Is SA sleepwalking its way into the collapse of a major audit firm, KPMG, through an overdeveloped sense of virtue signalling by essentially political actors?
Or is KPMG really beyond redemption, and should South Africans plan for the demise of the local firm — even though it would increase the concentration of big auditing firms and therefore auditing costs?
The problem is that there are good arguments on both sides. Let’s take the "sleepwalking" argument first. Barclays Africa on Thursday became the first major bank to boot KPMG and it did so conscious, obviously, that this could cause a kind of avalanche effect.
The problem for Absa — and therefore by implication for KPMG — is that the bank is losing clients because of its association with KPMG, and this is not something the bank can really control. The balance of risk, therefore, inclines the bank to cut ties, as it has for several other organisations.
That list is now getting ominously large; it now includes Foschini, Munich Re of Africa, Sasfin, Sygnia Asset Management, AVI, Hulisani, Wits University and Telkom. And, very importantly, the auditor-general.
The departure of these firms and state institutions creates its own snowball effect among staff, who have to wonder what the outcome of this will be. The effect is intensified because those who jump first are most likely to catch a lifeboat.
— THE BANK IS LOSING CLIENTS BECAUSE OF ITS ASSOCIATION WITH KPMG AND THIS IS NOT SOMETHING THE BANK CAN REALLY CONTROL.
The rival auditing firms are also faced with a timing dilemma. They know that accepting whole teams from another firm is likely to hasten KPMG’s demise, but turning them down will leave them vulnerable to losing their competitive position with the remaining competition.
In a sense, the other members of the big four auditors are forced to at least scenario plan for a smaller, more concentrated pool.
For KPMG, this is all horrible, but perhaps deservedly so. However, even if you agree that the firm has brought its troubles upon itself, one should at least consider whether the demise of the firm is in the best interests of the country.
What about the other side of the equation? The position of all concerned could have been considerably eased had KPMG not kept shooting itself in the foot. After the South African Revenue Service (SARS) and Gupta fiascos, the firm promised to clean house thoroughly. It was a difficult task but with a bit of goodwill and sensible planning, it was doable.
However, two things have now changed that picture dramatically. The first is the on-off internal investigation. Whatever its confused status, and the status of the Independent Regulatory Board for Auditors (Irba) investigation, no public explanation has been provided for what actually happened during the SARS-Gupta fiascos.
By passing the hot potato back and forth between them, KPMG and Irba have confused the situation and undermined KPMG’s attempt at a clean break.
Compare this with the actions of McKinsey, SAP and EOH, which were absolutely all over their clients, explaining, updating, making sure their systems were reviewed top to bottom.
Then the VBS bank issue exploded onto the scene. Essentially, what happened is that the head of the banking practice at KPMG took a loan from VBS, a bank the firm was auditing. KPMG found out and told the partner to pay the money back, which he said he did but it turns out he did not. As we all know, the bank involved went bust.
It’s easy to jump the gun here and we don’t know all the facts, but what we do know is enough to take one’s breath away — as it must have for the poor remaining partnership core. It’s impossible not to have sympathy with them, even as you wonder how on earth any responsible partner couldn’t recognise the obvious conflict of interest, never mind the mendacity. It might have been a partner gone rogue, it might not. We don’t know.
Whatever position you adopt, what we all should agree on, and agree on fast, is what SA needs — and that should be led by the Reserve Bank, the finance ministry and Irba, acting together. And did I mention quickly?
• Cohen is Business Day senior editor.
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