Something isn’t adding up about the auditing profession
Auditor general’s broadside pinpoints disastrous management that infects the entire SA industry
When auditor general Kimi Makwetu announced this week that he would terminate all government contracts with KPMG and Nkonki, he was scathing not only about the two audit firms but about the entire audit profession in SA.
And who can blame him? KPMG’s disastrous audit relationship with failed VBS Mutual Bank was the final straw at the firm, which has blown the second chance it was given after its Gupta and SARS work almost caused it to implode last year.
Nkonki sold itself to the Guptas, it seems, without considering how this might affect its independence or integrity.
But the list goes on and on. KPMG was VBS’s external auditor but PwC was the failed bank’s internal auditor. It hasn’t faced the same kind of scrutiny but it surely should, given the horror story that’s starting to emerge about VBS’s financial and liquidity management (or lack thereof). PwC was already in the news for the unqualified audit reports it had for years given the effectively bankrupt SA Airways.Then there is Deloitte, which signed off Steinhoff’s audits, at home and abroad , and evidently missed some catastrophic misstatements along the way. The Independent Regulatory Board for Auditors plans to investigate: Deloitte is under investigation already for its role in auditing failed African Bank.
The smallest of the big four audit firms, EY, has managed to keep its head below the scandal parapets locally but hardly globally, where it’s been embroiled in audit scandals in the UK, as have competitors including KPMG.
Something clearly needs to be done about the profession, but what? The regulatory board’s CEO Bernard Agulhas has proposed creating “audit only” firms, which would entail forcing firms to split their audit and advisory arms in a bid to ensure independence and quality. He is following the UK regulator, which also recently proposed this.
But it’s hard to see how this would help. Regulators often seek to solve problems with new rules and new structures. But the integrity and oversight failures at South Africa’s big audit firms were failures not of structure but of values and ethics – not to mention sheer common sense.This is a profession that seems to have lost its way, lost the values which used to anchor it. And in the view of some veterans, that is because the big firms see themselves primarily as businesses, not professions. “The leadership is focused more on profit per partner than it is on serving clients or the public,” says one seasoned chartered accountant.
No one expects them to do it for free, but auditors have a particular responsibility and role in terms of providing comfort to companies, public and private, as well as to financial markets, governments and the public at large on the integrity of the numbers. Public trust is crucial for the profession; each scandal has dented that trust, which is tragic, given how many excellent people there are in the profession, and how important a part is it of SA’s economic fabric.
But if the profession is to recover from the beating it has taken, it will have to start by understanding the nature and extent of the crisis it is in – and anyone who doesn’t think it’s a crisis should have heard what Makwetu had to say this week. Only then can it start to address that trust deficit.It’s quite urgent that it does, particularly with regard to SA’s banking sector where the “big four” audit firms are all-powerful. In SA, and globally, only very large audit firms with specialist financial services practices have the capacity to audit large, complex banking groups. Only the “big four” audit SA’s “big five” banks. In theory, there are a host of good second-tier firms that might do it, but in practice the big four have built specialised financial services practices, with expert systems and people, over a long period. That can’t easily be replicated. And where a big four firm might typically have 90 to 120 people working on a single big bank audit, some second-tier firms only have 30 people in total in their financial services practices.
In theory then, more competition in auditing big banks would be a fine thing. But in practice it’s unlikely to happen, at least in the short term and, if KPMG were to go down, that would simply make an already concentrated market even more concentrated, reducing the big four to a big three.