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Big audit firms make amends – but is it enough?

Business Maverick

MORAL COMPASS?

Big audit firms make amends – but is it enough?

(Photos: Brent Lewin / Bloomberg via Getty Images | EPA-EFE / WALLACE WOON)

With SA’s Independent Regulatory Board for Auditors (Irba) in a full-blown governance crisis and the Auditing Profession Amendment Bill still wending its way through Parliament, two of the firms involved in SA’s gigantic accounting scandals are attempting to make right for past failings.

On Monday, Frankfurt-listed Steinhoff announced several measures that will bring it closer to settling several multijurisdictional legacy litigation issues that have hamstrung the firm since it collapsed under the weight of its $7.4-billion accounting fraud in 2017. 

A key player in these agreements is Steinhoff’s former auditor, Deloitte, which many believe could have taken steps to prevent the fraud that impoverished thousands of shareholders. 

The agreement sees Deloitte chip in €70-million (R1.24-billion) to help Steinhoff pay the global settlement proposal announced last July. The proposal saw Steinhoff offer €266-million to big investors who suffered losses following the group’s collapse. 

If concluded, the process will see several litigants drop their claims against Steinhoff and Deloitte. 

This is the second settlement that Deloitte has reached with claimants. An $11-billion settlement between Deloitte, Steinhoff, South African litigants including Christo Wiese and the Vereniging van Effectenbezitters, the Dutch firm that was leading a class action lawsuit against Steinhoff, was announced in October 2020.

The deal is subject to Steinhoff successfully concluding a variety of legal procedures related to companies in financial distress in the Netherlands and SA, and other conditions. 

Deloitte has also made it clear that it accepts no liabilities for the losses incurred by Steinhoff and its shareholders as a result of the accounting irregularities at Steinhoff.

Meanwhile, the CEO of KPMG SA, Ignatius Sehoole, has announced that the firm will stop providing non-audit-related services – consulting services – to its listed audit clients from the end of March. 

Sehoole, who has been on a two-year campaign to revive KPMG and restore public trust after it was exposed as a key enabler of some of the most deplorable examples of State Capture in 2018, says that this step is one in a series that is designed to reposition the firm.

“While the overlap between audit and consulting is now very well managed by ourselves and audit committees, the objective of such a move is to help restore trust in the profession, as it removes any perception of conflicts of interest with our audit work for listed entities,” he says.

It was KPMG’s consulting arm that completed the 2015 “rogue unit” report at the behest of then SARS commissioner Tom Moyane. It was also KPMG that helped the Guptas launder stolen Estina funds on to the books of Linkway Trading, a Gupta company. And it was KPMG’s lead auditor on the VBS account who is alleged to have helped VBS cover up the crimes that were becoming evident.

The company has apologised and paid back R23-million in fees from SARS and pledged to donate the R40-million earned in fees from Gupa-related entities, according to Open Secrets

In March 2019 Irba struck the KPMG auditor involved, Jacques Wessels, from its register for his six counts of misconduct related to the audit of Linkway Trading. And the National Prosecuting Authority has declared its intention to prosecute the auditor involved in the VBS scandal.

While the wheels of justice – regulatory or criminal – grind on slowly, all eyes are on the audit profession to heal itself.

To be clear, removing consulting from its services to JSE-listed clients (which these days has dwindled to about 5% of revenue) does not mean that KPMG won’t provide consulting services to other clients. 

“Investors in listed firms have raised the separation as an issue. By taking these steps, their trust and belief in getting a proper audit will be enhanced,” Sehoole says. 

“This is not an isolated step. We have already implemented other measures – lifestyle audits of our partners and their spouses and developed a moral code. One can’t do one thing in isolation and think it will solve all our problems. It is a process.” 

The separation of audit and consulting has been debated since the Enron scandal broke Arthur Andersen in 2001.

Critics cite the possibility of clients purchasing both consulting and bookkeeping work from the same Big Four firms as a potential conflict of interest, suggesting that it is impossible for staff in the businesses’ audit arms to offer truly independent oversight of a client’s accounts in such a scenario.

In the UK the regulator has given the Big Four consulting firms until 2024 to separate their audit and consulting businesses.

KPMG’s step has been welcomed by the South African Institute of Chartered Accountants (Saica).

“This decision will no doubt remove any perception of conflicts of interest with their audit work for listed entities,” says Saica CEO Freeman Nomvalo. “We see this as an important step in the journey to the restoration of trust in the profession.”

But will it truly make a difference?

“Audit and consulting are markedly different businesses,” says Roger Stewart, a corporate governance specialist. 

“Audit is highly regulated and is compliance-driven; financial consulting is a less tightly regulated service and thrives on prudent creativity within the bounds of the law; general business consulting is an almost entirely unregulated service and thrives on creativity that pushes boundaries. It is challenging to manage businesses with such different formats, processes and even values. The potential for conflict is considerable but can be managed.”

He adds that this requires a moral compass and unfailing integrity.

“It seems that the challenges of some of the big audit firms have been one or both of poor practice and moral lapses. I am not aware of strong or consistent evidence that audit has been corrupted by consulting per se and in my view excising consulting will not guarantee better audit practice or morality.” DM/BM

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  • It will take many years and much more than repayment of fees (even the exorbitant fees amassed from State Capture) to fix this. All of the major auditing firms were involved.
    Auditors are supposed to inspire trust and confidence. The State Capture years destroyed both. Trust is a fragile thing, easily broken but very hard and time-consuming to rebuild. Separation of powers is a national imperative and so should it have been all along with the auditing companies. Any decent auditor would have not allowed consulting and auditing by the same company but it happened. Auditors should never be complicit in financial scams but it happened. Auditors should never aid and abet in illegal movements of money but it happened. Which means it will happen again.
    The amounts being repaid are minuscule compared to the damage done. Pensioners have lost significant portions of investments carefully put aside over 40 year careers. They will live in poverty. Taxpayers have lost ZAR hundreds of billions which no one is offering to pay back. School children have lost decent toilets, shack dwellers have lost decent houses, we all suffer roads with potholes etc etc because the so-called auditors allowed the money to be stolen. These can never be repaid. The repayments of 20 million or 45 million is equivalent to my giving a car guard R5 at the shopping centre. It makes no difference to my lifestyle and hardly any difference to my financial position

  • Why don’t we in SA, and for that matter why doesn’t the rest of the world, follow the UK example and separate audit and consulting businesses? That is the only bullet proof solution to what otherwise will forever remain a conflict.

  • I as a Chartered Accountant SA have lodged 4 complaints with IRBA upon behalf of various parties in the past year. Surprisingly, nothing has happened and IRBA refuse to reply to any emails but have the power to discipline auditors who fail to reply to correspondence …..don’t do as we do …. do as we say.! They are an embarrasment to the Auditing profession and can never be effective until they have principled and brave staff and leadership. Not happening in the near future – the rot is too deep.

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