Tuesday, December 5, 2023

Here is an “Audit” of the big four…..

The big accounting firms around the world find themselves under fire following a string of corporate accounting scandals which have put audit quality firmly back under the spotlight not since the collapse of Enron a decade ago.

The big four accounting firms ÔÇô Deloitte, Ernest & Young, KPMG and PWC ÔÇô are facing intense scrutiny from various regulators pertaining to their growing influence over the private and public sectors, with most critics questioning the competition landscape as well as the firms’ independence to deliver judgement without worrying about future contracts.

Earlier this year the Financial Times quoted a report from the International Forum of Independent Audit Regulators which highlighted several shortcomings of auditing firms. The report showed that global accounting watchdogs identified serious problems at 40 per cent of the audits they inspected last year involving companies in “riskier” situations. These included conflicts that compromised objectivity, and widespread failures to test the accuracy and reasonableness of companies’ data and assumptions.

This past week the embattled KPMG’s South African arm continued to lose high profile clients after Barclays Africa decided to cancel the firm’s audit contract. While corporate failures are yet to emerge in Botswana, the contagion of controversy surrounding the big four accounting firms is taking shape and has dissipated into some boardroom talk as pressure piles from shareholders.

Although KPMG Botswana enjoys management independence from its South African counterpart, the reputational risks associated with the firm’s name has not gone unnoticed. Since the break of the KPMG scandals in South Africa, the local arm of the firm has lost a key client; the dually listed Choppies has dropped KPMG this year as their external auditor.

“In relation to Choppies, the company’s Board adopted a policy to rotate auditors every 10 years, and KPMG had been auditors for this period of time,” said Nigel Dixon-Warren, KPMG Botswana’s partner.

The local KPMG arm now audits only two of the listed companies, Barclays bank Botswana and Standard Chartered bank Botswana. With Barclays Bank Botswana’s parent company, Barclays Africa, dropping KPMG SA as auditors, it remains to be seen if their decision will extend to its subsidiaries. KPMG Botswana was appointed auditor to Barclays Botswana last year following instruction from Barclays Africa.

Dixon-Warren says they have been auditing Standard Chartered Bank Botswana for more than 20 years. “The audit was put out to proposal a couple of years ago with KPMG being re-appointed.”

PwC Botswana, KPMG’s across town rival, audits eight out of the twenty two BSE listed companies, making it the largest in the country in terms of size. Of the eight domestic listed entities where PWC is the external auditors, the firm has acted as auditors for more than ten years for three companies; audited one company for between five and ten years and has audited four companies  for less than five years.

Butler Phirie, PwC managing director, said they employ more than one hundred and twenty audit professionals.  “Our practice therefore has substantial scale in the Botswana market.”

When Choppies dropped KPMG as auditors it cited King’s principle of good governance, which advocates for the rotation of auditors every 10 years. However, the King IV report does not require mandatory audit firm rotation. Instead the King IV report on corporate governance discusses auditor independence as part of the foundation of corporate governance, and links this very strongly to the roles and responsibilities of the audit committee.

“It espouses an important principle, namely that – although the auditor is responsible for the performance of the audit (and audit quality) – those charged with governance, including the audit committee, also have an important role to play in overseeing the audit,” said Phirie who is also a local partner at the firm.

Dixon-Warren says they fully support the adoption of the King Code of Corporate Governance by listed companies. The KPMG chief also explained that the King Code is fundamentally a set of recommendations to be adopted by listed companies at their discretion.

“The specific issue of Mandatory Audit Firm Rotation (MAFR) is being considered in Botswana by the appropriate regulator being the Botswana Accountancy Oversight Authority and we await the outcome of that process,” he said. “whereas the issue of MAFR is jurisdiction specific ÔÇô for example in the US, MAFR is not being enforced whereas in the EU, listed firms are required to put their audits out to tender at least every 10 years and should change auditors at least every 20 years. In South Africa MAFR will be introduced in 2023.”

The accounting firms do not only offer auditing but have morphed into multi-disciplinary business model that encompasses consulting and advisory services. Longstanding critics of the Big Four fear a firm’s audit work could be compromised if it secures large additional fees from the same client by doing consulting work, in areas such as tax advice. A broader concern is that firms are too focused on consulting, and not enough on audit.

“As a member of the auditing profession, PwC understands the key role the profession plays in building public trust in information disseminated in the financial markets.  There is little (if any) doubt that auditor independence is an important contributor to overall audit quality. Auditor independence may be impacted upon where services, which are incompatible with the external audit function, are performed by the external auditor,” said Phirie.

The dominance of the big four firms has also raised concerns about conflict of interests; are auditors able to exercise judgement rather than cozying to the views of managers and directors of the companies they audit. The issue is made even more troubling in Botswana where the market is small where business leaders regularly cross paths with their service providers. While in the past auditors have defended themselves that audits are not designed to detect fraud, that notion is being challenged both by public opinion court and regulators all over the world.

The fiercest critics are calling for the breakup of the big four firms to ease competition and also to crack down on poor practices. Most of these critics accept that some of the poor practices that led to scandals are not the results of inexperience or incompetence from the auditors but rather the result of insufficient will to do the real work of auditing and risk losing large fees. Critics of the big four are also increasingly concerned about a lack of competition available to companies when they look to procure audit services outside the big four.

Dixon-Warren admits that while KPMG has a broad client base across the private and public sector, the competition is ‘very robust’ with all the ‘major international firms’ operating in Botswana as well as a growing number of local firms.

Similar sentiments were also echoed by the PwC chief who said the local landscape for auditing services is influenced by a number of factors.  “Given the comparatively significant levels of foreign controlling ownership in listed entities, requirements from outside Botswana on such foreign holding companies often play a role in domestic auditor appointments on the BSE (and for large unlisted entities where shareholding is foreign).”

“In our experience, the competitive landscape is thus tough and healthy, albeit too often premised on a compulsion to reduce audit costs. The fact that five (out of a total of twenty-one) domestically listed companies changed auditors over the past twelve months is clear evidence of this,” said Phirie.


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