NASTASSIA ARENDSE: I spoke to Warren Thompson, who is a journalist here at Moneyweb, about the KPMG press briefing that took place yesterday, and this is what he had to say.
WARREN THOMPSON: The two partners [Sipho Malaba and Dumi Tshuma] were presented with disciplinary charges on Friday at some point, and in response the two partners resigned with immediate effect from KPMG. So they are no longer employees of KPMG. KPMG accepted their resignations. KPMG then made the point that their investigation into the conduct of the two men was still going ahead, regardless of the fact that they are no longer employees.
They alluded in their press statement to financial interests of the two partners who had both been involved in the audit of VBS Mutual Bank. The one partner, Mr Malaba, was a member of KPMG’s executive committee and was what they call the “engagement partner” with VBS Mutual Bank. So anyone who read our article this morning would have seen that he actually signed off on VBS’s most recent financial statements, which was to end-March 2017.
As we learnt in the press conference, the two gentlemen had received loans from VBS Mutual Bank. The quantum was not disclosed, nor were the terms, nor was the fact that the two men were actually servicing the loans. But, according to KPMG – and we must be careful here, we are trying to source the contact details of the two partners to give them the right to reply – the two men, when questioned about the nature of their relationship with VBS misled KPMG. That seems to indicate that they attempted to conceal the relationship when asked about it. So there is an ongoing investigation and part of the investigation will try and ascertain whether the quality of the audit of VBS Mutual Bank was compromised by the fact that there were these loans made to these two gentlemen.
NASTASSIA ARENDSE: I suppose part of the investigation would also look at which came first, the loans or the audit of the company, because that would play a role as to whether it was a conflict of interest or not.
WARREN THOMPSON: Partners at audit firms are of course allowed to enter into financial arrangements with financial institutions, but they must disclose it, and they must also disclose relationships with related parties – in other words, members of the immediate family and/or entities, private companies, CCs, that the partners control or have an interest in.
But it seems the real question here, Nastassia, is: was the quality of the audit affected? We know VBS went into curatorship a month ago, so it’s effectively a decisive intervention by the South African Reserve Bank to manage a bank that appears to be in very serious trouble. One would have to ask the question why would partners at KPMG, who I estimate earn five to six million rand a year, take loans from a fairly small bank. VBS has a balance sheet of only R2.2 to R2.5 billion – very, very small in the context of South African banks. These are usually prized customers for banks. Investec targets chartered accountants and certainly partners that have incomes that make them a fairly safe bet to lend money to.
And, of course, why they concealed these relationships is I guess the million-rand question. And, ultimately, how was the quality of the audit impacted, if at all?
NASTASSIA ARENDSE: You were speaking of Investec, and I know KPMG audits Absa, Investec, Standard Bank and Nedbank as well. Will they be looking at past audits of those particular banks just to make sure that they’ve ticked all the right boxes once you give them an unqualified report?
WARREN THOMPSON: First of all, the audit of VBS Mutual Bank, which is a very small bank, is a fairly small audit for KPMG, in which only really a small team from KPMG would audit. At something like an Investec or a Nedbank, KPMG would not be the only audit company auditing the financial institution. You would typically have quite a heavy involvement from the likes of KPMG International, as well, in audits of that size. So in the case of VBS it’s a very small audit, where you could say a senior partner would have a much greater degree of influence over the audit than perhaps a bigger one. But KPMG did point out that they were in contact with the financial institutions you’ve mentioned to reassure them of the quality, and I’m sure they will be re-checking the quality of the audits in due course as well.
NASTASSIA ARENDSE: When I comes to staff or partners they mentioned that they’ll also be doing checks, just to make sure that the partners and the staff are on the right side in terms of making sure that any information we know about them thus far is accurate and doesn’t compromise work that has been done in the past or that will be done.
WARREN THOMPSON: They are calling them integrity checks. So they are going to be conducting, I imagine with the help of a third party, an investigation into what the partners disclose about relationships with other entities, especially entities where they may be involved in auditing. That’s going to be conducted every two years, as I understand it. My personal view of it is that KPMG has a very serious problem with the culture in the organisation at the moment, given some of the other things that have been revealed over the past few months, particularly in September last year, around work done for the Guptas as well as the highly contested Sars “rogue” report. I wonder if the philosophy is right. I would imagine that the people in charge of KPMG at the moment would want to purge the organisation of any senior partners because it has only really been senior people in the organisation that have fallen foul of its ethical guidelines, as far as we can tell. What it would want to do is purge it of people who have not represented the company in accordance with its own standards. And then obviously make it very clear, from a cultural point of view and a behavioural point of view, that this type of action is completely unacceptable.
Whether you create more bureaucracy by doing these integrity checks every two years – for me the philosophy isn’t right. I’d suggest you probably have the wrong people in your organisation if you have to go to a partner every two years and establish whether he has been truthful in his disclosure to the company. So I differ with them on that course of action. But, given the serious nature of what is going on there, and their role in the greater financial community and giving reassurance to investors and other stakeholders of companies that the figures published are in fact correct, they are of course entitled to take whatever action they deem necessary.
NASTASSIA ARENDSE: With regard to the event last year, did they disclose how many clients they’d lost through reputational damage, or partners that may have resigned because they would rather be associated with a different firm, as opposed to KPMG?
WARREN THOMPSON: They indicated that they’d lost, since September 2017, less than 10% of their client book. Of course, you can’t tell what that means from a value or a revenue perspective, because you could have one or two big clients that, if they removed their business, would have a very large effect on income and profitability. But the bigger problem, I think, that KPMG are facing as well, is it sounds like there are many partners that have resigned and left to go and work at other companies. If of course these people were bringing in large amounts of business for KPMG, that would be a significant flag as to the condition of their business going forward.
So it’s not pretty at the moment and I can only imagine that clients of KPMG looking at what has transpired over the weekend would be even more averse to continuing relationship if they thought that the quality of their own audit had been affected, and that’s why reviewing 200 files of audits they conducted in the past is a very significant development.