All KPMG partners - even those who have jumped ship - could be held liable for a potential claim of R1.89 billion following the firm's disastrous audit of VBS.
The firm has indemnity insurance, but it may not pay out in case fraud was committed.
Meanwhile, KPMG International will send foreign execs to South Africa to prop up the firm.
The already deeply troubled KPMG South Africa could be liable to pay a claim exceeding R2 billion because of its work on VBS Mutual Bank – and its individual partners could be personally liable for the money.
Last week, advocate Terry Motau recommended that the SA Reserve Bank and VBS' curators launch "an auditor's liability claim" against KPMG for damages. The same report found that at least R1.89 billion in "gratuitous payments" from VBS went to 53 individuals – not counting legal and other costs that have been mounting since the bank was placed in curatorship.
And much of that money, experts agree, could be sought from KPMG, which signed off on the VBS books.
While there is a limit on liability for advice work – an audit firm typically may have to pay back twice their fee – there is no limit on how much could be claimed back for losses due to audit work, a senior partner at one of the biggest audit firms in South Africa confirmed to Business Insider South Africa, on condition of anonymity.
And because KPMG is a partnership, everyone who was a KPMG partner at the time of the audit would be liable for the amount. This means that the many KPMG partners who have jumped ship in recent months could still face a claim.
KPMG South Africa has professional indemnity insurance to cover the liability. However, depending on the terms of the contract, the policy may not pay out if it was found that the KPMG partner committed fraud – and that is unequivocally alleged.
"I accordingly find that Malaba committed fraud," Motau summarised one of his findings, referring to former KPMG senior partner Sipho Malaba, alleged to have received more than R33 million from VBS irregularly. Malaba has slammed the report and may take legal action.
Business Insider asked KPMG if its global parent company would fund a legal claim against it.
"KPMG South Africa has appropriate professional indemnity insurance to support the firm in the event a claim is made," said spokesperson Nqubeko Sibiya.
Asked if that insurance covers fraud by a partner, Sibiya simply referred to the same answer again.
If all the partners at a firm are involved in fraud, professional indemnity (PI) insurance will not cover a claim, Russell Kayton, of specialist professional indemnity insurance broker Picara, told Business Insider.
"The insured should always try and ensure that their PI insurance policy provides cover for fraudulent and dishonest acts by a partner / director of the practice which ensures that the innocent partners / directors are protected. Some policies, however, do not provide this cover while others may only provide cover for an employee, not a partner or director."
By law, auditors are protected from liability claims up to the point where they are proven negligent. After that, say if a firm was involved in brazen and large-scale fraud by way of its senior partner, various legal and auditing experts concur, a claim against an audit firm becomes a normal civil matter – and the size of the claim is unlimited.
There have been various attempts to set limits to that liability, including by KPMG itself. In 2005, in comments on what was then the Auditing Profession Bill, KPMG South Africa warned that it was "becoming increasingly difficult for auditors of major corporations to fully insure against their exposures".
"Unlimited liability results in auditors being the easy target to sue even when corporate failures are unrelated to any audit failure.," it said.
KPMG argued that an audit company's liability should be limited to "an agreed multiple of fees" or by way of "ring fencing of liability to a corporate entity as appropriate" – which would protect individual partners.
The VBS report findings, and the recommendation that National Treasury, the curator of VBS and the Prudential Authority should claim damages from KPMG, may be the “death knell” of KPMG South Africa as we currently know it, one senior audit professional predicted.
The person said that it may make sense for KPMG to completely dissolve the partnership of KPMG South Africa, and constitute it anew, with new partners and new staff.
Sibiya confirmed to Business Insider that KPMG International will nominate a number of senior KPMG partners from across the international network to serve on the KPMG South Africa board and in executive positions, as well as in senior client service roles.
Asked if KPMG was contemplating exiting South Africa, or closing down its current partnership to create a new one, spokesperson Sibiya said: "KPMG is firmly committed to South Africa and still has much to offer the country and the business community."