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By Inge Lamprecht

Moneyweb: Journalist

Lessons from KPMG: Be careful who you get into bed with

Reputational risk is not necessarily about right or wrong.

When Barclays Africa announced that it would sever ties with its external auditor KPMG, it said it could no longer support its reappointment in light of “ongoing and more recent developments”.

After KPMG admitted that its processes failed when it conducted work for Gupta-owned companies and had to withdraw parts of a forensic report into the “covert” unit at the South African Revenue Service, recent admissions that partners did not fully declare their interests while auditing VBS Mutual Bank seem to have been the last straw.

Barclays was quick to point out that it was “satisfied with the quality of the audit of the 2017 annual financial statements”. And just in case this wasn’t enough to allay any fears, it added: “[The audit] was conducted jointly with EY”.

When Redefine Properties announced its separation from the audit firm one day later, its CEO, Andrew Konig, was much more frank: “Redefine’s reputation is everything and our decision was made for this reason. We will have a new auditor on board for the 2019 financial year”.

When asked about the reasons behind the decision taken by Barclay’s Africa during a radio interview, Professor Jannie Rossouw, head of the School of Economic and Business Sciences at Wits University, said there were questions about the quality of some of the audits conducted by KPMG and there were questions about whether it could continue operating in its current form.

Moreover, reputation was of utmost importance to any bank. Banking is built on trust, he added.

Yet, KPMG is a large organisation with several branches in various cities around the country, and unfortunately certain practices in some offices have tarnished the whole firm’s reputation. There were many partners within the firm that were not involved in any of the controversies. From that perspective, one has to have a little bit of sympathy with the larger KPMG Group, Rossouw added.

Unfortunately, the court of public opinion can be a harsh place. While the firm should take responsibility for its transgressions and deserves a lot of the criticism it has received, one also has to feel for the many hardworking employees who have devoted years (sometimes decades) of their careers to the firm and whose credibility and capability have been called into question even though they had nothing to do with the transgressions. There almost seems to be a palpable sadness among many of the firm’s employees when talking about the ongoing fallout.

What complicates intricate matters in the financial services realm is that there is often a difference between what the public expects professionals to be doing and what they are actually paid for. The public mandate is often much broader and sets the bar much higher.

How could Deloitte have missed the accounting irregularities that led to Steinhoff’s demise, people ask.

If this was a case of serious fraud, it would have been highly sophisticated and well concealed, Karl Leinberger, CIO of Coronation Fund Managers, wrote in a note to clients in January.

“David Young, a professor of accounting and control at graduate business school INSEAD who analysed Steinhoff’s financial statements post the events of December, concluded that these off-balance sheet structures could not have been uncovered using the group’s annual financial statements or other publicly available information,” he noted.

And when it comes to reputational risk, right or wrong is not necessarily a straightforward issue.

Firms with strong consumer brands (banks and retailers in particular) run significant reputational risk if they find themselves on the wrong side of public opinion.

In 2012, Starbucks faced a consumer boycott after it emerged that it was not paying its “fair share” of taxes in Britain, and offered to pay millions in voluntary taxes, even though this was not “legally” required. In the public mind, there is often not a distinct line between (legal) tax avoidance and (illegal) tax evasion.

Had KPMG declined to do work for politically-exposed parties all those years ago, a lot of the damage could probably have been avoided.

In walking away from KPMG – even though there is currently no reason to believe the auditing work it has done for Barclays Africa is anything but of the highest standards – Barclays Africa is perhaps pre-emptively doing what KPMG should have done many moons ago: carefully weighing who it gets into bed with.

In the court of public opinion, you may well be found guilty by association.

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