Reuters has reported:
South Africa's central bank has told top lenders they cannot fire auditor KPMG [KPMG.UL], entangled in a scandal involving friends of President Jacob Zuma, because it might undermine financial stability, two sources with knowledge of the matter said.
KPMG sacked its South African leadership two weeks ago after it found work the accounting firm had done for companies owned by the Gupta family “fell considerably short” of its standards.
Their headline is:
South Africa's central bank tells lenders that KPMG is 'too big to fail'
So now we have auditors too big to fail, and being paid substantial sums despite that for the risk that they are very obviously no longer taking. If ever there was a recipe for moral hazard this was it.
The case for total reform of the audit market grows by the day.
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Can’t fire them because only another set of ….crooks(?) could untangle the books? And the new team would be able to charge even more because the client is over a barrel.
Everywhere you look there is not full free market capitalism operating but a twisted system of cartels
Yes. You got in one.
Hello Richard.
After 2008 it was ‘banks are too big to fail’.
Now in South Africa it is ‘KPMG too big to fail’.
Yet we know that QE allowed the government to deal with this problem. Under MMT sovereign governments can always fund themselves and purchase anything for sale in their own currency.
I’m wondering therefore if it is actually correct to say any private business is too big to fail?
If sovereign governments cannot financially fail, and are in control of legislation, then I don’t see why any business can be too big to fail.
Is there something I’m missing?
Thanks for your blogs. I enjoy them.
Gordon.
Of course KPMG is not too big to fail
SA like here needs a new audit model, that’s all
@Gordon, thanks for providing the weakest link in MMT: “Under MMT sovereign governments can always fund themselves and purchase anything for sale in their own currency.” Fine if you don’t need to trade in other currencies.
So don’t rely on or become captive to other currencies. Few are.
So what was the relevance of your observation in this context anyway ?
We do need to import and export in other currencies. We are a very open economy without lots of natural resources which we need (even if we don’t need manufactures).
@Carol Wilcox
MMT covers that. It s all there in their frequently referenced “sectoral balances” narrative which I won’t explain as its fundamental to them so you would either know about that or easily look it up. I’m not religiously uncritical of them. But if you want to get objectively critical you’ll find that they have actually covered basic concerns like the ones that you indicated here and to the extent that there may be flaws they exist at a more sophisticated level.
Personally I find some of it, especially the stuff that refers to the external sector, as being too narrowly quantitative and mathematical too include qualitative considerations such as those that define Dutch disease (for example). As regards your expressed concern, one might also consider that a sovereign economy need only be ‘open’ to the extent that its serves the purpose of its people and foreign dependency can be just as much of a restriction as openness is a liberty. Remembering where I am I might just quietly tiptoe out of here at this point…
If it’s “too big to fail” then logically isn’t it “too big to be allowed to exist”?
Time, I think, to bring such firms into government and later perhaps, where appropriate, sell of bits of them to the private sector in chunks small enough to allow actual competition.
If we do the audit markets, can we do the ratings market too please?
Isn’t it obvious that a market economy can only work to the benefit of a country if no participant is allowed to be too big to fail? So shouldn’t we have a policy of breaking up big companies?
Yes
Call it The Anti-Monopoly, Pro-Competition Law
Too big to fail, or not?
The question, then, is “What does this failure look like?”
Not necessarily the Arthur Andersen collapse, where the firm voluntarily surrendered their licenses and dissolved; nor even a disorderly exit of all the clients who fear for their reputation ’til the only ones remaining are those who fear what will be revealed by a less-disreputable auditor.
No, the failure mode that no-one talks about is the one we’ve watching right now: a succession of increasingly-disreputable compromises and whitewashes and rationalisations while confidence in audit ebbs away, replaced by a cynical acceptance of that corruption is inevitable and successful commerce relies on being ‘onside’ and an insider in dishonest businesses.
I think KPMG is only a part player in this story, they could have easily been leaned on by politicians to give the gupta family as clean bill of health, no question asked.
They are to blame, I have no doubt, but the problem stems far deeper than KPMG.
If the regulator is consistently fining the big 4 firms 5m per audit failure (when the annual audit fee is say 300k) then where does that leave the audit market? Riskier audits will presumably cost more and might get done by smaller firms. Is that what we need?
Nationalising audit is impossible. The public sector won’t pay an audit senior manager the 90k a year they are getting in the big 4 let alone the salary of anyone more senior
Why can’t the public sector pay the appropriate salary
It will be cutting out the 1/3 profit after all
The public sector will pay for what it wants. And what it wants at any given time is dependent on the will of the government of the day. Only to a minor extent is this influenced by the desires of the electorate.
I’ve long been cynical about the role of ‘Audit’. My impression is that in reality all an auditor does is checks the figures to see if the columns add up. The crisis of 2008 seems to bear this out.
It does not seem to be incumbent on an auditor to determine whether the figures make ‘business sense’.
I’ve no doubt Richard will correct me if I’m being unduly cynical here.
Using the figures 300K and 5m you provide as examples. Profitability of the big audit firms is purely a numbers game. As long as they get more than 17 successful audits past the regulators for every time they get fined they are quids in. If the regulator gets better at regulating the audit fee will have to increase, or the auditor will have to be more obscure in the presentation …or something. It’s a sophisticated cat and mouse game of risk and reward.
Expensive and pointless. But lucrative for the participants. A 90K salary for doing what a spreadsheet does has to be nice work if you can get it.
Adding up is not the issue
Auditors are there to ensure a particular world view is presented. That world view is that business is run in the interests of capital. This is what IFRS requires. You aw being insufficiently cynical
So if the ‘too big to fail’ suggestion is an absurd excuse then the central bank is corrupt as well?
It’s complicit in an unsustainable process of maintaining a veneer on a system that is clearly well over due for replacement
South Africa is well on the way to a destination we call “Nigeria”: a situation in which all businesses exist and operate by corruption, and the authorities – auditors, regulators, courts and governors – are themselves corrupt and work to perpetuate the corruption.
We in London are appalled and dismayed by this, for it could never happen here and we take great care to avoid inadvertently laundering the proceeds of corruption.
A Gentleman Banker will not touch your money unless and until it is demonstrably and provably clean.
Or cleaned.
And Africa’s auditors are, despite the domiciliary status of their local legal entities, rather closer to us than being foreign firms that just happen to share the names of our familiar Big Four auditors.
My word! Nile, that’s a very finely crafted statement.