Audit firms lay low lest they too get tagged for shady state work
If KPMG is starring in its role as the whipping boy of all things wrong with the audit profession, then it is important not to lose sight of the fact that there are other large audit firms whose conduct has and continues to do the profession’s reputation no favours.
As KPMG feels the blowtorch of opprobrium, one would have thought rival firms would be licking their lips at the prospect of windfalls from former KPMG clients, but their response has been muted, making one wonder why the reticence.
A possible answer might be that many of the rival firms that have also audited or provided advisory services to state-owned enterprises (SOEs) are concerned that they, like KPMG, might be similarly complicit in state capture and that by downplaying the situation, they may be able to fly below the radar.
Unfortunately for the auditors of SOEs, annual financial statements over recent years bear witness to their apparent participation in state capture.
If the statements are all about numbers and disclosures, an audit is all about gathering evidence to support the audit opinion on the information supplied being accurate and free from material misstatement.
Auditors are compelled by statute and the International Standards on Auditing to conduct their work in compliance with regulations and guidelines. On accepting an audit appointment, an auditor is required to consider the inherent business and audit risk of the client and plan an audit and schedule of work that will result in the collection of sufficient evidence to support the audit opinion.
The three best-known audit opinions are "clean", "qualified" and "adverse".
In the case of SOEs, a clean audit opinion should provide confidence to all users of the financial statements that they pass muster. A qualified audit opinion is normally a slightly watered-down version of a clean audit opinion, in which the auditor will confirm that, but for one or two areas, the statements are free from material misstatement.
An adverse opinion is the proverbial killer blow because this opinion confirms that misstatements are material and pervasive and that the statements do not fairly reflect the situation of the entity, which is akin to an individual being blacklisted by credit providers.
Space does not allow for the deconstruction of the financial statements of all SOEs audited by external firms, so for the purposes of this article, the performance of the auditors with respect to two key numbers in the recent statements of Eskom and South African Airways (SAA) has been considered.
Much media space has been devoted to the audit qualification in the most recent set of Eskom results. In essence, the auditors gave Eskom a clean bill of health with a qualification on the disclosed R3bn irregular expenditure, which the auditor was unable to verify or validate.
How, with a fee of R119m, is an audit firm unable to verify or validate irregular expenditure when various investigative journalists are able to expose irregular expenditure far exceeding these numbers?
If the systems of internal control at Eskom failed so spectacularly to allow unverified irregular expenditure of R3bn, and if the same systems failed to provide the documentation to support this figure, how can anyone know if the disclosed irregular expenditure is not materially understated? How did Eskom arrive at this figure in the first place, and what assurance is there that other figures in the statements are correct?
This audit qualification appears to be a cop-out given the reporting of significant fraud and irregular conduct at Eskom. Everything points to misstatements owing to fraud and error that are so pervasive and material that an adverse audit opinion is the only appropriate opinion – yet the auditor gave what was in effect a clean audit opinion with a tame qualification proviso.
In the most recently available set of SAA financial statements, the auditors go one better and give the struggling carrier a clean audit opinion.
On the one hand, there is all the reported procurement malfeasance running into billions at SAA, yet the auditors make no findings and raise no concern that irregular and wasteful expenditure SAA discloses in its 2016 statements as R13m out of a potential R22bn could be materially understated.
If the ratio of irregular and wasteful expenditure is a minuscule fraction of 1%, then is it reasonable to conclude that the auditors have no idea what the figure should be? And is it reasonable to conclude that the directors of SAA have misrepresented the figures?
It appears SAA’s auditors have been drunk as well as asleep at the wheel, because had they identified the audit and business risk of procurement at SAA and then conducted a thorough and systematic audit of procurement, their findings would surely have confirmed irregular procurement that was so material and pervasive that the only option would have been an adverse audit opinion.
These are but two examples of where it appears auditors have let SA down.
If auditors of SOEs identified audit and business risk and then planned and performed audit work in terms of International Audit Standards, it is unlikely any of the SOEs that are in the media for all the wrong reasons would get anything but an adverse opinion.
KPMG has set the precedent with its commitment to pay back the money for the unacceptable quality of its work in the South African Revenue Service’s "rogue unit" report, and it would appear the financial statements of large SOEs over many years indicate a similar unacceptable level of work.
One has no expectations of corrupt officials and crooked business people, but one does have expectations of a profession that extols the virtues of trust and integrity.
Auditors of SOEs can choose the low road of remaining silent, while hoping that any misconduct on their part is never identified, or they can choose the high road and confirm their unsatisfactory audit work and pay back the significant audit fees they have charged. What choice will these firms make?
• Mantell is a chartered accountant who served articles at one of the big four.