The South African Reserve Bank in Pretoria.

JOHANNESBURG - The SA Reserve Bank (Sarb) has told top lenders that they cannot fire auditor KPMG, entangled in a scandal involving friends of President Zuma, the Guptas, because it might undermine financial stability, two sources with knowledge of the matter say. 

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 had fallen “considerably short” of its standards. 

KPMG has said it will ask a senior legal figure to conduct an external investigation into whether its South African-based workers were complicit in illegal activities or colluded in producing a report that has since been discredited. 

The scandal has raised questions about the survival of the local unit of KPMG after it lost at least four clients.  A number of blue-chip companies, including Barclays Africa and Nedbank, have said they are considering dropping one of the biggest names in accounting in the world. 

However, the prospect of the local unit of KPMG going under has rattled the Reserve Bank because it is one of only four auditors with enough depth to jointly audit the four largest banks. 

No bank may drop or hire an auditor without the central bank’s approval.  “The Sarb is essentially saying KPMG is ‘too big to fail’,” one source said. “They have taken that stance to their discussions with banks.”  

The Sarb did not respond to questions about its dialogue with lenders and referred to a statement it issued two weeks ago in which it said it would hold meetings with banks and auditors with a view to maintaining financial system stability. 

Risk to the system 

Under South African rules, the big four banks, Standard Bank, Barclays Africa, Nedbank and FirstRand must appoint two joint auditors from the pool that comprises KPMG, Ernst & Young, Deloitte and PricewaterhouseCoopers, companies deemed to have specialist banking knowledge. 

In addition, the big four are required to rotate their auditors every five years. The central bank believes that without KPMG in the mix it would be harder, if not impossible, to comply, the sources say. 

“The Reserve Bank believes KPMG failure poses risk to the system,” another source said.  Standard Bank did not directly answer a  question about whether the central bank had asked it not to drop the embattled KPMG. 

It said it would wait for the auditor to complete the investigation before taking any action.  “We do not consider that KPMG has yet taken sufficient action to begin to restore its reputation,” it said.  

Rival Nedbank also did not specifically address the question. 

The bank’s chief financial officer, Raisibe Morathi, said it was awaiting the result of KPMG’s independent inquiry before deciding on its next step.  Barclays Africa said it was still in the process of reviewing its relationship with KPMG, without going into details about whether the central bank had told it to keep the firm as its auditor.

FirstRand does not use KPMG as its external auditor. 

The KPMG scandal largely relates to a report it produced at the end of 2015 that alleged people at the SA Revenue Service had created an illegal “rogue spy unit”.  The report was used to discredit then-finance minister Pravin Gordhan, a vocal critic of Zuma. This month KPMG  apologised for the report and withdrew its findings.     

KPMG is one of several high-profile international companies facing questions about its work for the Indian-born Gupta brothers, who were accused by the public protector of unduly influencing the awarding of government contracts.  

The Guptas and Zuma deny any wrongdoing and say that they are victims of a politically motivated witch-hunt.  The Guptas and their companies also have not been charged with any crime yet.

Lenders are required to rotate auditors every five years and Sarb fears without KPMG this will be impossible to achieve.

- BUSINESS REPORT