Another day, another scandal: Big Four auditors need to reign in their subsidiaries

Another day, another high-profile auditor scandal. This time from South Africa, where sugar giant Tongatt Hulett is taking legal action against Deloitte - and suing some of its own former executives for $29 million - for failing to flag irregularities that inflated the company’s value by $770 million. Deloitte had been auditing Tongatt for 82 years; unpacking the full extent of the cover-up may very well take just as long.

The Big Four accounting firms – KPMG, PwC, EY and Deloitte – have come under increased scrutiny in recent years because multi-million-dollar companies have been collapsing with increased frequency and severity under their watch. Wirecard, 1MDB, Guptagate, Abraaj Capital; the Big Fours’ repeated missteps and bungled audits are raising valid questions about their competence, reliability, and perhaps most importantly, their de facto market monopoly. 

For developing countries like South Africa, where governments are often already struggling with governance challenges, corruption, and limited room for fiscal manoeuvre, the consequences of Big Four malfeasance can be particularly severe. From hospital patients in Kenya to Malaysia’s rural poor, some of the world’s most vulnerable are being harmed by prestigious accounting firms’ habit of signing off on bad audits.

A greater responsibility

Auditor misconduct is felt more keenly in developing economies because their citizens are facing more serious economic precarity than in the developed world, with fewer social protections and higher poverty levels. If a large company in a developing country collapses, investment dries up and job losses ensue, which makes a very real impact on people’s lives, as well as a country’s development trajectory. Big Four auditors bear greater responsibility in emerging markets – but this is often where they are most irresponsible. 

Take Malaysia’s 1MDB scandal, for example. In mid-January, KPMG paid out $80 million to the government of Malaysia, after reaching a settlement over botched audits of the state-owned 1Malaysia Development Berhad (1MDB) fund. 

The settlement came after the government, 1MDB, and its subsidiaries filed a $5.6 billion lawsuit against 44 current and former KPMG partners who signed off on 1MDB’s accounts in 2010, 2011, and 2012. Nearly $3.2 billion was allegedly misappropriated from the fund and its subsidiaries during that time – money that was meant to fund long-term, sustainable development projects, while safeguarding the economic well-being of Malaysian citizens in Terengganu, one of the country’s poorest states. 

For companies and funds investing abroad, the impact of shoddy oversight is equally severe.  In Dubai, for example, KPMG is being sued for $600 million for signing off on bad audits in the lead-up to the collapse of private equity firm Abraaj Capital. 

This was a particularly egregious case of auditor misbehaviour: Abraaj founder Arif Naqvi, who was just slapped with a $135.3 million fine from the Dubai financial regulator, swindled investors with claims that he could solve humanity’s biggest problems: hunger, disease, illiteracy, climate change, and energy shortages. The company’s former CFO, Ashish Dave, left Abraaj to become a KPMG partner in the months preceding its collapse, before returning to his previous role at Abraaj to preside over its downfall. This, apparently, failed to raise any red flags. 

The Emirati investment fund handled $14 billion of assets at its peak, and benefited from the support of high-profile philanthropic organisations including the Bill & Melinda Gates Foundation and Hamilton Lane. Abraaj was extremely active in Kenya, with $3.2 billion of investments in the country by the time it went bust. Equities markets shook in the aftermath, affecting women’s hospitals, hospitality businesses, and value-added manufacturing, all of which play a crucial role in supporting sustainable long-term growth.

Ignorance is bliss

Worse, though, is that when the truth of auditor malfeasance comes to light, top leadership often pleads ignorance. In the Tongaat case, the team that had been handling the account was removed, but Deloitte’s head office told the media it has no reason to suspect any staff member acted outside of required rules and standard guidelines. And in July 2018, KPMG’s umbrella organisation, KPMG International, launched an independent investigation into its Dubai affiliate’s work for Abraaj. 

The message in both cases is clear: HQ had no idea what was going on. 

For these companies, ignorance is bliss because it means zero consequences for top leadership, and more importantly, because both global subsidiaries and emerging market operations are big business for the Big Four. Deloitte’s global alliance and ecosystem business grew by 24% last year, while total revenues rose by 5.5% to hit $50.2 billion. PwC, meanwhile, reports Middle East revenues rose by 5% in 2021, and by 30% in Turkey alone, while total annual revenues grew by 2% to hit $45 billion. 

Supported by profitable and fast-growing foreign subsidiaries, business is booming for the Big Four. They recorded a combined $167.3 billion in turnover last year, their strongest collective result since the Enron scandal, which pared what was then the Big Five down to four – Arthur Andersen, Enron’s auditor, collapsed in 2002. 

Given this recent track record, perhaps more of them should collapse. Claiming to be unaware of misconduct and criminal behaviour at branch offices and subsidiaries not only perpetuates the problem, it ignores the real issue: that corporate culture emanates from the top. 

Investment-driven economic growth is a lifeline for developing countries. When it collapses due to external malfeasance, victims are left with very little recourse. It’s not just market monopolies and the scandals themselves that are cause for concern: there are also serious questions to be asked about the Big Four’s global operations. Are these firms capable of catching wrongdoing within their own subsidiaries? If so, why does it keep happening? And if not, why are they in the audit business at all?

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)