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The KPMG fall-out after the Gupta-related entity audits and the South African Revenue Service (SARS) “rogue unit” report must be the biggest scandal so far in the South African audit profession.  On 15 September 2017 KPMG CEO Trevor Hoole, chief operating officer Steven Louw, chairperson Ahmed Jaffer and five senior executives resigned “in the best interests of the firm as it rebuilds and moves forward, and to restore public trust”.

KPMG South Africa said further that it had offered to repay the R23m fee to SARS received for the “rogue unit” report. It would also make a donation of R40m into education and anti-corruption not for profit organisations. The R40m figure is based on the total fees earned from Gupta related entities to which KPMG South Africa provided services from 2002.

Melanie De Nysschen, Corporate Finance Principal at Bravura, an independent investment banking and advisory firm specialising in corporate finance and structured solutions, comments that restoring trust in KPMG might take a lot longer than KPMG anticipates, especially given the long-standing relationship it had with the Gupta-related entities.

Entities breaking links with KPMG

The public outcry started with JSE-listed asset manager Sygnia under the helm of CEO Magda Wierzycka who fired KPMG over its alleged role in state capture in July 2017.  This followed Sygnia asking hard questions of KPMG about its business with the Gupta family to ascertain how it could have missed “a big money-laundering exercise”. The most pertinent of the irregularities was that KPMG did not pick up through its audit of Linkway Trading the R30 million earmarked for an agricultural development project in the Free State, which was diverted to pay for the infamous Gupta wedding at Sun City.

This was followed by The Board of the Institute of Directors in Southern Africa (IoDSA) who announced last week that it “temporarily” suspended all co-branded events with auditing firm KPMG following damning allegations of misconduct related to audits of Gupta-owned companies.  Following this, Dr. Iraj Abedian, a respected economist and CEO of Pan-African Investment and Research Services, resigned as non-executive director of Munich Re of Africa, due to the fact that KPMG is their external auditors.  Dr. Abedian said that “external auditors play a critical role in ensuring good governance and compliance with ethical codes …. So external auditors and their reputation matter beyond measure.”

The Save South Africa campaign called on corporate South Africa on 11 September 2017 to “urgently review business relations with KPMG”. The advocacy group said it put out the call “in light of ongoing revelations about the audit firm’s central role in facilitating state capture”.

Barclays Africa followed by saying it was reviewing its relationship with KPMG as the auditing firm comes under scrutiny for work on behalf of South African companies linked to the politically connected Gupta family.

But is this too little, too late?

Resistance against the introduction of mandatory audit firm rotation

Audit committees of public companies have a statutory duty to assess the independence and quality of their choice of auditor and make a recommendation accordingly to their shareholders.  KPMG audited the Gupta-related entities since 2002, a period of fifteen years.

The IRBA issued a regulation in December 2015 requiring audit firms to disclose the length of tenure of an audit in the independent auditor’s report to shareholders. This was to ensure that shareholders were aware of the tenure of the relationship between the auditor and their client, which should have also been considered by the audit committee when the auditors were considered for reappointment.

In June 2017, the Independent Regulatory Board for Auditors (IRBA) issued a rule prescribing that all South Africa Public Interest Entities (including all listed companies) must rotate their audit firms after a period of maximum audit tenure. This tenure is set at ten consecutive financial years, after which an audit firm will only be eligible for reappointment as the auditor after the expiry of at least five financial years. Mandatory audit firm rotation will become effective for financial years commencing on or after 1 April 2023.

The mandatory rotation rule experienced very strong resistance from a number of parties.  One of these were the audit profession itself. EY Africa CEO Ajen Sita and PricewaterhouseCoopers (PwC) CEO Dion Shango told members of Parliament’s finance committee as recently as March 2017 that “SA did not have a known crisis of the independence of its auditing profession, so should not rush into changing the system (to mandatory audit firm rotation”).  Sita also stressed that there had not been any audit failure in the past 20 years that could be attributed to a failure of independence.

The CFO Forum, the Association for Savings and Investment SA, the Institute of Directors, the King Committee and the Audit Committee Forum also resisted the mandatory rotation requirements, because of its “disruptive effects, the cost of implementing it, the removal of choice from audit committees and because it is unlikely to achieve its purpose of strengthening auditor independence”.

