Finance Minister Nhlanhla Nene has weighed in on the calamitous state of auditing in South Africa, calling for the industry to "cleanse itself" to avoid further damage to the livelihoods of those who are innocent of any misdemeanour. This comes as another two clients said on Friday they were reassessing their relationships with KPMG.
Nene will meet with auditor-general Kimi Makwetu in the next two weeks, to ask for an explanation for axing audit firms KPMG and Nkonki Inc and what further action his office will be taking.
Nkonki Inc has since applied for voluntary liquidation, while KPMG's future has become uncertain afterBarclays Africa, a major client, signalled intentions to cut ties.
"The only way the profession in my view can cleanse itself is for the good men and women to stand firm and do what is right. It's going to take a bit of time for them to clean up their name. The audit profession has taken a beating."
Although he will meet with auditor-general Kimi Makwetu, Nene has no authority over his office and cannot reverse the axing of KPMG and Nkonki Inc.
Nene said it was unfortunate that when firms go down they take innocent employees with them.
Although he will meet with Makwetu, Nene has no authority over his office and cannot reverse the axing of the two firms.
Makwetu has already received a thumbs up from parliament. On Friday the chairperson of the standing committee on the auditor-general, Vincent Smith, said the fact that Barclays Africa had also dumped KPMG strengthened Makwetu's case.
"The standing committees on public accounts and on the auditor-general feel that what he did was proper because his reputation is the only thing that an auditor has."
Addressing the two committees Makwetu said that he would gather all the audit firms contracted in the public sector next month to decide how to proceed in the face of the industry's challenges.
"It is an industry problem. The industry is in tatters because of the lack of trust between those who are audited and auditors," Smith said.
On Friday mining firm Sibanye-Stillwater told shareholders it would vote on the future of its contract at its annual general meeting at month-end. Redefine Properties intends to terminate its KPMG contract in November.
Barclays Africa's intention to fire KPMG this week may be the final straw. The bank's audits were estimated to generate around R138-million in annual fees.
KMPG spokesperson Nqubeko Sibiya would not disclose what percentage of audit revenues was derived from the Barclays Africa account. The 250 staffers who were dedicated to the account - about 7% of its entire staff - would be redeployed, he said.
When asked about the number of clients the firm had lost since last year, when it was rocked by scandal related to state capture, Sibiya said he was not going to provide running commentary on the state of KPMG's client list. "We have engaged intensively with our clients and [they] have a good understanding of the firm's position and status of our reforms."
Barclays Africa joins a number of smaller former clients, including AVI, Sygnia Asset Management, Wits University and Telkom, to have canned KPMG's services.
At a briefing late last month, KPMG CEO Nhlamu Dlomu said the firm had lost less than 10% of its clients since late last year.
KPMG's local woes join a growing list of crises that face the global auditing firm, which is one of the big four and has become the subject of multiple investigations.
In the US, advisory group Glass Lewis called for companies to dump KPMG and questioned its role in auditing certain embattled companies. One of these is Wells Fargo, which is accused of opening 3.5 million fake accounts, charging 57000 clients for car insurance they did not need and charging unfair mortgage fees.
In the UK, the Financial Reporting Council is looking into the preparation of reports and other financial information between 2014-17 at Carillion plc after the collapse of the construction firm, which was audited by KPMG. The council is also investigating KPMG's conduct in its audits of Rolls Royce firms.
"The question is whether KPMG is too big to fail. But you only have to look back a little while at the Enron scandal to see that sometimes these issues can result in what we would call, in the risk management industry, a catastrophic risk. A lost reputation can spread like an epidemic," said Tara O'Connor, executive director of Africa Risk Consulting in London.
The Enron scandal sank auditor Arthur Andersen, formerly one of the big five firms, in the US in the early 2000s in a matter of days. The auditor's South African operation was absorbed by KPMG South Africa.
Though banks globally rely on the big four to handle large and complex audits, the disappearance of one would not pose an insurmountable challenge, said Kokkie Kooyman, a portfolio manager at Denker Capital specialising in international banks. "Most of the [big four] teams that focus on banks are fairly stretched. But if all the banks ditched KPMG its teams would be taken on by other firms."
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