The KPMG saga displays the depths to which the once noble audit profession has plunged, writes MLUNGISI MTSHALI
In 2013, Ebrahim Fakir, political analyst at the Electoral Institute of Southern Africa, lamented that the ‘South African discourse on corruption is shrouded in misconceptions”. Fakir’s observations are not unique. The private sector, predominantly white and privileged, has an unearned amount of goodwill in the country’s account, leaving the main focus of scrutiny of NGOs and media and outright rightwing organisations like Afriforum and Solidarity on the much-paraded corruption of government, predominantly black and historically disadvantaged.
In his weekly online letter as President of the ANC, published in December 2006, Thabo Mbeki said, ‘’I have in the past made the point that a central and permanent feature of the racism experienced by black people over many centuries has been the stereotype that as black people we are inherently amoral and corrupt. Thus some in our country and elsewhere in the world know it as a matter of fact that our government is bound to be amoral and corrupt. Because of this, it is very easy successfully to market all manner of deliberate falsehoods about the ANC and our government, counting on the stubborn persistence of an insulting stereotype to give credibility to the most outrageous untruths’’.
This stubborn persistence of black stereotypes about corruption has seen an exaggerated focus on government corruption, real or perceived, and has resulted in the private sector getting away with a lot of evil deeds, and we are left to count the real cost of their deeds after a hundred years of slipping through the cracks and existing above scrutiny.
As we watch business after business ejecting KPMG from their doors as Auditors due to so-called ‘reputational risk’, given the highly muted historical corruption of big business, the KPMG fallout feels like watching a member of the Mafia being kicked out of the family for getting caught.
On October 13, 2010, in a seminar led by Edmond J. Safra Lab Fellow, Abigail Brown, whose research focused on institutional corruption in the audit industry, lamented the current structure of the audit industry which she said ‘creates the improper dependencies that enable misreporting’. Brown stated unequivocally that ‘the nature of the relationship between managers and auditors is such that there are few incentives for the manager to report accurately, and there are plenty of disincentives for an auditor to detect fraud. The primary disincentive for the auditor is the implicit threat of the loss of a future stream of revenue through the discontinuation of their contract with the company’.
The problem of ‘improper dependencies that enable misreporting’ in the Audit industry is an old and enduring problem which in no small measure has led us from one crisis to another, with the great recession in 2008 being the last monumental catastrophe. In that crisis, Audit firms went on to declare most businesses as going concerns a day before they were declared completely bankrupt.
Intentionally turning a blind eye to businesses in deep financial difficulty or directly misreporting the financial soundness of a firm or colluding with management to mislead shareholders is a problem deeply entrenched in the Audit industry. So the Idea that this is now a KPMG problem is not only mischievous and dishonest but is akin to the ‘you got caught’ narrative so take one for the team.
That first huge accounting scandal which comes to memory is the Arthur Andersen audits of Enron in 2002, which led to a new law in the United States called ‘Sarbanes-Oxley Act of 2002’. This law was meant to put the accounting industry under tightened federal oversight and create a regulatory board—with broad powers to punish corruption—to monitor accounting firms. It established stiff criminal penalties, including long jail terms, for accounting fraud. At the law’s signing, President George W. Bush said, “The era of low standards and false profits is over”.
Oh well, here we are.
In his book ‘Corporate Governance: Promises Kept, Promises Broken’ Jonathan R. Macey says, ‘There was a time audit functions were performed in an environment that induced high-quality financial reporting. In that era, accounting firms were willing to put their seal of approval on the financial records of a financial company, if only the company agreed to conform to high standards imposed by the accounting profession. Investors trusted accountants because investors knew that if accounting firms were sloppy or corrupt, they could not stay in business for long. Auditors had significant incentives to do superior work because auditors with strong reputations could command a fee premium, and high fees signalled quality in the auditing market’.
We have lost our way. We must again reclaim the integrity of the profession upon whom so many decisions are made.
Mtshali is a social activist and political commentator