THE BLOG

KMPG Must Just Decide Who And What It Is Already

Whether this steady flow of revelations will be the proverbial death by a thousand cuts for KPMG SA, only time will tell.

10/10/2017 03:58 SAST
KPMG SA

The daily drip, drip, drip of bad news with companies calling it quits on their relationship with KPMG SA and more questionable reports coming to light must be pretty painful for KPMG, which was once called the fastest-growing of the Big Four accounting firms. Whether this steady flow of revelations will be the proverbial death by a thousand cuts for KPMG SA, only time will tell.

The recent call by Nedbank and Investec for KPMG SA to release the results of the independent investigation that was led by a senior partner from KPMG International, with law firm Norton Rose Fulbright as external counsel, is placing pressure on the South African arm of the auditing giant, which is looking more and more like a deer caught in the headlights as it seems unable to competently deal with the crisis at hand.

The laudable intention of the new CEO Nhlamu Dlomu to regain the public's confidence is being diluted by the strategy it seems to be following -- the hunkering down of KPMG Crescent, hoping to sit out the storm. Its media silence while meeting some -- but not all -- of those affected by the Sars report does not engender any confidence that the company is serious in its attempt to deal with the damage its lack of professionalism caused.

However, it was the lacklustre appearance of the KPMG SA top brass before Parliament's standing committee on public accounts (Scopa) that clearly showed that the beleaguered auditing firm remains willfully ignorant of the extent of the crises it faces.

The independent investigation announced by KPMG International chairperson, John Veihmeyer, will try to determine whether evidence exists that KPMG SA partners or staff were involved in illegal activities by the Gupta family and their businesses as well as establishing whether there were any failings or collusion in the Sars report. Missing from the Veihmeyer announcement was, however, a call for other South Africans who were affected by questionable investigations and reports conducted by KPMG SA to come forward.

This omission makes Veihmeyer's plan to do all that is needed in order to regain public trust, and the company's intention to seek to actively address the public's concerns, look as if KPMG is only trying to deal with incidences of failure that have become public. For obvious reasons, it seems not to be in KPMG's interest to expand the ambit of the investigation and to include other damaging reports done "for hire".

Getty
KPMG International Chairman, John Veihmeyer.

The professional services provided by KPMG SA to clients who prescribe certain outcomes of an investigation they pay for are in complete antithesis to the auditing service KPMG SA is known for, where auditing standards such as objectivity, independence and integrity apply.

KPMG SA, which was originally known for its independent external reviews of financial statements and its independent, objective assurance and consultation required for internal audits, has over the years increasingly branched into the more nebulous area of investigations to which no international engagement standard apply.

In order to straddle the line of accepting engagements governed by international auditing standards and engagements free of any such standards, KPMG SA explicitly includes in its reports compiled in what amounts to engagements-to-specification the disclaimer that those types of engagements are not conducted in the firm's capacity as registered auditors.

In a 2016-dated forensic report, KPMG SA safeguarded itself for the absence of objectivity by including in the report that the engagement: "...does not constitute an audit, assurance, examination or review in accordance with generally accepted auditing standards and, therefore, KPMG does not express an opinion and/or make any form of representation regarding the sufficiency of the procedures that KPMG performed."

These are the types of engagements that KPMG SA performed for South African government departments and agencies and for which they were paid millions from taxpayers' funds. Economist Alex Cobham has stated that the technical expertise offered by KPMG and the other "big four" firms can be bought by clients who pay their fees; therefore, these firms no longer serve as the guardians of financial and accounting probity.

It is exactly this realisation that makes the role KPMG SA has played so insidious. Unlike Bell Pottinger or McKinsey, which unabashedly work for and in the interest of their clients, auditing firms are believed to be independent. With public relations or consultancy firms, there is no question that they work in the interest of their clients and there is no mistaking these companies as acting objectively.

In its attempt to be all things to all clients, KPMG SA has compromised itself and its reputation.

However, the inherent understanding of auditing firms performing their work objectively and with the utmost integrity, is what makes KPMG SA's investigations like Sars and another one, done for a government department, so Machiavellian.

Understandable too is the disillusionment of those persons against whom KPMG SA conducted investigations, as they believed that a forensic investigation conducted by an auditing firm would vindicate them, especially in the absence of any misconduct.

However, the subjects of forensic investigations realise too late, that instead of KPMG SA considering all evidence and reaching objective conclusions after they conducted the highest level of ethical scrutiny, the resultant reports reflect client wishes by ignoring evidence that does not comply with those wishes. In its attempt to be all things to all clients, KPMG SA has compromised itself and its reputation.

From not complying with auditing standards to producing substandard work, KPMG SA has failed every employee who was not involved in the business decision to accept engagements not governed by any international engagement standards.

By using their technical expertise to meet client specifications while giving the impression that they conduct investigations that are objective and independent, KPMG SA has misled South Africans. Instead of separating the auditing sector from its professional service sector, KPMG SA has auditors acting as lead partners in forensic investigations that do not adhere to auditing standards.

For the sake of profit and growth, KPMG SA overplayed their hand, becoming advocates for their clients, thereby jeopardising their own integrity and objectivity. From their role of policing organisations and thus protecting the public interest, they morphed into a firm for hire producing work to client specifications: even where they were expected to act with professional scepticism, i.e. the audits of the Gupta entities, they botched up.

iol.co.za
KPMG SA CEO, Nhlamu Dlomu

What KPMG failed to understand is that in life (and even as a company) one must decide who one is and what one does; one cannot be the cop on the beat, protecting the public interest, while at the same time being Heidi Fleiss, a madam who provides clients with whatever they want, to client specifications.

It is too early to say whether KPMG SA will survive this bruising time; however, the way they are dealing with what is probably the greatest threat to their existence in South Africa, is not convincing and in no way, is it instilling any confidence.