Business Maverick

BUSINESS MAVERICK BOOK EXTRACT

KPMG: Rogue reports, dead cows and state capture

In 2020, the auditing firm is still trying to come back from something that began in 2014.

Accountants have done outrageous things before, which is why accounting firm Arthur Andersen no longer exists after the Enron scandal. The crisis that hit one of the “Big Four” accounting firms in South Africa, KPMG, may not have engulfed the whole global company – but it stands as another example of astounding misconduct. The problem was that leaders, who were not necessarily involved in any wrongdoing, didn’t respond properly to the crisis, which meant that good people in the company were affected along with the bad. A response that matched the crime could have saved jobs and morale, and perhaps prevented the mass exodus of clients that followed. KPMG allowed itself to become embroiled in a love affair gone wrong, which escalated into a political mud fight and misinformation campaign, left journalists who touched the story tainted and culminated in claims of treachery at the highest level of the state. In 2020, KPMG is still trying to come back from something that began in 2014.

The ‘rogue unit’ hits the front pages

One of the scandals that KPMG was caught up in first became very public in late 2014 when the Sunday Times newspaper ran a series of front-page splashes about a “rogue unit” operating within the South African Revenue Service (SARS). The alleged unit was accused of issues such as running a brothel and spying on then president Jacob Zuma – and the revelations kept coming for more than a year.

The reports implicated the former SARS commissioner, Pravin Gordhan, who was still a senior figure in South African politics as the erstwhile former finance minister and then minister of cooperative governance and traditional affairs. Gordhan’s former deputy, Ivan Pillay, and a former SARS executive, Johann van Loggerenberg, were also accused of knowing about, conducting or condoning the alleged illegal activities of the unit. They all maintained that there was nothing “rogue” about the unit, but rather that it was a legally constituted body established to fight crime while Gordhan was SARS commissioner, and which focused on high-risk individuals. The unit, which was called the Special Projects Unit and later renamed the High-Risk Investigations Unit, had been approved by the former president, Thabo Mbeki, and the former minister of finance, Trevor Manuel. Gordhan has always maintained it acted ethically as far as he was aware.

The claims hadn’t emerged out of thin air. As early as 2009, a dossier on the Special Projects Unit had been written by a former member of the team, who had been arrested on charges relating to rhino poaching, and was subsequently fired from SARS. Now, however, the unit was widely dubbed rogue and the claims were taking on a whole new life, partly because of a failed love affair.

An attorney and spy called Belinda Walter had had a relationship with Van Loggerenberg when he was running the unit in question. She was a state security agent, who had also spied for British American Tobacco while working for a smaller competitor. When the love affair soured, she complained to Pillay, who was the acting SARS commissioner, that Van Loggerenberg had given her confidential taxpayer information and intercepted communications illegally. Pillay established the Kanyane Panel to investigate the claims.

The panel did not make a finding against Van Loggerenberg because there was no backup of Walter’s claims, but, in September 2014, the then finance minister, Nhlanhla Nene, instructed Pillay to establish the Sikhakhane Panel to investigate further. Around this time, Tom Moyane was appointed SARS commissioner, and he extended the terms of reference to look into the media reports that began to surface around the “rogue unit”. The Sikhakhane Panel accused the unit of illegal intelligence gathering and recommended that a judicial commission be established.

So the probes were already stacking up when KPMG got involved. Seemingly, on the basis of the Sikhakhane report, Moyane then shut down the unit, suspended Pillay and Van Loggerenberg, appointed attorneys to investigate and assigned KPMG in December 2014 to conduct a probe into the claims about the covert unit. In February 2015, Nene also appointed the Kroon Advisory Board, which said the so-called rogue unit had been “unlawfully established”.

Enter the KPMG report

On 4 October 2015, the Sunday Times reported that a new report by KPMG, which became known as the rogue unit report, confirmed that the SARS spy unit was real and that it was operating outside of the law. According to the newspaper, the KPMG report said “agents unlawfully intercepted communications of taxpayers’, and Gordhan “ought to have known” of its existence within SARS.

