Fire turned inferno for KPMG SA as Auditor General terminates contracts

JOHANNESBURG — It keeps going from bad to worse for the embattled auditing firm KPMG, which did the external audits for VBS Bank. In a deepening crisis at the auditing firm, the Auditor-General announced late on Tuesday afternoon that it was terminating all public sector auditing contracts with KPMG and Nkonki Inc. The latter company, Nkonki, has recently come under the spotlight amid a scandal involving its former chief executive Mitesh Patel. His R107m “management buyout” of the black auditing firm was funded by Gupta-linked Salim Essa. KPMG, of course, still has a hangover from its own Gupta-curse as well as the disastrous and discredited SARS Rogue Unit report. – Gareth van Zyl

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Auditor-General of South Africa media statement:

Auditor-General (AG) Kimi Makwetu has announced his office’s decision to terminate, with immediate effect, the auditing contracts with KPMG and Nkonki Inc., who do public sector audits on behalf of the AuditorGeneral of South Africa (AGSA).

Use of private audit firms

As the country’s supreme audit institution that audits South Africa’s public sector, the AGSA, due to the size of its audits, uses various private audit firms – such as KPMG and Nkonki Inc. to audit on its behalf and to augment its auditing staff.

When conducting these audits, the contracted firms stringently follow AGSA auditing standards, which include layers of rigorous internal and external, independent quality assurances and peer reviews to ensure that quality audit work is produced.

File Photo: A logo sits on display outside the offices of KPMG LLP in the Canary Wharf business and shopping district in London, UK. Photographer: Simon Dawson/Bloomberg

In addition to this, the core pillars that define the foundation of our profession are independence, professional competence and ethics. Once these have been fundamentally impacted, we are called upon to review and reassess our position.

Decision to totally terminate audit contracts

Last year Makwetu announced that his office, while waiting for various investigations into matters raised in the 2017 report titled ‘KPMG South Africa leadership changes and key findings arising from KPMG International investigation’, would continue to secure the services of KPMG SA, limited to the audits that were already allocated to the firm at the time.

Makwetu says recent media reports relating to the external audit of VBS Mutual Bank and the conduct of KPMG audit partners are some of the reasons that prompted the decision to withdraw all KPMG audit mandates with immediate effect.

On the termination of Nkonki Inc.’s contract, Makwetu said recent media reports on matters arising from the shareholder transactions involving the firm were of “grave concern and pose significant risk on the reputation of my office through the statutory audits contracted” to Nkonki Inc.

Maintaining accountability

Says Makwetu: “As South Africa’s supreme audit institution, this country looks up to us to act and project an image of accountability, the same way we hold the entire public sector to account on how it uses taxpayers’ monies.

This is one of the tenets that have anchored this organisation for over 100 years, and we encourage all our employees and contracted audit firms to conduct themselves in a manner that will not erode this long-standing legacy.

“While we have adopted the International Standards of Auditing, which we follow and adhere to whenever we conduct our audits, it is also worth noting that all audit work performed by AGSA employees or contracted audit firms is subject to a series of rigorous internal and external quality control measures.”

The AG says these terminations are not a judgement on the capabilities or integrity of the professionals that work in the firms, but are recognition of the significant reputational risks associated with matters that affect them at present.

We will continue to engage with both firms as they focus on their internal systems and the external, industry investigations, in the case of KPMG. “Our priority now is to closely work with all interested stakeholders in the quest to maintain and further improve the confidence that the public places on the external audit function in the public sector. We are also part of endeavours to help mend the image of the accounting/auditing profession, which has received some reputational dents – most of these self-inflicted – in the recent past,” concludes Makwetu.


KPMG South Africa fights for survival as public image shattered

By Renee Bonorchis

(Bloomberg) – KPMG LLP’s South African unit is flying in trouble shooters from around the globe and hurriedly meeting clients to stem any further loss of business after becoming embroiled in three evolving scandals.

