Battered KPMG stays afloat

KPMG, in the wake of a string of corporate governance scandals, has so far survived an exodus of clients in the public and private sectors, the latest being the auditor general and Absa Barclays. But commentators are split about whether the worst is behind it or whether it has just begun.

Iraj Abedian, an economist and the chief executive of Pan-African Investments and Research Services, said the exodus was evidence that KPMG was “sinking slowly” and it would soon become clear that the company was not salvageable.

But Gavin Price, a senior lecturer at the University of Pretoria’s Gordon Institute of Business Science, said the firm would eventually bounce back. “I don’t think it is the end. It may be the end of bonuses for a time.”

The fallout follows KPMG’s role in state capture, which was called into question last year after its audit of a Gupta-linked entity through which state funds were laundered and for penning of a report for the South African Revenue Services that was used in a bid to oust Sars employees and then finance minister Pravin Gordhan.

The next blow to the firm’s reputation came last month when two KPMG partners responsible for auditing VBS Mutual Bank resigned before disciplinary charges were laid against them. They had reportedly not disclosed the full extent of their financial interests in relation to the embattled bank, which was placed under curatorship last month. The Independent Regulatory Board for Auditors has launched a multifaceted investigation into KPMG and will now also review the firm’s turnaround strategy.

In April, the auditor general announced he would withdraw all KPMG audit mandates.

Abedian said Old Mutual’s completion of unbundling, which the firm is managing for them, would be a key moment. “When that is done, KPMG will be sacked … For me that will be the tipping point.”

Another would be if the South African Reserve Bank did away with a requirement for major banks to have two external auditors. “Then, for sure, Standard Bank will sack them too,” he said.

But Price said, despite Absa’s bold move, South Africa’s regulatory environment was conducive to KPMG’s survival.

Besides the major banks having to have two external auditors, the banks must rotate their auditors every five years and the pool of recognised service providers was limited. To cut ties with KPMG would make compliance difficult.

“Excos [executive committees] will rationalise the decision [to keep KPMG on] in this way,” said Price. “They will say ‘what else can we do?’ and they would have satisfied themselves.”

The auditor general’s office would not say how much of its outsourced work had been going to KPMG. In the 2016-2017 financial year, the auditor general’s office spent R584-million on outsourced expertise.

In the case of Absa, KPMG was the joint auditor, with EY, and the two billed the bank R190-million for their services in 2017.

Price said the losses suffered by KPMG appeared to have been self-inflicted because of the inadequate way in which it had addressed the issues. But he thought the firm was saved by the fact that in all cases top management staffers were not the real culprits. “As bad as it is, I don’t think it deserves a death sentence,” he said.

KPMG South Africa said its staff attrition levels were “slightly higher than usual” at the moment. “However, we continue to secure work, to have the skills and talent to serve our clients’ needs.”

The firm said it took comfort from the support from the majority of its clients and employees during this time. “Although some clients have made the decision to end their association with KPMG, we are proud of the dedication and work performed by our engagement teams.”

What could the South African scandal mean for KPMG’s big four status? Probably not much, according to one audit industry insider. That was determined by the volume of work and not the regulators, said the insider, who asked not to be named.

Globally, KPMG revenue has grown to $26.4-billion. KPMG has more than 700 offices in 152 countries and employs almost 189 000 people.

The insider said the rest of the world was unlikely to take much notice of KPMG’s disgrace in South Africa. The firm was also facing reputational risks elsewhere.

In January the United States Securities and Exchange Commission (SEC) charged three KPMG directors for their alleged involvement in the sharing and misuse of confidential information about planned inspections by the Public Company Accounting Oversight Board of KPMG.

According to The New York Times, the federal government revealed in September 2016 that Wells Fargo, a major bank, had been opening new accounts and issuing credit cards in its customers’ names without telling them. About 3.5-million fraudulent accounts were created. Wells Fargo also agreed to pay a $1-billion fine to regulators for improper fees charged by its vehicle and mortgage businesses.

Last month, shareholders put pressure on the bank not to reappoint KPMG as its auditors. General Electric (GE) was also urged to ditch the firm after a 109-year relationship. In January, the SEC began investigating GE’s accounting practices.

But both companies reappointed KPMG as their auditors at their annual general meetings in April.

In Britain, the firm is being investigated by the accounting watchdog, the Financial Reporting Council, for its role in the collapse of construction firm Carillion.

According to The Guardian, Carillion went into compulsory liquidation in January with debts of £1.3-billion, a pension deficit of nearly £1-billion and many unfinished public contracts.

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