By December 2015, the Press Ombudsman was investigating the reporting of the Sunday Times, and the newspaper defended itself by saying that the claims were backed up by “a number of independent investigations, most recently a KPMG report”.

But questions were raised about the “independence” of the KPMG report. Daily Maverick reported on a memorandum sent by SARS’s own lawyers, Mashiane Moodley & Monama, to KPMG forensic auditor Johan van der Walt, which seemed to be supplying KPMG with “findings and recommendations” for their report.

The Press Ombudsman ultimately found the so-called rogue unit journalistic reports to be “inaccurate, misleading and unfair”, and ordered the Sunday Times to retract them. Among his findings was that the initial KPMG report obtained by the newspaper had only been a draft version, but this fact had not been stated in the story. (The Sunday Times initially appealed the ruling but, in 2016 under a new editor, it issued a heartfelt apology for misreporting on the “rogue unit” and other stories.)

Over and above the concerns about KPMG’s report, there were major circularity actions going on. The Sikhakhane report had used evidence from the Kanyane Panel. The Kroon Advisory Board was then accused of merely endorsing the findings of the Sikhakhane report without properly investigating them. The KPMG report was initially to be a collection of documented evidence that existed, which included two of the same reports. Neither Pillay, Van Loggerenberg or any other key players were interviewed by the compilers of the Kroon, Kanyane, Sikhakhane or KPMG reports. Also, the findings of the KPMG report seemed to have been provided by SARS’s own lawyers.

The Press Ombudsman had also recorded (but did not take into account) an accusation that the editor-in-chief of the Sunday Times, Phylicia Oppelt, had been used by her ex-husband, Advocate Rudolf Mastenbroek, and that he had instigated some of the storylines. Mastenbroek was an ex-SARS official, who had nevertheless been appointed as a member of the Kroon Commission despite a conflict of interest. In March 2016, the Treasury said it would be evaluating the questionable work of the Kroon Commission.

KPMG implicated in ‘state capture’

While reports about the rogue unit may have initially shocked South Africa, by the early part of 2016 they were discredited, and many independent journalists, commentators, academics and opposition parties started to believe that SARS and KPMG were actually conspiring against those implicated in the SARS unit, and were even involved in “state capture”. Appalling claims had been made about how members of the influential Gupta family were influencing the decisions of then president Zuma for their own gain, and how others were feeding off corrupt state contracts. Moyane was seen as a Zuma acolyte in SARS, and KPMG began to be viewed as an “enabler” of state capture due to the rogue unit report.

As early as December 2014, there were claims that Moyane was “purging” non-compliant officials to bring SARS under control. It was alleged that Pillay, in particular, had been targeted because he had stopped a huge consignment of ANC T-shirts from China until taxes were paid on it. There was also a sense that the purge could be a backlash because of the efforts Pillay and Van Loggerenberg had made to crack down on illicit cigarette trading. (On a side note, KPMG had been appointed the auditors for British American Tobacco, which had been investigated by the so-called rogue unit, and it’s unclear if this was ever raised as a possible conflict of interest with SARS.)

By 2016, Gordhan had been returned to the position of finance minister after a fiasco with Zuma’s short-lived previous appointment. The special policing unit, the Hawks, which also seemed to be in Zuma’s “captured” camp, was using the rogue unit as one of the bases to pursue Gordhan on criminal charges, and it emerged that Moyane himself had laid the claim.

In March 2016, journalist Marianne Thamm wrote that “at the heart of it all now is a controversial report by the auditing firm KPMG”.

Perceptions were hardening against KPMG but it was doing very little to manage them. In January 2016, KPMG CEO Trevor Hoole issued a statement that did little to explain why KPMG had not interviewed anyone affected by the rogue unit claims. He said the report had “limitations” and “our mandate was to undertake a documentary review”.

The statement addressed none of the serious claims swirling over KPMG, including plagiarism and state capture.

Enabling Gupta looting

In April 2016, KPMG cut ties with the Gupta family after being their auditors for 15 years, and many other financial institutions followed suit. But it was too late.

