Auditor General Kimi Makwetu told Parliament’s Standing Committee on the Auditor General that uncertainty of independent leadership at Nkonki Inc and the contagious effect of eroded trust in KPMG drove his office to cut ties with the two auditing firms.
Briefing the committee on the Auditor General’s decision to cut ties with the two auditors, Makwetu told Parliament on Friday that to continue enlisting the firms to assist in the audit of government departments and entities in all spheres of government would undermine trust in the chapter nine institution and in the South African auditing profession.
A week after the Auditor General announced that it would cut ties with the 25-year-old local firm, Nkonki Inc announced that it would go into voluntary liquidation. Barclays Africa Group announced on Thursday that it would drop KPMG as its auditor while Nedbank said it would stay the course with KPMG, at least for the 2018 financial year.
Makwetu told Parliament that the trust which it placed on external auditors it worked with in its work depended on the independence of the firms in question as well as their adherence to best practice in auditing disciplines.
“We contracted these firms in the view that they will strictly adhere to the codes of auditing. We also superimpose internal and external quality assurance to ensure that nothing is left to chance in the oversight process,” said Makwetu.
“The issue of independence and professional conduct speaks to the final product and whether it can be regarded as valid. An audit is not a physical good, but a product based on trust. The issue of independence and professional conduct is non-negotiable in building trust,” Makwetu said.
Makwetu said the Nkonki issue had to do with the firm’s independence and potential risks management environment. He said his office wanted to understand whether the shareholders were registered in the auditor profession or not.
“One of the key elements of independence for auditors is enshrined in the Auditor Professions Act which stipulates that the only firms that may be registered auditors are partnerships where all individuals are registered auditors, sole proprietorships where the owner is a registered auditor or companies which are registered by Irba,” he said.
Makwetu said the AG gave KPMG seven months after the scandals into its conduct first emerged in September to pursue and answer to the initial question of whether the risk management defects there were systemic or isolated. However, the answer emerged in the form of the VBS situation, he said.
“As far as one looks at KPMG, we crafted it to look at the whole journey as an action taken because of a systematic breakdown in the risk management and audit practice disciplines with a direct bearing on issues of trust when it comes to reports they sign off brought to us,” he said. —