- Absa fired an embattled KPMG as its auditor, with more companies expected to follow suit.
- Many senior employees have left KPMG in recent months, and one former staffer says there is 'enormous panic' in the firm.
- PricewaterhouseCoopers seems to be the major recipient of former KPMG staff.
KPMG employees are jumping ship as the firm struggles to keep its clients, with Absa’s decision on Thursday to ditch KPMG seen as a tipping point.
A number of companies have fired KPMG as more details about its disastrous association with Gupta companies, and its involvement in a discredited report into a so-called rogue unit at the SA Revenue Service, emerged.
But the final straw for Absa was apparently the suspension of KPMG’s head of financial services auditing, Sipho Malaba, who was also the lead partner on VBS, where R900 million went missing.
ABSA sacks KPMG:rather late than never!It is a good stance by ABSA. Now why are the other listed entities such as Std Bank,Old Mutual,Investec,JSE so ambivalent? What does it say about their ethics? What else do they need to be convinced of the KPMG risk?Can we trust their AFSs?— Iraj Abedian (@IrajAbedian) May 3, 2018
“Just when we thought the worst was over, it clearly wasn’t,” said one former senior KPMG employee, who spoke to Business Insider South Africa on condition of anonymity.
Another spoke of “enormous panic” in the firm, as KPMG faces a number of lawsuits which could strip it of its licence to practice.
While its international parent company was still expected to cover salaries, staff feared that no bonuses will be paid for some time.
This has contributed to an exodus from the firm, which is still reeling from the loss of its top brass who resigned last year. They included the CEO Trevor Hoole, Mike Oddy (head of audit), Muhammad Saloojee (head of tax), Herman de Beer (head of forensic), John Geel (head of deal advisory) and Mickey Bove (risk management partner for deal advisory)
A number of senior and mid-level staff have resigned in recent months, including:
- Frank Rizzo, previously KPMG's technology sector leader, moved to the tech firm BCX in February this year.
- Alida Botes, formerly a partner at KPMG, moved to PricewaterhouseCoopers in February as a partner in finance and accounting.
- Dane Ashe, previously a partner at KPMG, also joined PwC this year.
- In March, Adele de Jager, previously KPMG's tax partner and head of mining tax for Southern Africa, as well as Michael Rudnicki, KMPG's former head of M&A financial services tax and the private equity sector for Southern Africa, resigned to join Bowmans.
- Former KPMG Chief Economist Lullu Krugel – and most of her team – joined PricewaterhouseCoopers at the end of last year.
Business Insider SA is also aware of another partner, at least four associated directors, senior managers, IT analysts, business analysts, supervisors, and compliance auditors who have left in recent months.
“Very few of my colleagues are still at KPMG,” one former senior staffer told Business Insider SA.
PricewaterhouseCoopers has been one of the biggest destinations of former KPMG staff, while Deloitte is understood to be recruiting “whole audit teams” in KPMG’s financial services section.(Deloitte did not respond to a Business Insider query.) This could assist in positioning the firm for massive and lucrative bank audits that may now be up for grabs.
More of SA’s large banks – including Investec and Standard Bank – are expected to ditch KPMG.
Anthony Clark, analyst at Vunani Asset Management, expects that KPMG’s global parent company, which is headquartered in the Netherlands, will support the local firm until its name is “rehabilitated”.
Audit contracts usually run five to seven years. "Many SA companies will review their association with KPMG as their auditors in light of events in the past year – but may reconsider in seven years’ time," Clark predicted.
Will KPMG be replaced in the top four auditing firms?
In the meantime, two things are expected to happen: KPMG will shrink to become a much smaller firm, and SizweNtsalubaGobodo, which is merging with the global Grant Thornton in South Africa, may grow at pace.
“But only if local companies decide to give a domestic BEE accounting firm an opening to prove themselves and gain traction… they have to earn that trust and right,” says Clark.
SizweNtsalubaGobodo has its own chequered history; it was the auditor of the Gupta-owned Oakbay Resources. But the firm was appointed as the curator of VBS, and it is homegrown and black-owned, which will help as it aims for KPMG’s place in the top four, says Clark.
On Thursday morning, the SA Reserve Bank made it clear that there was no requirement for a bank to use one of the Big Four auditing firms, which could benefit the much smaller firm. According to the central bank, a new auditor only needs to have the capacity and "sectoral competence".
But one former KPMG audit partner doubts SizweNtsalubaGobodo has these skills to take on banking audits.
“You can’t just move from auditing a PTY Limited to a bank; it requires massive depth of skill.”
He says that there is a lot of anger inside KPMG about the fact that it has been “singled out” in the media for its transgressions, pointing to the fact that Deloitte was Steinhoff’s auditor and PwC was the internal auditor at the bankrupt VBS.
“Only EY is unsullied at the moment. ”
Ironically, Ernst & Young went through its own "KPMG trajectory" twenty years ago, when the firm – which was Masterbond’s auditors – was forced to pay tens of millions of rands to investors who lost everything when the scheme went bankrupt. Following the fiasco, EY streamlined its activities, but eventually emerged from the storm.
“The same will probably happen to KPMG,” says its former partner.
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