EDITORIAL: KPMG SA separating its services should be celebrated
Not only is the move lauded, it should replicated to restore confidence in the audit profession in toto
KPMG SA, for so long the poster child of all that went wrong in the auditing profession during the state-capture era, is now emerging as the leader in best practice and attempting to rebuild public trust in the integrity of the audit industry.
While the Sars “rogue unit” report was its most infamous contribution to the creation of a parallel shadow state and the gutting of the country’s law enforcement capability, the firm became the target of “unrelenting public anger” for its role as auditor and corporate adviser to the Gupta companies and as the delinquent custodian fundamental to the great bank heist of VBS Mutual Bank.
But faced with imminent extinction, things hit rock bottom and a realisation dawned deep that it was simply lying to itself and the public about how bad things had become. That painful realisation eventually prompted change and the company began to turn things around by vanquishing and replacing the executives that had led it to its sorry state, and returning a laser-like focus to the quality of its audit work.
On Monday, it became the first KPMG partner to voluntarily cease offering consulting services to listed audit clients in its home market, a quarantining of sorts that will extend, in due course, to non-listed clients as well.
This could well be a seminal moment for the local audit industry. From one angle, it essentially puts to bed the debate that has been raging for some time as to whether the provision of consulting and audit services to the same client by the same firm raises conflicts of interest that have ultimately led to the dilution of audit quality the world over.
To quantify this conflict of interest, the investigative NGO Open Secrets pointed out in 2020 that the Big Four audit/consulting firms generated $134bn in revenue in 2017, the majority of which it estimates came from consulting.
Under the current model for listed companies, non-audit work is permitted, but is overseen by an audit committee that must approve each component of the additional non-audit work. KPMG SA chair Wiseman Nkuhlu says such a move — to put the question of independence above reproach — is a necessary step considering public perceptions with regard to trust and competence of the industry.
The underlying issue is the natural tension between consulting and auditing work. The former is done for purely commercial reasons — it is generally lucrative and adds to the bottom line. The latter, as Donald Brydon, former chair of the London Stock Exchange, noted in his lengthy review of the industry published in 2019, is a public interest issue that must put the needs of the users of audited accounts above the commercial interests of the audit companies themselves.
Opinions regarding the separation of consulting divisions from audit divisions within firms has been drawn along predictable lines. One of its advocates is former Independent Regulatory Board for Auditors (Irba) CEO, Bernard Agulhas. Opposing the call are some of the CEOs of the local arms of the Big Four that have defended the hybrid offering, arguing that suitable controls are in place to protect independence.
We disagree. The quality and trust in the audit industry has fallen so far short of what is reasonably expected that such severe action is warranted. Not only do we celebrate KPMG’s example, but we think it should be followed by its peers. Now it hase broken ranks, the firm should actively persuade its peers in forums such as the SA Auditing Profession Trust Initiative to consider making the same changes.
But this cannot be the only step. A raft of urgent reforms is needed to restore auditing to an honourable profession once again, and remove any doubt by the user of financial statements that an honest and accurate picture of a company’s financial performance and position is not a hit-and-miss affair.
Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.