Over the past eight months, the auditor issued a public apology for work done for the politically connected Gupta family, withdrew the findings of a report about the country’s tax authority, and interrogated staff who signed off on VBS Mutual Bank’s accounts before it failed. In meetings over the weekend in Johannesburg, directors came up with three ways to convince its customers that the audit firm still deserves its fees. That didn’t stop it losing one of its biggest clients on Tuesday, the government’s Auditor-General.

The Gupta Effect. More magic available at www.zapiro.com.

“We’ve reached the breaking point,” Chairman Wiseman Nkuhlu told reporters on Sunday, before pledging to vet KPMG’s more than 3,000 staff spread across two large buildings in central Johannesburg every two years for warning signs of malpractice. He’s also called in international colleagues to help probe the quality of past audits and set up a hotline for employees to report corruption. “Owning up to the fact that things are broken is very important,” the 74-year-old said.

Worried Clients

KPMG South Africa’s VBS crisis erupted last week when two of its partners resigned instead of facing disciplinary proceedings for not disclosing financial interests related to the bank. The company last year lost publicly traded clients including clothing retailer The Foschini Group Ltd. and financial services firm Sasfin Holdings Ltd. After the Auditor-General cut ties, KPMG can’t afford to further risk its biggest business — the auditing of four of South Africa’s six largest lenders.

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Standard Bank Group Ltd., Africa’s largest lender by assets, is assessing the latest “adverse information,” a spokesman said, while Nedbank Group Ltd. said it can’t practically change auditors this year because parent company Old Mutual Plc is splitting into four separate units. Barclays Africa Group Ltd. said its board will discuss KPMG’s role in the collapse of VBS next month, and Investec Plc said it was scrutinizing an ongoing audit by KPMG into financials for the 2017 fiscal year.

KPMG didn’t immediately respond to requests for comment on the banks’ reaction.

While South African banks are required by regulators to have two auditors and there’s a scarcity of alternative candidates, KPMG is “fairly certain” to lose more clients, said Iraj Abedian, the head of Pan-African Investments and Research Services, who has consulted with Nkuhlu about the auditor’s strategy. The latest measures are not enough “by a long shot,” he said.

Global Woes

VBS’s administrator withdrew the bank’s 2017 annual financial statements on Monday, saying they contained “material mis-statements.” That followed KPMG’s admission last year that parts of a 2016 report on a so-called rogue unit at the country’s tax authority “should no longer be relied upon.” And an internal investigation into work done for Gupta-linked companies including Oakbay Resources and Energy Ltd. found the auditor fell short of its own standards and eight senior executives quit.

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KPMG’s woes aren’t confined to South Africa. In August the firm agreed to pay more than $6.2 million to resolve allegations that it didn’t adequately audit U.S. oil and gas company Miller Energy Resources Inc. Then this year the U.K. Financial Reporting Council opened a probe into KPMG’s audits of Carillion Plc, the builder that collapsed under a mountain of debt in January.

Another consequence for KPMG South Africa has been a higher-than-normal rate of senior departures, according to Chief Executive Officer Nhlamu Dlomu. Chief Economist and Partner Lullu Krugel has joined PricewaterhouseCoopers LLP’s South African unit, alongside fellow economics specialists Christie Viljoen and Maura Feddersen.

Investigations Abound

In South Africa, KPMG is facing three probes. The Independent Regulatory Board for Auditors and the South African Institute of Chartered Accountants are both investigating the company, while a commission of inquiry has been set up by the government to investigate allegations that the Gupta family siphoned off state money and influenced ministerial appointments. The Guptas, who have left South Africa, have denied wrongdoing. But for KPMG, sanctions could range from fines to being forced to close down.

“KPMG still believes its problems are such that it can manage by adding layers of ‘new measures’ and ‘new promises’ on top of a broken organizational culture and operational codes of behavior,” Abedian said. KPMG needs to set up an independent team of people who aren’t linked to the company to probe “what went wrong, why it happened, and put out a public report irrespective of the consequences,” he said.