Evidence would still surface showing that, by giving the Guptas clean audits for years, KPMG seemed to have facilitated the theft of taxpayer funds. It came in the form of leaked emails, which, in the words of the Sunday Times, “prove the Guptas run South Africa”.

Years before, in 2013, the Guptas had held a razzle-dazzle wedding at Sun City. Everyone heard about the extravagant details because of a major scandal surrounding the arrival of the guests. The Guptas landed a civilian chartered plane at a state air force base, with rumours that “number one”, meaning President Zuma, had allowed it.

A later scandal related to a company called Estina, which was given a free lease and millions of rands by the Free State provincial government to set up a dairy farm that was meant to empower local farmers. But the money never flowed back to the community, and images were released by the media of dead cows being dumped in a ditch.

In June 2017, the scandals collided when #GuptaLeaks showed that the Guptas not only controlled Estina but they also used R30-million of state funds for the project to pay for the wedding. So it was actually taxpayers who had picked up the tab for the lavish affair.

The leaks disclosed how the money was funnelled from Estina through a complex web of shell companies in Dubai, all controlled by the Gupta family. The Gupta-owned Linkway Trading then invoiced one of these companies for the wedding expenses, so the cash could be returned to South Africa.

Linkway Trading was audited by KPMG, which had not picked up the money laundering going on right under its nose. Besides, KPMG allowed Linkway to invoice the company in Dubai, without flagging that the two companies were related. If it could get worse, a manager signed off even though the wedding expenses (including chocolate truffles, scarves and fireworks) had been categorised as “business expenses”, despite this being flagged by a junior. So KPMG allowed the Guptas to reduce their tax bill too.

The then CEO of KPMG, Moses Kgosana, had been a guest at the wedding, and he had gushed about it being the “event of the millennium” in a thank you note to Atul Gupta.

When the reports came out, KPMG said: “We stand by our work done and audit opinions issued.” But the Independent Regulatory Board for Auditors (IRBA) said it would be investigating. Prominent commentators called for serious action because the entire auditing profession was being tainted.

KPMG starts talking

KPMG had said little since the start of the rogue unit report controversy in 2015. The #GuptaLinks piled on the pressure but it still took more than a month for the company to respond beyond one sentence.

On 11 August 2017, KPMG’s Hoole issued a statement saying that KPMG South Africa was working with KPMG International to review the facts regarding the services it had delivered to the Guptas, and it was looking into the SARS report. The international company was finally getting involved in what was going on in South Africa.

Hoole made two admissions – that KPMG should have resigned the Gupta accounts earlier and that the “partners should not have attended the wedding”. In his statement, the auditing firm said it had suspended its lead audit engagement partner and was relieving two other partners of board and executive duties pending the outcome of the review.

There were still attempts to minimise the damage, however, with Hoole emphasising that there was no evidence KPMG supported or condoned tax evasion. The statement ended with a trite assertion: “Mistakes have been made and painful lessons learnt.”

The media was immediately sceptical, calling the statement a reluctant apology and “lip service”. The reports about KPMG’s relationship with the Guptas continued, and the auditing firm now faced questions about the extent of its involvement in a controversial coal mine deal.

Finally a ‘full’ response

On 15 September 2017 – nearly two years after the KPMG rogue unit report first made headlines – KPMG finally released a comprehensive 10-page statement detailing the measures it was taking in response to KPMG International’s investigation.

KPMG withdrew the conclusions, recommendations and legal opinions in the report. It said the conclusions were not clear, and the recommendations of legal advisers were presented as if they were KPMG’s opinion. It admitted that the documentary evidence did not support the finding that Gordhan knew, or ought to have known, that the SARS unit was “rogue” in nature.

KPMG said that, against its own standards, “the final deliverable of this work was not subjected to second partner review”. But the partner responsible for the report was no longer with the firm, assured KPMG. And it said it had contacted SARS and offered to repay the R23-million fee received for the work performed.

