On a knife-edge – will KPMG survive in South Africa?
05 Oct 2017

(PHOTO CREDIT: SolvencyIIWire)

KPMG’s embattled South African unit suffered fresh blows this week with more clients ditching the firm.

On Tuesday, Munich Re of Africa’s board said, after reviewing the outcome of KPMG International’s investigation, it would not retain the auditor.

This was followed by the University of Witwatersrand, which on Wednesday stated that it would not be renewing its contract either.

Then on Thursday, more bad tidings came, this time from waste management company Interwaste, which also decided to fire the firm.

Already, locally-based companies such as Sasfin and Hulisani have decided to ditch KPMG as well as South Africa’s parliament.

Meanwhile, some banks are understood to be considering dumping the auditor too.

In the mire

KPMG’s troubles are linked to work it did for the national tax agency and the wealthy Indian-born Gupta family, who are accused of looting public funds and holding undue influence over the South African government, amongst other issues.

The Guptas, who are considered to be friends of President Jacob Zuma, have denied the accusations.

They too have been battling it out, including with financial instituions.

The country’s top banks decided to terminate their relationships with the Guptas, and have raised issues such as worrisome suspicious transactions and also the possibility of falling foul of anti-money laundering regulations if they continue banking the family and its firms.

Organisations associated with the Gupta family have paid a high price – PR firm Bell Pottinger’s South African unit collapsed and firms like McKinsey and SAP also had to take internal measures.

It came as little surprise therefore that KPMG, which audited the Gupta-associated firms for many years, also found it-self under increasing pressure over its involvement with the scandal.

KPMG responded by launching an internal investigation and several of its senior officials stepped down. In addition, it decided to donate the total fees it said it had earned from its Gupta company work to non-profit organisations.

It also retracted a South African Revenue Service (SARS) report that had suggested former finance minister Pravin Gordhan had helped set up a rogue unit to spy on political leaders.

However, these measures have failed to put out the fire, as events this week show.

In a statement on Wednesday, the University of Witwatersrand’s audit and risk committees said that although KPMG had made some efforts, it “had not gone far enough” to tackle the matter.

“[The committees] agreed that KPMG had not been sufficiently transparent and that it is hard to reconcile KPMG’s conclusion that no one did anything illegal, when senior individuals have been dismissed and the SARS report has been retracted,” the statement said.

Survival chances

Despite its woes, the beleaguered auditor is optimistic it has a future in South Africa.

On Wednesday, KPMG SA CEO Nhlamu Dlomu said she and her team have been talking to many clients and regulators, outlining efforts being undertaken to prove KPMG’s “continuing ability to serve their needs.”

She added that her organisation has the backing of its parent KPMG International for as long as is needed to once again “earn the respect and trust of South Africans.”

But for now, observers indicate that KPMG South Africa is on a knife-edge and its survival depends on a number of factors.

These include how many more people or firms jump ship and also what emerges from the on-going reporting season in South Africa, said Johannesburg-based Ben Theron, Chief Operations Officer at the Organisation Undoing Tax Abuse, which has played an active role in the anti-corruption drive in South Africa.

In reporting seasons, big state-owned entities appear before parliament with their annual reports, and the work of their auditors can be examined, and “if in this process, the works of peer auditing firms EY, PWC and Deloitte’s are also found to be wanting, then this will ease the pressure off KPMG as it will indicate that generally the accounting standards in South Africa are ‘low or compromised.’”

“Also, in addition to KPMG’s own independent inquiry, there is an on-going review by the Independent Regulatory Board for Auditors. The reports from both these are likely to impact KPMG’s fate in South Africa,” he explained.

South African-based analyst Daniel Silke believes that although KPMG is in a “very precarious” position at the moment, not all hope is lost.

The difference between KPMG and Bell Pottinger is that KPMG has a large global footprint and the measures [it has] taken in the South African context have been “substantial,” he said, hence there is “maybe a chance for it to regroup at some time in the future.”

In addition, KPMG has invested in South Africa and pulling the plug may not be that simple, he indicated.

It also has about 3,400 workers, which is “a considerable number of employees who are clearly reliant on the company,” he said.

“KPMG also has capital commitments in South Africa, for example, it recently completed [constructing] a large building in Cape Town. It will survive, [but] in a dramatically reduced format that will require restructuring,” Silke added.

Going forward, a main challenge for KPMG will be getting work in the public sector, said Silke. On Thursday, lawmakers “did not seem impressed” with the firm and showed “little sympathy” when it appeared before the parliamentary public accounts committee, an indication that doing business with the state “is a long way off,” Silke explained.

By Irene Madongo

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