The recent developments relating to the auditing profession require all stakeholders to reflect on the state of the profession. ABASA – as a body representing various members within and outside the profession – has also been paying keen attention to the latest developments. It is no secret that the developments around the KPMG SA engagements with SARS and the Oakbay business group have cast the profession in a less-than-favourable light. It is also evident to all stakeholders that KPMG has a lot of work to do in addressing the loss of trust in the business itself and the profession as a whole.
As ABASA, we haven also engaged with the leadership of KPMG in recent weeks. As part of our mandate, we sought assurances from KPMG that they were proactively dealing with the issues. ABASA met with the new leadership at KPMG to discuss our concerns. ABASA seeks to ensure that transformation in the industry occurs within our lifetime. We have been vocal in the past in dealing with the matters of succession planning within KPMG which we viewed as a setback for transformation. Disappointingly, we do not feel that in the recently-announced leadership structures, KPMG has managed to deal decisively with its transformation issues. It is with great disappointment that we were made aware that the new CEO has in fact been given a temporary 24-month contract rather than a permanent post as the CEO. This is in light of the fact that the process of selecting the new leader for KPMG – through a partner vote process – will likely yield the same results from a couple of years ago. It is also a sad state of affairs that the white levels of ownership in KPMG are currently recorded at 69% – this cannot be accepted in the South African state where over 80% of the population is black. KPMG needs to take this opportunity to seriously consider the sustainability of its operations in light of its current ownership levels. A serious, committed resolution to address the current ownership patterns is critical in order to ensure that KPMG just not find itself permanently consigned to the wrong side of the transformation journey.
We would have been more comfortable with KPMG providing a tangible roadmap of how they will incorporate transformation into their succession planning. As it currently stands, we do not believe that KPMG has taken the right steps in ensuring that its transformation roadmap is feasible and progressive.
A key issue that has arisen from the recent developments is the loss of key clients for KPMG. Whilst we remain cognizant of the fact that KPMG employs a significant number of black professionals and is a significant contributor to employment in the country, we do feel that the loss of key clients is as a result of KPMG’s tentative rather than decisive approach to dealing with the current crisis. As it stands, South Africans are not in a position to understand the steps that preceded the retraction of the SARS report for example. Unfortunately that simply gives the impression that KPMG has not been fully forthcoming with the details behind what issues were at play. In a profession where perceptions count for so much, it is inevitable that KPMG will face a loss of clients. It is in our view, KPMG’s primary responsibility to ensure that the market and the public at large start believing that KPMG is being transparent in its engagements with the public. An inability to do that will exacerbate the trust deficit that is already evident.
We have noted that the Independent Regulatory Board for Auditors and the South African Institute of Chartered Accountants have both committed to initiating processed aimed at investigating the true nature of events. Whilst IRBA is the statutory body empowered to conduct investigations of this nature it is also limited in its powers as it can only investigate audit firms and registered auditors. In the KPMG case, the nature of investigations required relate to both the auditing division and the advisory division. As we currently understand it, IRBA has jurisdiction relating to the audit-related matters and not necessarily the advisory side. However, as far as the public interest is concerned, an investigation that covers the audit and advisory divisions is warranted. More importantly, such an investigation needs to be and be seen to be credible. This can only be achieved by the appointment of an independent tribunal/commission to oversee the process. We are aware that KPMG has committed to participating in such a process. However, we do not believe that KPMG itself – as an affected party – should be appointing such a tribunal. If KPMG appoints and funds such a tribunal, then public perception may not regard it as an independent and credible process. This would make public buy-in for its recommendations even more difficult.
In addition, due to the rather pervasive nature of interactions between SAICA and KPMG – as evidenced by KPMG representation on various SAICA governance structures – including the presence of the former CEO on the board of SAICA – we do not think that a SAICA-led process would be seen as independent and credible. More importantly, a SAICA-led process might be seen as a replication of the IRBA-led process. In such a case, there is a risk that the 2 processes might generate different outcomes which would further dent the credibility of the profession in the eyes of the public. In this case – even though IRBA’s mandate is limited by the Auditing Profession Act – we suspect that getting IRBA to appoint the independent tribunal to oversee both the auditing-related investigation and the advisory-related investigation would lend credibility to the process. This will assist in helping to address the trust deficit that is currently harming the profession.
Historically investigations of such a nature take a long time to complete, however we would appeal to IRBA to find ways to fast-track the process given the heightened levels of public interest in the matter.
A sad indictment of the profession is that one of its fundamental problems remains the issue of market concentration. As we have seen, most of the clients that have terminated KPMG mandates have gravitated towards appointing another Big 4 firm as the new auditors. The reality is that for a long time, the profession has seen a concentration of high-value clients centred around the Big 4 firms. This means that we have not done enough to grow the stature and capacity of the mid-size firms and the indigenous firms. Given the risk that this model poses, we do think that the profession needs to reflect on this and initiate reforms that will ensure the long-term sustainability of the profession.