JOURNAL - TRUST

The Role of Audit – Guardians of Truth


2019/06/24 - Monocle Journal

It is a basic fact of western civilization that one should be able to trust the accounts published by a firm, since they have undergone an independent audit. The auditor’s job is to dispassionately provide an assurance that what is described and declared in the financial statements of a firm is, in fact, true. To be clear, the assurance industry is made up of audit, which is an immense business on its own, as well as the high-end offering of what is known as advisory services. These are the consultants.

In the main, the auditing business, for decades now, has provided this service as well, separating its audit and advisory practices through corporate structuring and the implementation of so-called Chinese walls. There have been several attempts, particularly in Europe, to have these services completely separated, specifically in the “Big Four” audit firms (Deloitte, PwC, Ernst & Young and KPMG), for obvious reasons of potential conflict of interest, but to little avail.

Of course, there are the minnows as well – the advertising firms, the public relations firms, the graphic design firms – but these are really just small players in the greater scheme of things, for their job is not nearly so important as the job of an auditor, since they exist only to serve their clients’ needs, not those of the greater good. Or to stretch the metaphor, they are not responsible for the health of the body economic in totality.

In this context – in other words in the context of applying one’s mind to the question of ultimate responsibility and credibility – it is very telling and ironic that it is Bell Pottinger, the firm made infamous for its creation of the concept of “white monopoly capital” – on behalf of a small group of corrupt and indignant businessmen and politicians – that has received the harshest sanction thus far.

Compare, for instance, the burden of responsibility taken on by KPMG as an audit firm – and as an advisor to government in the act of apparently representing the interests of the people – in conducting a formal inquiry into allegations of a “rogue unit” within SARS, to the burden of responsibility taken on by Bell Pottinger.

Bell Pottinger, after all, as a public relations firm – whilst propagating perhaps one of the most vile and cynical campaigns ever witnessed in modern society – was acting really on behalf of no one else but their clients. Their fate, to be clear, is no more or less than they deserve.

But, consider now both the implicit and explicit burden of truth that is conferred upon the audit profession. It is the very source of truth in the world of business, of economic growth, of investments for retirement, for example – it is no less than the thread that sews together the various patches of fabric that we call society. KPMG, as one of the Big Four audit firms, was certainly remiss in providing advice on the Optimum Coal buyout, in which Glencore was effectively black-mailed to sell at rock-bottom prices. KPMG was also undoubtedly remiss in auditing and signing off the accounts of a previously state-owned dairy farm, whose source of income was a Gupta-owned business out of Dubai, which was primarily used to fund a wedding.

But, worst of all, KPMG, in writing and signing off a fake report into the accusations of a rogue unit unravelling the integrity of SARS – the single most important source of revenue in South Africa – is nothing less than the single most egregious action of any person or organisation at any time in post-Apartheid South African history.

This firm did nothing less than rob us of the truth – not the truth per se in terms of the fictitious rogue unit, but the very concept of truth itself. If it is not possible to trust the findings of an internationally-revered firm of the calibre of KPMG, previously one of the most desired firms in the world to work for, handpicking the very best minds of our generation in graduate programs and into careers as auditors and advisors, then there is nothing left to conclude other than there is no place to find truth at all.

To further drive this point home, consider this: after years and years of labour and indescribable effort on the part of various government commissions, organisations such as Freedom Under Law, the Helen Suzman Foundation, and a variety of well-wishing NGOs, little was achieved other than forcing Zuma to pay in for his Nkandla home-building escapades, and the prevention of certain Zuma-inspired high-level replacements in government. The simple and depressing reality is that it was the theft of a single hard-drive from a Gupta computer, unencrypted, that has led to the steady flow of factual information that now reaches us on social media on virtually a daily basis.

Were it not for this single hard-drive, we would not know that directors of McKinsey South Africa had arranged an extensive fronting relationship with Trillian to garner billions in fees from Eskom. Nor would we know about the shelf-ware sold by SAP, the revered German software maker. Nor for that matter would Bell Pottinger be out of business. But most importantly, we would not know that KPMG, one of the few guardians of truth in the western world, knowingly, cynically, and maliciously lied in a report that aided and abetted the capture of perhaps our two most important organs of state: The Ministry of Finance and the South African Revenue Service.

If one considers the long-range implications, and if one contemplates what this means for the very notion of audit independence, it is easily argued that there has never been a clearer case of wilful malfeasance in the history of corporate South Africa. Inexplicably, however, despite these self-evident conclusions, the regulatory body overseeing the audit community in South Africa, IRBA (Independent Regulatory Board for Auditors), took an inordinate amount of time to come up with even preliminary findings. In fact, KPMG’s own parent company beat them to it, exiting a few high-ranking individuals and offering to pay back a pittance of the company’s annual income.

At the time of writing, mid-October 2017, IRBA’s website still has the following claim on its homepage: “South Africa has maintained its number one ranking for the strength of auditing and reporting standards for SEVEN years in a row, according to the World Economic Forum’s Global Competitiveness report.” Their website manager must not yet be aware that the WEF has already bumped South Africa’s audit position on their competitiveness scorecard down by thirty-one places.

Consider that Deutsche Bank was recently fined almost 10 billion USD for the misleading of mortgage customers in 2007 in the U.S. KPMG’s offer of a R27 million fee to be returned to SARS and a R40 million charitable contribution make an insult to the industry of which they are a part. To be clear: there are many good men and women who work at KPMG and they have done nothing wrong. But the corporate entity known as KPMG South Africa has had its credibility substantially eroded. They fessed up only when they needed to. And it remains unclear, and will probably continue to remain unclear for some time, the full extent of their actions.

In a recent article in the Financial Times, John Gapper, a distinguished journalist, makes the distinction between the responses of McKinsey and KPMG to their respective woes. McKinsey, he essentially argues, is playing a dangerous game by denying any wrong-doing. Whereas, he argues, KPMG has at least come clean. He writes that KPMG “fell into the trap of sticking with an old client after its flaws became clear”, referring to their audit of Gupta-related companies.

One could not disagree more vehemently. KPMG knowingly chose to do business with these entities in the first place, with full and complete knowledge of who they were. A review of directors and owners is, after all, the first step in any audit. KPMG then went on to sign off accounts that they knew were misrepresentations, both from a financial reporting as well as from a tax point of view. Then they wrote a fake report damaging the integrity of the organs of state. No credible response has yet to emerge from any government institution other than the laughable response from the head of SARS, arguing that the report remains valid since it is their property, having paid for it.

KPMG International’s response is inadequate at best. And the response from business has been far too slow and cautious. Very few firms stuck their necks out until they got a feel for which direction the wind would blow. At the time of writing, we exist in an obscene limbo as a country. We have had the rug pulled from underneath us. Our primary source of truth is not the audit and advisory communities, but rather the work of a few fearless journalists and the chance theft of a single hard-drive.

At the very least, to maintain some semblance of integrity in the business community that could save the poor of this country, let those who undermine the truth be severed from the body economic.

If the regulatory bodies within South Africa that are meant to oversee and sanction the audit firms, namely SAICA and IRBA, continue their squabble over who has jurisdiction, then perhaps we should look offshore for help. This issue of the Monocle Quarterly Journal will cover these conundrums, that of the roles played by the auditors, the advisors, the regulators, the journalists and by the organs of state.

There is no single solution to be found in this Journal. There is only the hope that a degree of anger will spur some action and that the community of chartered accountants, management consultants, and executive officers of this country will, en masse, reject those entities that have undermined society or, at the very least, force the prosecution of the individuals who so cynically brought their firms’ reputations into disrepute. There is no clearer way to invoke change.

 



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