With regards to the audits of the Gupta entities, KPMG was no longer standing by its work, and it said the “audit teams failed to apply sufficient professional scepticism and to comply fully with auditing standards”. It said that KPMG International would be working with its South African company to improve the quality of audits and that the company would fully cooperate with the IRBA investigation under way.

The statement ultimately blamed the Guptas for what had happened, and, while it accepted some competence problems, it rejected the claims that KPMG staff members had been dishonest. The implication was that the Gutpas had lied and led the auditors astray. “There was a series of misrepresentations from the client”, it read, but there was no indication that “KPMG South Africa, its partners or staff, were involved in any activities of the Gupta family involving potential money laundering, tax evasion, corruption or any other illegal activity”.

On the controversial coal deal, KPMG explained that it had provided limited services. It said that during the engagement, KPMG had become aware of “information which called into question the integrity of the Guptas”, and this information “was not adequately dealt with by a number of senior leaders”. Barring this admission, it claimed there was still no evidence that partners or staff engaged in illegal activity.

Comprehensive leadership changes were announced. Hoole had tendered his resignation, and the statement included him saying he had done so “in the best interests of the firm as it rebuilds and moves forward”. Nhlamu Dlomu, then KPMG South Africa’s head of Global Culture and Organisational Development, was appointed CEO to replace Hoole and a member of KPMG International was appointed as COO.

In addition, it was stated that the chairperson of the board and several partners would be leaving the firm, although no reasons were given. KPMG also said it would be taking disciplinary action against Jacques Wessels, who was the lead partner on the audits of Gupta entities.

The statement ended with a pledge from Dlomu that “we can and will regain the public’s confidence”.

An epic backlash

KPMG International had tried to get to the bottom of things, and the people involved in the report clearly understood that, after years of defensiveness, it was time for transparency. For an auditing firm that prided itself on keeping client confidentiality, it must have felt like it was going very far indeed, announcing resignations, disciplinary action, donations, admitting to grave errors and trying to show it was making them right.

KPMG may have been astounded, therefore, that the statement made things so much worse.

The negative media coverage exploded. “The bombshell statement by KPMG International on its internal investigation… opened a can of worms rather than exonerating the firm,” reported the Mail & Guardian. The Financial Times immediately ran a story for global audiences emphasising that the investigation had picked up red flags, which had been missed.

Hidden in the statement was a form of apology for the reputational harm that Gordhan and others had experienced over the rogue unit report. KPMG said, “We recognise and regret the impact [misrepresentations in the report] have had. KPMG South Africa had no political motivation or intent to mislead.”

But Gordhan immediately rejected that, and he said he would be seeking legal advice. “I note their ‘regret’,” he said, “but doubt whether this is adequate and proportional to the damage that KPMG has done.” He added that “the witting and overenthusiastic collaboration of senior KPMG personnel and their collusion with nefarious characters in SARS, in fact directly contributed to ‘state capture’ and gave legitimacy to the victimisation of good, honest professionals and managers”. Gordhan was angry that KPMG had not acknowledged that the unit was in fact legal. “This is typical colonial arrogance,” he said.

In the days that followed, several clients ditched KPMG as their auditing partners. A week after the statement, another three private sector clients had followed suit and 13 more clients were reviewing their relationship with KPMG.

KPMG lost a third of its R3-billion annual revenue in the wake of the scandal. It released its statement in September 2017. The following June, the workforce had shrunk from 3,400 to 2,200. Between the start of 2017 and August 2018, the firm lost 20 listed audit clients. By then, KPMG had become embroiled in a fresh scandal involving the collapsed VBS Mutual Bank, and South Africa’s Auditor-General had barred KPMG from government work at every level, citing “significant reputational risks”. DM

When Crisis Strikes is available online from Amazon and Kobo.

Gallery

Comments - share your knowledge and experience

Please note you must be a Maverick Insider to comment. Sign up here or sign in if you are already an Insider.

Everybody has an opinion but not everyone has the knowledge and the experience to contribute meaningfully to a discussion. That’s what we want from our members. Help us learn with your expertise and insights on articles that we publish. We encourage different, respectful viewpoints to further our understanding of the world. View our comments policy here.

No Comments, yet