KPMG SA fights for survival as public image shattered

The auditing firm is struggling to stay afloat amid the latest scandal regarding VBS Bank.
Government was the latest client to drop the firm on Tuesday with the Auditor-General announced that all contracts had been terminated with immediate effect. Picture: Reuters

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.

“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.

Read More: Auditor-General cancels all contracts with KPMG

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.

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 scrutinising 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. In a statement on losing the Auditor-General’s contract on Tuesday, KPMG said the company is taking significant steps toward improvement and that it hopes “it will prove to only be a temporary break in the relationship.”

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.

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 US oil and gas company Miller Energy Resources Inc. Then this year the UK 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 PwC 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.

Letters have been issued to the two KPMG partners who resigned over the VBS work notifying them of a regulatory investigation, Irba said in an emailed statement. More broadly, the regulator wants to see auditors separate their advisory services to stem the decline in audit quality in South Africa, which is consistent with global trends, Irba said.

“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 organisational culture and operational codes of behaviour,” 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.

© 2018 Bloomberg L.P

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Methinks they have now finally been ”find out”….their shenanigans, starting with the JCI debacle in the early 2000’s, by shamelessly and arrogantly contravening the Companies and FICA ACT by not issuing compliant financial statements in line with International standards etc…

Most reputable listed companies, like banks, will now have to follow suit – tell them to make like ”Donald and Duck”

The VBS Mutual Bank debacle must surely be the ”cherry on the cake”..

I would be very very worried, if I was Investec…tghe major beneficiary of all Brett Kebbles theft and KPMG, turning a ”blind eye” !

Why exactly is Iraj Abedian commenting? Last time I checked he was an economist with no auditing qualifications.

I know this is not to the point, but the “usual suspects” – of which Iraj is one – that features on every financial media platform irritates me no end. They have an opinion about everything under the sun and make these broad, sweeping statements without have done any real research or analysis.

SAICA and IRBA could and should have seen this coming a very long time ago. Are the gentlemen in question here being investigated by either of these bodies? Were the partners involved in the Gupta Estina fraud investigated? Is Markus Jooste being investigated?

Hahahahaha!! I had a good laugh when I read your comment, Sir/Mam.

To this very day, I have yet to see/hear any statement from SAICA about Anoj Singh’s deeds at Eskom. I, therefore, do not expect to hear/see anything from SAICA about about KPMG and/or Mr Jooste.

Iraj is a qualified CA and came from the profession!

Thats not factually correct. He holds a B.A, M.A and Doctorate in Economics.

This company just needs to leave our country and go wherever it originated. With the sort of scandals they have been involved with, suffice it to say that they are lucky not to have some in their management behind bars already and pulling some serious time for their variable crimes. I am not interested in having any company that I invest with to be involved with KPMG, for I cannot be certain that their audits and assurances are any good. If, I find that any of the companies I invest in continue to keep them, I divest without delay, lest I end up belly up like VBS. This company is toxic..no sensible and serious company should be dealing with them, in my humble opinion. Have they not caused enough harm already? #EnoughAlreadyHambaVoetsek!

If banks have to have two auditors who was VBS’s other auditor and why did they not pick up any problem?

KPMG, as I understand, are/were the lead auditors. The other fish audit firm is/was just supporting KPMG by providing ancillary audit services.

If they can’t even audit a small bank like VBS properly, how on earth can they be trusted with the audits of Nedcor and Standard Bank?? I don’t think KPMG is going to survive this one.

You can include Old Mutual in that group. Makes you wonder when large corporates hang on to dodgy auditors. There must be a reason.

Let it crash and burn like Arthur Andersen so it can become a case study for students in finance and a warning to Toilette & Douche and PricksWithCalculators.

@ps – you just made my day with your analysis of our esteemed firms. /Really funny comment.
For me the other company to crash and burn is SAP. They undertook an Industrial Espionage program against our small company and I just dont have the cash to engage Paul O’Sullivan to assist (they were caught doing the same thing against Oracle and had to pay $1,2BN in damages). He says we have a very strong case.

India banned PWC from operating there for 2 years following their involvement in the collapse of a huge IT company. Investors lost around $2bil and the regulators acted. Here we are still waiting to hear who will be held accountable for the Steinhoff demise. KPMG should be banned for their role in state capture alone ……!!

Time to do an Arthur Anderson and distribute the good guys (probably the vast majority of the 3,000) to the other 3 big ‘uns.

Time for Grant Thornton and BDO to step up in SA too.

End of comments.

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