the world was rocked with a similar problem when the role of auditing agencies in the great global banking and financial crisis emerged in 2008.

In general, we were informed that two auditing firms, Arthur Andersen (in the case of Enron) and Ernst & Young (in the case of Lehman Brothers) two of the world’s leading auditing firms had been responsible for investment clients losing their life savings because of a moral lapse on the part of these auditors.

Immediately after the global financial crisis of 2008, we were notified that the culprits would be severely dealt with and more “stringent” regulatory measures would prevent a repetition of such transgressions against humanity in the future.

The financial industry was reassured, and in the case of the US, some banks and financial houses were propped up with treasury grants at the expense of the general public.

No one bothered about the negative effects on the millions of victims who had lost their life savings in this “crime caper” of the century.

Closer home, we are back to ground zero with the KPMG offence. The proverbial “Pied Piper” has been caught out. “He” has trumpeted his master’s tune once too often.

After initialling denying its complicity, KPMG has admitted that it was cutting off all fiduciary ties with Gupta-related companies and that it regretfully erred in its “report” to Sars regarding the complicity of Pravin Gordhan (former financial minister) and Ivan Pillay (former deputy commissioner of Sars) in the “rogue unit” drama. Besides these two, many other members of the Treasury were implicated through the KPMG report and have since lost their jobs.

While still denying any guilt, KPMG has gracelessly apologised for its indiscretion and has promised to return the R23 million to Sars, and to disperse R40m it earned through shady deals with the Gupta-associated companies to charitable and other worthy organisations.

Eight senior members of the organisation have since resigned without any recourse to punishment. It is almost like an “eye for an eye” in reverse. How absurd? Perhaps it has reassured KPMG that it is done some right?

Notwithstanding the above, a few critical questions emerge from this unfortunate fiasco.

● How will those adversely affected by the KPMG wrongdoings be compensated?

● How will KPMG restore the integrity of those were affected?

● Can one put a quantum to the grief experienced by the affected parties?

● Is a simple apology by KPMG to those affected good enough?

● Will social justice be served?

● What assurance can KPMG give to the nation that it will not commit a similar or perhaps worse misdeed in the future?

● Will those responsible for defeating the ends of justice be appropriately punished?

The last question is of particular relevance to the assurances given to the world by auditing firms in the aftermath of the global financial crisis of 2008 – that they would operate morally and ethically in the future.

The case of KPMG’s transgression in South Africa raises even bigger and more profound questions about the integrity of auditing firms.

Globally, it would seem corporates cannot afford to disappoint their clients’ expectancy in terms of financial outcomes and in response they push their earnings up to the point of deception.

Reacting to this scenario, auditing firms overlook this fancy footwork of cheating because they are too preoccupied with the desire to preserve lucrative auditing and consulting contracts.

In essence, auditing has devolved into a numbers game and auditing firms have strayed from their prime role of verifying financial accounts for the benefit of all stakeholders, to become “mercenaries of fortune”.

Because auditing firms have quasi-public responsibilities and need to show greater accountability, they should reveal more about how they operate. On the contrary, rather than being the custodians of corporate governance, the bastions of anti-corruption measures, the candid reporters of the financial health of companies and upholding the clients’ interests in company accounts, auditing firms have metamorphosed to become avaricious.

Within the context of the unfolding national drama, it is important to recognise that this calamity is not just about KPMG.

Confidence

We need to review the entire system of corporate governance – auditors, corporate boards, investment bankers, and accountants who operate and regulate the financial industry.

For after all, the confidence of all stakeholders, especially the investors depends on honest, moral, ethical and independent gatekeepers.

Sadly, the KPMG fiasco reveals that the auditing system is urgently in need of radical transformation.

At the same time, the KPMG crisis is an opportunity to reinvigorate the checks and balances in the auditing system.

Bringing more transparency to audited statements, ensuring the independence of public-company auditors, ending the numbers games that companies play and revealing analysts’ conflicts can help restore public confidence in our auditing firms.

We are also compelled to return to the initial question: Who audits the auditor?

Fortunately, South Africa has an Independent Regulatory Board for Auditors (IRVA) and it needs to be revitalised to deal cogently with the types of challenges that have emerged in the KPMG saga. This is the possibly the best way to ensure that auditors live up to their reputation as the gatekeepers against corruption.

Besides being independent, financially and otherwise, this agency should set stringent auditing standards, obtain testimony and documents, and discipline unprofessional conduct.

In the interest of transparency, its conclusions should be made public. The auditing profession will have to earn the trust, respect, and confidence of the general public in South Africa through mutual respect, objectivity, competence, integrity, discipline, and diligence. It has to be beyond reach and need not be subject to an independent audit.

Equally, we need to seize the moment to applaud those who have upheld against some very difficult odds the virtues of the noble occupation of auditors and ensure that they are protected and not tainted by the broad-stroke brush that paints the misdeeds of the rotten eggs in the profession.

Finally, the auditing profession needs to heed the prophetic words of Henry Kravis: “If you don’t have integrity, you have nothing. You can’t buy it. You can have all the money in the world, but if you are not a moral and ethical person, you really have nothing.”

The auditing profession will have to earn the trust, respect and confidence of the general public