2018 was a shocking year for auditors – well, some of them, KPMG in particular, which has lost more than 20 major clients since 2017. The real question is, can it survive?
The trust in the audit profession has never been lower. Just take a look at what happened at the looted VBS Bank (KPMG) and retailer Steinhoff (Deloitte), whose mysterious and opaque accounts will likely take years to unravel.
These are the financial equivalent of hiding the weapon after a murder. Public trust lies at the heart of the audit profession. We trust competent and skilled people are employed to find the weapon and disclose it to the police. Instead, we got accomplices.
The police in this case is the Independent Regulatory Board for Auditors (IRBA), which is accused of sleeping on the job. It has a tough task ahead of it to restore trust in the profession.
It’s easy to assign blame, but one must have an element of sympathy for the IRBA when one looks at the make-up of the profession. When the Guptas were in control of the country and wads of money were being hurled around like confetti, the temptation to look the other way must have been irresistible. And for some, it was.
Former finance minister Malusi Gigaba (for all his other faults, not least of which was as an alleged enabler for the Guptas) put it best when describing the audit sector in 2017: “96% of South Africa’s audit market is dominated by four multi-national firms, and some of these in the 96% have up to 120 years contracts. I fail to believe that I can remain independent while I have a 120-year contract with you.”
KPMG’s South Africa’s headcount slumped to 2,200 from 3,400 a year earlier, as the fallout from its suspect dealings with the Guptas – accused of corrupt ties to former President Jacob Zuma and his cronies – came home to roost. It has lost more than 20 listed clients since 2017. If there is a climb back from this, it will take years of toil and sweat.
Among the high profile clients KPMG lost in 2018 were Absa, the Auditor-General and Dimension Data. The loss of these three accounts alone docks nearly R300 million from KPMG’s annual revenue. Significantly, the AG barred KPMG from any government work citing “significant reputational risks”. KPMG’s name crops up again in the worst possible way through its association with the failed VBS Bank. The hemorrhage of clients is so bad one competitor believes it is in a death spiral.
According to the Financial Times, KPMG’s loss has been PwC’s gain over the same period. PwC won 11 new clients and lost four. Meanwhile, Deloitte has gained a net five new audit clients in the country, while EY has made a net gain of one.
None of the audit firms are in the clear when it comes to reputational issues. Deloitte is under pressure for its questionable audit opinions at Steinhoff and African Bank, and was berated by the finance ministry for lacking independence and objectivity in its forensic investigation into the Integrated Financial Management System (IFMS). The R4,3 billion IMFS project was conceived in 2005 to save costs by integrating human resources, payroll, financial and supply chain management functions in the public services sector. It will likely be implemented only in 2021/2.
The IRBA said 43 South Africa-listed companies had changed their auditor since the start of 2017, some as an early response to the mandatory rotation requirement.
Not surprisingly, the IRBA and its CEO Bernard Agulhas have been under pressure to act against rogue auditors and restore trust in the profession.
Agulhas told Fin24 that one of the steps taken to strengthen IRBA’s independence included the introduction of mandatory audit firm rotations, which will come into effect in 2023. The profession tried to stop the implementation of the rule, but Agulhas said it was in the best interest of the public to introduce it.
Shareholders have become more proactive in scrutinising auditor appointments, with 40% voting against the appointment of the same auditors at companies, versus just 1% in the past. There is a clear change in shareholder behaviour, who are aware of their responsibilities and acting on it.
There is another element to this saga that warrants closer inspection: the unlimited legal liability of audit firms in SA (unlike other countries, which have limited liability). That poses a massive risk to auditors, which I will cover in a separate article tomorrow.