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By Hilton Tarrant

Moneyweb: Columnist

R100m-plus hit as Barclays Africa fires KPMG

All eyes on Standard Bank as Nedbank Group plans to keep firm on for now.

Under fire KPMG has lost about R125 million in annual audit fees after the decision by Barclays Africa Group (soon to be Absa Group) to not reappoint the audit firm as one of its joint auditors for 2018. KPMG and EY (Ernst & Young Inc) have acted as joint auditors for the group, and in 2017 were paid a total of R250 million for that reporting period. This implies that each were paid around R125 million.

 KPMG was appointed by Barclays Africa Group in May 2016, following approval by shareholders. Its appointment was “a consequence of the retirement of PwC as group auditor pursuant to a mandatory rotation of auditors by Barclays PLC and following both a global and local tender process”. EY has been in its position as group auditors for more than 25 years. Having joint auditors is a requirement of the South African Reserve Bank (Sarb), the primary regulator of banks in the country.

In 2016, KPMG was paid around R111 million in audit fees (being half of the R222 million reported by the group). The bank says, “the appointment of KPMG Inc as external auditor of the group will cease on completion of the statutory and regulatory audit and reporting matters relating to the 2017 financial year, which is expected by approximately May 31 2018.”

More than a handful of JSE-listed companies have fired KPMG as auditors in the past year, following the fallout from various audit scandals. These include The Foschini Group, African Rainbow Minerals, Gaia Infrastructure Capital, AVI Limited and Sasfin. Most of these are small in the broader context. For instance, AVI and Sasfin only spent R11 million and R6 million with KPMG in their 2017 reporting periods, respectively. The JSE Limited rotated away from KPMG to EY in FY2017.

In November, then Imperial Group CEO Mark Lamberti lashed out at KPMG and moved secondary accounting and consulting services away from the group (read: Imperial’s Lamberti lashes out at KPMG; state capture). Imperial spent R13 million on this work.

Barclays Africa Group is the highest-profile and almost certainly highest-value account lost by KPMG thus far. Standard Bank Group and Nedbank Group are other high-profile and high-value accounts.

Standard Bank Group spent R234 million on audit fees for the 2017 financial year, meaning a further R100 million-plus is on the line. Nedbank Group spent a more modest R144 million on statutory audit fees for 2017, meaning R70 million is on the line.

Both have asked shareholders to support the reappointment of KPMG as joint auditors. Nedbank’s other auditor is Deloitte, while Standard Bank’s is PwC. These resolutions will be voted on at the banks’ respective AGMs (Standard Bank Group on May 24 2018 and Nedbank Group on May 10 2018), unless these resolutions are withdrawn ahead of time.

In the notice of its AGM, published on March 27 2018, Barclays Africa Group defended the reappointment of KPMG:

“In a media statement issued on October 2 2017, the company expressed its concerns on alleged inappropriate conduct by KPMG Inc in relation to audit and advisory services the firm provided to certain of its clients. In particular, the board highlighted its concern regarding the behaviours underlying the allegations against KPMG Inc which were in conflict with our values. The board engaged with the firm on the issues of concern.

“In order to reassure stakeholders of the quality of the audit, the GACC [Group Audit and Compliance Committee] secured additional support, enhanced quality processes and quality reviews from KPMG Inc and from KPMG International. The audit team displayed an appropriate degree of technical expertise and challenge to management during the audit, resulting in an audit of satisfactory quality.

“The board recognises that there are a limited number of professional audit firms able to accept the risk of conducting an audit of a Pan African financial services business the size and complexity of Barclays Africa.

“The board is proposing that KPMG Inc be reappointed as auditors for the 2018 financial year, but will continue to monitor developments relating to KPMG Inc, as well as their ongoing efforts to remediate their governance, independence, and audit quality.”

In Thursday’s announcement to the market withdrawing the resolution regarding KPMG’s reappointment, Barclays Africa Group says, “Subsequent to the release of our Notice of AGM, the ongoing and more recent developments were evaluated by the board, which decided that it is no longer able to support the reappointment of KPMG Inc.”

It adds, however, that the “board confirms that through the Group Audit and Compliance Committee it secured additional support, enhanced quality processes and quality reviews from KPMG Inc and KPMG International for the 2017 audit, resulting in an audit of satisfactory quality”.

EY will be the sole auditors of Barclays Africa until a second firm is appointed. Given that there are only four large auditing firms, and the requirement that auditors be rotated, the appointment of a replacement for KPMG is going to be challenging.

Hilton Tarrant can still be contacted at hilton@moneyweb.co.za.

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