Auditing of listed firms comes with higher perks due to their big size as well as the reputation of being associated with well-known brands. file photo | nmg
Two of the Big Four audit firms trounce rivals, bagging 10 out of 11 NSE-listed lenders.
Ernst & Young signs up to audit one bank while Deloitte misses out of the publicly traded list as CBK directive is implemented.
The Big Four have effectively locked mid-tier global consultancy firms such as RSM, Grant Thornton, Crowe Horwath, Parker Randall, Baker Tilly, Mazars, and BDO out of the lucrative listed banks’ auditing market.
KPMG and Pricewaterhouse Coopers have emerged the biggest winners in the ongoing reshuffle of bank auditors in compliance with a Central Bank of Kenya (CBK) directive.
The two have between them signed up 10 out of the 11 Nairobi bourse listed banks.
KPMG and PwC now have on their clients’ lists five NSE-listed banks each, up from four last year.
Ernst & Young – trading as EY – bagged only one listed bank client, Co-op Bank #ticker:COOP, while Deloitte missed out on the publicly traded lenders.
The pack of Big Four accounting firms — Deloitte & Touche, PwC, EY, and KPMG — raked in a total of Sh241.84 million in professional fees from Kenya’s 11 listed banks, a 6.1 per cent growth from the Sh227.84 million they earned a year earlier.
Co-op Bank attributed the growth in audit fees to inflation.
“The fee increase of 10 per cent for the group and about six per cent for the bank is largely an adjustment for inflation,” the bank said in an interview.
The Big Four have effectively locked mid-tier global consultancy firms in Kenya — such as RSM, Grant Thornton, Crowe Horwath, Parker Randall, Baker Tilly, Mazars, and BDO — out of the lucrative listed banks’ auditing market.
Auditing of listed firms comes with higher perks due to their big size as well as the reputation of being associated with well-known brands.
Anne Muraya, a partner and deputy audit leader at Deloitte East Africa, attributed the dominance of the Big Four to their having higher capacity in terms of workforce and expertise over the smaller players who ‘lack critical muscle’ to deliver the audits within the three-month window for banks after close of the financial year.
Furthermore, Institute of Certified Public Accountants of Kenya (ICPAK) rules cap the fees an audit firm can make from one client at 10 per cent of its total annual revenue, a test some of the mid-tier players may fail.
The order requiring banks to hire auditors on a rotating basis comes after the consultants were entangled in the collapse of three banks, namely Dubai Bank, Imperial Bank and Chase Bank.
The growth in audit fees recorded last year was also attributed to the complexity of the book reviews, with banks having opened regional subsidiaries and diversified into streams such as bancassurance, investment banking, and custodial services.
Further, stringent oversight by the CBK on matters such as loan loss provisioning, fraud, and integrity disclosures as well as new accounting standards means the scope of work taken by external auditors has expanded.
“One of things CBK introduced in auditing banks is an in-depth review of the IT systems. There is also the risk complexity in auditing banks,” said Ms Muraya.
A senior executive at one of the mid-tier accounting firms in Nairobi, however, said it was a matter of ‘perception’ that the smaller auditors do not have the capacity to handle banks.
“It is just a matter of perception that the big ones do a good job. But look at all the accounting scandals that have happened here like Mumias #ticker:MSC, Shelter Afrique, CMC #ticker:CMC, Uchumi #ticker:UCHM, and the collapsed banks. Who were the auditors?” asked the official who requested anonymity to discuss the issue freely.
CBK Governor Patrick Njoroge has proposed three-year term limits for external accountants handling the books of lenders.
Kunal Ajmera, chief operating officer at Grant Thornton, said term limits for auditors will help address the ‘familiarity threat’ posed by long-serving external auditors.
Barclays’ shareholders last month approved the hiring of KPMG as the lender’s external auditors, bringing to an end PwC’s nearly two-decade stint as auditors.
Deloitte fell off the NSE-listed banks list after National Bank shareholders on Friday voted to appoint PwC as the lender’s new external auditors.
“It is always good practice to change auditors. Deloitte had served us for many years,” said National Bank chief executive Wilfred Mutuku Musau at the bank’s annual general meeting.
Equity Group shareholders on Tuesday approved the hiring of PwC as the new external auditors, replacing EY which had audited the lender since it acquired a commercial banking licence in 2004.
The new catch now grows the number of listed banks audited by KPMG to five, including I&M Bank #ticker:I&M, StanChart #ticker:SCBK, Housing Finance #ticker:HFCK, and KCB #ticker:KCB.
PwC also has five listed banks: NBK #ticker:NBK, Equity #ticker:EQTY, DTB #ticker:DTK, NIC #ticker:NIC and Stanbic Kenya #ticker:CFC.
KPMG pocketed a total of Sh90.2 million in audit fees from the four listed banks it handled last year, ahead of PwC which earned Sh79.3 million from a similar number of publicly traded lenders it audited.
EY earned Sh60.1 million in fees in 2016 from Co-op Bank and Equity Bank. Deloitte made Sh12.06 million last year as National Bank’s #ticker:NBK external auditors.
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