South African regulators are stepping up efforts to break the oligopoly of the country’s top auditing firms after accounting scandals involving two of the Big Four failed to do the job for them.
The nation’s largest publicly traded companies are reluctant to switch to mid-tier firms out of concern they may not be able to handle complex operations often sprawled across Africa or further abroad. That’s spurring smaller firms to scale up their businesses and hire teams in anticipation of new rules aimed at dismantling the dominance of PwC, Deloitte, EY and KPMG.
The industry has been in turmoil since late 2017, when KPMG was blasted for working for the Gupta family, which was accused of using politicians to loot the government through state capture. The firm had to retract a report for the tax agency and was involved with a bank that failed due to alleged fraud. Deloitte came under fire for accounting irregularities that led to the near collapse of a South African-born global retailer and a criminal probe at a sugar producer.
“Has state capture really forced everyone to look at the market’s current concentration? No,” said Bernard Agulhas, head of the Independent Regulatory Board for Auditors. “There is a big gap between the Big Four and other firms. That is a big problem.”
The regulator is now developing guidelines on how firms can perform joint audits to upskill mid-tier companies, while also encouraging smaller auditors to combine their operations or cooperate to handle larger mandates. The board is ramping up its monitoring role to ensure larger firms don’t collude in switching among themselves when mandatory rotation starts in 2023.
While KPMG has cleaned up its image by bolstering the independence of its board and adding layers of accountability to its auditing process, the firm is down a third of its revenue and staff numbers. Deloitte South Africa is also scrutinising potential clients more carefully.
Deloitte has repeatedly said there is no evidence of wrongdoing by the staff involved in the Steinhoff International Holdings and Tongaat Hulett audits and that it is difficult to detect fraud. KPMG said it has learned from the scandals, changed its senior management and is now “a very different business compared to what it was two years ago”.
Anoop Ninan, co-CEO of Mazars South Africa, formed a unit specialising in financial services companies by head-hunting teams from the Big Four to win banks and insurers as clients. But it’s not just a matter of acquiring the skills.
“It’s also the network,” Ninan says. “The client base of a Big Four firm, most of them worked together and some articled there. They know each other, so there is familiarity and loyalty.”
Mazars, which took over Steinhoff from Deloitte, reported an increase in revenue of 12% in 2019.
“Deloitte’s objective is not to increase market share as a result of mandatory firm rotation” every 10 years and taking on additional risk, the firm said in an e-mail.
BDO is seeking to score clients changing their auditors, CEO Mark Stewart said. An important part of its strategy is actively training staff to do the right thing, although the cost of bolstering operations can handicap smaller players.
At BDO, initiatives aimed at improving audit quality and independence have knocked about 3% off its bottom line, Stewart said. This becomes “a big number” when compounded by a bigger wage bill and slow growth in larger clients.
The regulator is lobbying audit committees at companies to embrace the use of mid-tier firms. In his budget speech on 26 February, finance minister Tito Mboweni said an independent panel will be appointed to review the profession’s practices and add legislation to strengthen oversight in the industry.
“Not every business failure is an audit failure,” the regulator’s Agulhas said. “Part of the regulatory response is to review the fraud risk standards to see whether auditors should be expected to do more work around fraud.” — Reported by Roxanne Henderson, (c) 2020 Bloomberg LP