JOHANNESBURG — South Africa is regarded as a world leader in auditing and reporting standards and yet the country finds itself having to deal with the awkward situation of KPMG having produced questionable work for the Guptas. While this may be a rare slip-up, it’s resulted in a lot of South Africans asking whether local audit firms can be trusted. Of course, the bad work of a few shouldn’t be a blight on the entire industry. But these events should serve as a reminder that nobody is invisible. Regular BizNews contributor Glynnis Carthy raises some cogent points in this piece about the industry. – Gareth van Zyl
By Glynnis Carthy*
Almost a year ago I wrote an article for BizNews article titled “Business’s PG support good, but where are Van Rooyen-praising accountants?” In it, I wrote:
While having a quick read through the list of the 81 captains of industry in the article “Captains of industry who back Gordhan in war against #Zupta – 81 and counting”, I was struck by the apparent lack of response from Chartered Accountants and professional services firms in South Africa. I wondered whether other professional services firms, for example legal firms, were equally silent?? So…I put my bean counter hat on, opened a spreadsheet and started analysing…
Of the 81 captains of industry, only 1 – KPMG – represents the accounting and auditing industry. How sad is that?
A big thank you to KPMG – you are a great example of leadership. We, the Chartered Accountants, one of the supposed group of leaders, are silent while other industries have the courage to stand up and lead”
With all the recent news on KPMG, the SARS report and its link to the Guptas, it appears that KPMG had two hats on – with some parts digging Gordhan’s grave and other parts standing up to support him. How sad that the “rogue” people at KPMG were undermining their colleagues who do contribute to the great example of leadership.
This unfortunate saga raises many issues:
Mandatory audit firm rotation
As a start, is it possible that the Independent Regulatory Board for Auditors (“IRBA”) has been right all along about mandatory audit firm rotation (“MAFR”)? The audit firms were up in arms when MAFR was proposed. In fact, there was also a lack of support from the CFO Forum, a forum of the chief financial officers of the top 100 JSE-listed companies. Even the South African Institute of Chartered Accountants (“SAICA”) became excited about MAFR and has a whole page dedicated to it:
My view on MAFR was that the IRBA seemed to be overreacting because it had not provided examples of instances where audit firms had failed to act in an independent manner. Had IRBA provided proof that this was an area of concern, the whole debate might have been different. While I am not saying that MAFR is necessary nor that it will achieve the outcomes that the IRBA expects it to, KPMG you have played right into the IRBA’s hands. In fact, it reminds me of a Tom and Jerry cartoon – with the IRBA (being Tom) just waiting to pounce on the mouse (the auditors, but particularly the big 4 audit firms).
The sad part is that we are sorely mistaken if we think that KPMG is the only renegade. I bet the same problems exist in some other audit firms too.
IRBA selection of audit firms and audit files that it will review
Any audit firm and auditor who audits a listed company or is deemed to be a public interest entity is subject to frequent reviews by the IRBA. The IRBA reports are not published so it is currently difficult for the public to assess the quality of an audit firm and / or audit partner (but this a subject for another day).
However, does the IRBA automatically flag the audit files for an inspection when an audit firm resigns from a client – particularly in a high-profile case when KPMG, as the auditor for all Gupta-owned and -controlled businesses, resigned in March 2016? Does the IRBA make a “note-to-self” to select the future audit files and focus on the firm that took over as auditors? In the KPMG example of Oakbay, this is SizweNtsalubaGobodo? Does the IRBA look-out for reports of possible corruption, scandals, fraud etc. and select those auditors and files for a review as soon as possible? Have the auditors and audit files of Eskom, Transnet, SABC, SAA, Nova Property Group, to name a few, been subjected to a recent inspection? If yes, were the inspections satisfactory?
Application of professional scepticism
After KPMG resigned as the Gupta auditors, we started seeing the sponsors of listed companies and the banking industry taking a stand. Perhaps one benefit of the KPMG saga is that the auditors will also start taking a stand. I suspect that companies might increasingly see their auditors as “being a pain” when the auditors focus more on quality control, independence, auditing standards, financial reporting standards and applying ‘professional scepticism’, which is defined as:
“An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.”
KPMG: Sorry, we screwed up, we take it back. SARS: No, you didn't screw up, your only mistake was admitting that you screwed up #KPMG
— Max du Preez (@MaxduPreez) September 18, 2017
Corruption – public versus private sector
In South Africa one of our favourite topics is corruption in the public sector. Without detracting from the severity thereof, the KPMG saga serves as a reminder that the private sector is no angel. It has also given the public-sector ammunition and thereby could provide a distraction. The focus of South Africa may switch to the private sector and therefore conceal what we might be looking for in the public sector.
We should be careful to focus on all corruption – in other words, let’s address it in both the public and private sectors.
- Glynnis Carthy is a chartered accountant based in England. She is an independent financial reporting advisor and previously worked at Deloitte.