Banks have to thread the needle of joint auditors and rotation
SA’s banking regulator is sticking to the requirement that big banks must have two external auditors, despite concerns that the crisis at KPMG could result in the "big four" audit firms being reduced to a "big three".
This might leave big banks struggling to hire joint auditors while they also comply with new rules on mandatory audit firm rotation.
"We like joint audits for big, systemically important banks. We think it gives us a higher level of quality assurance," Reserve Bank deputy governor Kuben Naidoo said on Tuesday at the release of the annual report of the bank supervision department. The report was the last from the department, which has been absorbed into the Prudential Authority created by SA’s new twin peaks legislation.
However, Naidoo acknowledged that the joint audit requirement, combined with the new requirement for mandatory audit firm rotation, which the Independent Regulatory Board for Auditors has introduced from 2023, posed challenges for the banks. His department was in discussion with the Independent Regulatory Board for Auditors, the finance minister and the banks on how to manage the practical complications that would arise, he said.
Naidoo’s comments come after the Barclays Africa board terminated KPMG’s services as its auditor, leaving the bank with one audit firm: EY.
Naidoo said the joint auditor requirement for Barclays Africa had not been relaxed and the bank had been given reason-able time to appoint a second audit firm.
Big banks tend to rely exclusively on the big four audit firms, which have resources and specialised models that second-tier firms usually cannot offer.
The joint audit issue is complicated by section 90 of the Companies Act, which requires a five-year cooling-off period before companies can appoint as their auditors firms that have done certain nonaudit work for them. Naidoo said the banking regulator wanted to reduce this to a two-year period.
KPMG’s woes have deepened since it admitted to failures in its audit of VBS Mutual Bank, which was put under curatorship in March, and has subsequently been shown to have misstated its financial position. Naidoo said that when the Reserve Bank put VBS into curatorship it believed the bank’s problem was largely a liquidity problem and it was confident it would be able to save the bank.
"The probability that we can save VBS has fallen since the first day of curatorship, but that’s not to say it is zero," he said.
The year under review was an eventful one for the banking regulator, which during 2017 converted to being the Prudential Authority, taking in prudential regulation of the insurance sector and of financial markets as well as banking.
It licensed two new banks – Discovery Bank and Commonwealth Bank of SA, trading as TymeDigital – and registered a new co-operative bank, Ziphakamise Savings and Credit Co-operative Bank. This came after 11 years in which no new banks had been given licences.