Are KPMG’s three pillars of governance strong enough to revive its reputation?

Auditors, says Ignatius Sehoole, CEO of KPMG, are like guard dogs. They are there to look after the interests of shareholders. They are not bloodhounds, which means their duty is verification rather than detection, though when something smells off, it is their duty to probe the matter thoroughly.

 That said, there have been a number of corporate scandals in South Africa’s recent past when even a guard dog should have picked something up, he says.

“In some cases, the fraud was not reported because the auditor chose to look away, as was the case with KPMG and VBS. In others, the auditor chose, for whatever reason, to believe the information presented by management.”

Investors, shareholders and the public might have unrealistic expectations of auditors, he says, but there is no doubt that they have also been let down by the profession.

This is the expectation gap. It’s the difference between the public’s perception of an auditor’s role and responsibilities, and what the auditor’s legal responsibilities are. 

“We need to step up. As opposed to the public changing its expectations, we have work to do to close that gap,” he says. 

KPMG’s reputation hit the gutter in 2017 after it emerged that the firm had been doing work for the Gupta family for years. It had published a patently false and misleading report on the SARS Rogue Unit, and it aided and abetted corruption while as auditor at VBS Mutual Bank.

The result was that chief executive Trevor Hoole fell on his sword, as did a number of other senior staff. 

A year later, KPMG SA and KPMG International apologised to the nation, withdrew the findings, conclusions and recommendations of its SARS report, and repaid its full fee back to SARS.

It is now discussing the possibility of paying reparations to the people whose lives were damaged by that report.

“The looting that happened during the years of State Capture is a disgrace,” says Sehoole. “And as individuals who love our country we are looking at making reparations. Not because we think we are liable – let me be clear, the Nugent Commission did not find that we had a role in the reorganisation at SARS – but this is not the time to be legalistic. Instead, we choose to engage with SARS to see how we can help. It’s the right thing to do.”  

Adding to work that had been started by Professor Wiseman Nkuhlu, executive chairman of the board, and non-executive director Ansie Ramalho, a consultant to the International Finance Corporation, both appointed in 2018, Sehoole set about appointing a heavy-hitting team of non-executive directors to the board of KPMG.

This is a significant shift as previously KPMG appointed its own partners to the board, which obviously becomes problematic when firms start chasing profit at the expense of principle.

“They have no personal interest in the business and would not be willing to sacrifice their reputations for the sake of any indiscretions.”

The second pillar, he says, is to build KPMG into SA’s leading professional services firm. This involves delivering a quality service, one that clients, regulators and the public cannot “pick holes in”. 

Arguably, this is an easier task, because the work performed can be quantitatively and scientifically measured. Technology, including artificial intelligence, is also making it easier for auditors to get through “humanly impossible volumes of work”.

The third pillar is trickier, and that’s rebuilding trust.

“As a firm, we have to understand and believe that our first duty is not to each other, or even to the client, it is to serve the public interest. If the interest of the client is not in sync with the public interest, then you have a problem and you need to ask yourself whether you want that client.”

It sounds all too simple and possibly naive.

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