Support for mandatory audit firm rotation

Ahead of the 2023 implementation date, the Public Investment Corporation (PIC), the largest investor on the JSE, had strongly endorsed the push for mandatory rotation of audit firms by voting against the reappointment of audit firms at JSE-listed companies where there has been a 10-year plus relationship.  The PIC’s voting results for AGMs held during the December 2016 quarter show it voted against the reappointment of auditors at 14 of the 40 AGMs it attended. This means mandatory rotation of auditors is now at the top of the PIC’s list of corporate governance issues. However, in no instance did the PIC’s vote result in an audit firm not being reappointed as it mostly holds minority shareholdings.

IRBA has been tracking the results of shareholder voting at annual general meetings with respect to the reappointment of auditors. “A visible trend towards voting against the reappointment of auditors is developing, with 27% of the surveyed ordinary resolutions increasing the opposing votes by up to 40%. This appears to be the case, particularly for those companies where the tenure is excessively long.”

“What is clear is that the shareholders are beginning to make their voice heard at AGMs regarding the necessity for firm rotation to end excessively long relationships. Where audit committees may feel a 20-year, 50-year or longer relationship might not impair auditor independence, shareholders are saying otherwise,” says Bernard Agulhas, CEO of the IRBA.

Say Agulhas: “Of the 102 auditor appointment resolutions tabled at annual general meetings since November 2016, 51 recorded an increase in opposition; of these 24 resulted in significant shareholder opposition to the auditor’s reappointment. The most significant opposition recorded an increase of up to 40% year on year in the votes against the reappointment of auditors. The reality is that even with some shareholders opposing the reappointment of auditors, the vote is not binding without a majority. This is not in the best interest of minority shareholders.”

Melanie concludes by saying: “The latest turn in events has shown that auditor independence is an absolute necessity rather than an idealistic concept in the prevention of corruption and fraud.  All eyes will be on corporate SA and how it responds next.”

Table published by: Independent Regulatory Board for Auditors (IRBA)

Company AGM Date Auditor Tenure For Against Preceding AGM No Vote Increase
Lonmin Plc  26-Jan-17 KPMG  Undisclosed  58.310%  41.690%  1.390%  40.30%
Reunert Ltd  13-Feb-17 Deloitte 31  63.050%  36.950%  0.00%  36.95%
Spar Group Ltd  07-Feb-17 Deloitte 49  64.070%  35.930%  0.31%  35.62%
Telkom SOC Ltd  24-Aug-17 EY 19  83.880%  23.660%  0.01%  23.65%
Telkom SOC Ltd  24-Aug-17 Nkonki 11+1  83.890%  23.300%  0.01%  23.29%
Barloworld Limited  08-Feb-17 Deloitte 98  81.840%  18.160%  0.01%  18.15%
Woolworths  30-Nov-16 EY 84  81.380%  18.620%  0.52%  18.10%
Astral Foods Limited  09-Feb-17 PwC 16  83.050%  16.950%  0.00%  16.95%
PPC Ltd  28-Aug-17 Deloitte 14  84.680%  15.320%  0.42%  14.90%
Tiger Brands  21-Feb-17 EY 13  84.890%  15.110%  0.47%  14.64%
Aspen  06-Dec-16 PwC 19  85.560%  14.440%  0.00%  14.44%
Pioneer Food Group  10-Feb-17 PwC 69  87.140%  12.860%  0.00%  12.86%
Investec Limited  10-Aug-17 KPMG 47  87.720%  12.280%  0.34%  11.94%
Anglo American  24-Apr-17 Deloitte 17  83.910%  16.090%  4.35%  11.74%
Investec Limited  10-Aug17 EY 22  87.830%  12.170%  0.90%  11.27%
Grinrod Ltd  24-May-17 Deloitte 13  90.240%  9.690%  0.00%  9.69%
Rhodes Food Group  09-Feb-17 Deloitte 17  90.430%  9.490%  0.00%  9.49%
AngloGold Ashanti  16-May-17 EY 73  90.560%  9.440%  0.16%  9.28%
Barclays Africa Limited  16-May-17 EY (joint) 24  92.070%  7.930%  0.01%  7.92%
Octodec Investments Limited  27-Jan-17 Deloitte 25  92.280%  7.720%  0.03%  7.69%
Nedbank Limited  18-May-17 Deloitte (joint) 43  92.510%  7.490%  0.26%  7.23%
Nedbank Limited  18-May-17 KPMG 43  92.510%  7.490%  0.28%  7.21%
Oceana Group Ltd  16-Feb-17 Deloitte 74  94.500%  5.100%  0.00%  5.10%
Adcorp Holdings  19-Jul-17 Deloitte 16  92.440%  7.560%  3.75%  3.81%

Catergories: Corporate Governance, Economy, News, Taxation

Published in Business Report 18 September 2017