As the crowd in the Colosseum screams for KPMG’s blood, there are some voices in the same arena advocating calm by arguing that the demise of KPMG as joint auditor at 4 of the big 5 commercial banks could pose “systemic risk” to South Africa.

These advocates in favour of KPMG have also drawn attention to the specialised nature of bank auditing and the capacity which only the large audit firms seem to possess to which must be added the reported Reserve Bank concerns, the future well-being of its 3 200 employees (excluding partners) and the new CEO of KPMG’s argument that “it would not be good for the country if KPMG folded.”

It is as unnecessary and unproductive to twist the knife further as it is unnecessary and unproductive to support KPMG for reasons which fail to pass muster.  It follows that the arguments of the voices of calm supporting KPMG should be closely examined and measured against KPMG’s performance with respect to its own core values when read with the requirements of the Audit Professions Act and the Rules of Professional Conduct.

Some of KPMG’s core values on its website include: we respect the individual; we are open and honest in our communication; we seek the facts and provide insight and above all, we act with integrity.

It is quite clear that KPMG, on its own version, has failed dismally to uphold any of these core values which has resulted in an imbroglio engulfing the firm, its leadership, and the audit profession at large. It is equally clear that KPMG’s failures were not a once off aberration, rather, these were recurrent failures which occurred over an extended period of time.

International Standard on Auditing (ISA) 250 demands what is known as professional scepticism and is the crowd with the thumbs currently pointing downwards expected to believe that the 200 odd partners were either not concerned or unaware of the modus operandi of companies linked to the Guptas and the questionable KPMG SARS Report? At best, one can argue that these partners were not sceptical which raises the questions of their competence and whether a responsible audit committee of a listed company would want any of these partners to sign off their company’s AFS?

The Rules of Professional Conduct are a function of the Audit Professions Act and a contravention is effectively a breach of statute as opposed to breaking some cosy private club rules. That these Rules should be so blatantly breached by a big 4 audit firm with all the resources to ensure compliance makes the situation even more damning.

Fundamental principles contained in these Rules require that a registered auditor perform work with integrity; objectivity; professional competence and due care; and professional behaviour which doesn’t discredit the profession. After considering the admissions of KPMG in its press release, it seems apparent that KPMG, with all its reputed capabilities and vast partnership experience, has not even come close to satisfying these non-negotiable requirements.

And what of the other arguments in support of KPMG?

The notion that the big 4 audit firms have all this specialised banking knowledge has a hollow ring when none of these firms raised any concerns in their audit reports in AFS prior to the 2008 banking crisis where Ernst &Young audited Lehman Brothers; Deloittes audited Bear Stearns as well as Royal Bank of Scotland and where PwC audited Goldman Sachs.

Closer to home and more recently, Deloittes gave African Bank a clean audit the year before it went into liquidation and Ernst & Young was the auditor for the failed Regal Bank. Audit firms by their very nature experience high turnovers of staff as graduates serve articles, write their professional examinations and move on to gain wider commercial experience. Those that remain become audit managers and more often than not, use their more senior positions to move onto the higher rungs of the corporate ladder outside of the profession. The notions of “institutional memory, unique training methodology and intellectual capital” seem vastly over-rated. It must be remembered that the audit “donkey work” is being done by what can best be described as greenhorns and in large audit firms the partners are far removed from the coalface as their priorities and focus tend to involve the usual corporate Machiavellian machinations prevalent in any big organisation interspersed with the occasional wedding reception, games of golf, and other such recreational events.

In spite of spectacular audit failures, supporters of the big 4 audit firms continue to argue their perceived superior audit capabilities and one must ask whether the large body of contrary evidence demands that mid-tier local firms, some of whom have international links, should be afforded a place at the table and whether these firms with more hands-on partners would not deliver better audit quality?

The new KPMG CEO argues that the failure of her firm will not be good for the country. Whilst her undoubted bravery in taking the ultimate hospital pass is to be commended, the counter argument is that in a country where public and private corporate malfeasance occurs with apparent impunity, then is it not time for business leaders to draw a line in the sand if we are to ever be taken seriously in the eyes of the international business community?

Even more importantly, a serious clean up and restructuring needs to be done and be seen to be done if we hope to re-establish the credibility of the audit profession in the country. It cannot be the case that some senior KPMG partners resign and disappear without any consequence for their professional standing. Surely the Investigations Committee of the Independent Regulatory Board for Auditors (IRBA) should be gathering evidence to support a charge sheet advocating the removal of registered auditor status of the entire block of more senior partners and should the South African Institute of Chartered Accountants (SAICA) not be doing the same with respect to the CA (SA) designation which these partners currently enjoy? Can we be seen to be soft pedalling on such colossal and flagrant violations of ethical codes of professional conduct and how can we be justified in pointing a finger at Gupta entities, state capture and corruption on one hand whilst giving old established “too big to fail” business a get out of jail free card?

There are vast numbers of ethical and skilled employees at KPMG who must be furious at the way their partners have let them down and in the event that more listed companies dispense of KPMG’s services in a slow burn fashion, then the first to suffer retrenchments will be these employees who make up 94% of the total headcount.  The piecemeal migration of former KPMG clients to other audit firms will see new audit assignments allocated to existing audit teams and any new hiring will increase at a far lower rate than the value of new work obtained – in short, retrenched KPMG employees will be in for a very rough time.

The collapse of Arthur Andersen in 2002 was a big bang situation and not only were their clients quickly absorbed without systemic risk, but the urgency which former clients had to find a new audit firm resulted in almost all ethical and competent Arthur Andersen employees being employed by rival firms.

We would argue that the empirical evidence of the Arthur Andersen collapse shows, as it did in the USA and in the rest of the world, that rival firms will employ the vast majority of the 3 200 KPMG staff almost immediately so as to satisfy all the new audit assignments in the event of a rapid demise of KPMG South Africa.

Time will tell whether the arguments in favour of KPMG pass muster and whether the crowd demanding blood is misguided.  In the meantime, it is patently obvious that the damage wrought on the audit profession and the CA (SA) designation by KPMG partners is nothing short of a disgrace.

Never before has corporate South Africa been presented with such a clear opportunity to do the right thing as regards its choice of external auditor and with the entire audit profession’s credibility at stake, never before has the IRBA and SAICA been presented with the choice of ambivalence and prevarication on one hand versus the choice to take the urgent and decisive steps necessary to restore the integrity of chartered accountants in the audit profession as well as in business.

What choices will be made and will they be the right ones?