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.
KPMG South Africa’s VBS crisis erupted 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 biggest bank 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 the auditor’s current work on the lender’s 2017 fiscal year.
‘Temporary Break’
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.
VBS’s administrator withdrew the bank’s 2017 annual financial statements on Monday, saying they contained “material misstatements.” 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 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 probe 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 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.
