22 August 2017

South Africa: KPMG's Questionable Behaviour Goes Beyond Gupta Companies

editorial

Yet another scandal means it's time for some changes in the auditing industry

Once again, auditing firm KPMG is at the centre of a controversy.

First there was its role in the SARS "rogue unit" claims published by the Sunday Times. In an unpublished but leaked report KPMG recommended that Pravin Gordhan, finance minister at the time, be investigated for starting the unit. But as we now know, there was no rogue unit. The story was a concoction to get rid of Gordhan and further the aims of the state capturers.

Now the Independent Regulatory Board for Auditors is investigating KPMG for the "2014 audit of Linkway Trading, the company alleged to be involved in the Gupta wedding scandal."

Readers may remember that it was also KPMG which wrote a report for the company at the centre of the social grant payments crisis, Net1. The report essentially cleared Net1 of wrongdoing. But as an analysis published on GroundUp shows, the report failed to ask the right questions.

KPMG is one of the "Big Four" audit companies in the world. In the 1990s there were eight. Through mergers this became five. Then Arthur Andersen went down in flames because of its bogus auditing of oil company Enron. So now there are four. These firms have a virtual monopoly on big audits. And there's no reason to believe that Arthur Andersen's corruption was unique, given the inherent conflict of interest in the relationship between the auditing and the audited. The audit companies bid for business from, and are paid by, the very companies they're auditing.

Instead of listed companies directly hiring audit firms, would it not be better if they paid audit fees to the stock exchange where they are listed? The stock exchange could randomly select an auditor from a list of high quality audit firms and pay the auditor directly. Audit firms could regularly tender to be on the list, which would include many besides the Big Four. The audit firm could be assigned to a company for a few years because rotating auditors too frequently is burdensome, but they must rotate regularly.

This is not a guarantee against corruption but it might go some way to making sure that KPMG (and the others) live up to the promise on the KPMG website: "We seek the facts and provide insight". "Above all, we act with integrity".

GroundUp will be publishing occasional editorials on topics we report on. This is the first one.

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