Opinionista Francis Herd 19 September 2017

How KPMG tried to manage a crisis – and only managed to make things much worse

There’s always a danger that responding and admitting culpability – while absolutely necessary in a crisis response – can actually raise awareness about a problem, give journalists more information to latch on to and spark further outrage. And it seems that KPMG has blown a hole in its own foot.

It has long been acknowledged by practitioners and academics that crisis management is itself in crisis. Companies operate in a world where there is a crisis – with dire consequences for their reputations – lurking behind every rock, stone and pebble. They range from North Korea’s nuclear ambitions and hurricanes to terrorism to tweets from staff members. The responses from businesses in South Africa embroiled in corporate crises of late have shown that they have simply failed to adapt; that they need to understand how accountability works now, and fast.

The case of KPMG is particularly fascinating, given the wide range of measures it announced last week as penance for doing business with the Guptas and writing a flawed report on the so-called “rogue unit” of the South African Revenue Service (SARS). There’s always a danger that responding and admitting culpability – while absolutely necessary in a crisis response – can actually raise awareness about a problem, give journalists more information to latch on to and spark further outrage. And it seems that KPMG has blown a hole in its own foot.

The company has managed to unite arch enemies – ex SARS commissioner, Pravin Gordhan, and current SARS commissioner, Tom Moyane – in their scathing responses. The global company that was trying to minimise a problem in South Africa will now have to deal with the perceptions that have been created globally, after KPMG’s response was on the front page of the FT the next day.

The problem is quite simply that, if you are going to try to self-inflict penance, it has to match your crime. If you are Ford and your cars are catching fire, you cannot simply offer people a chance to fix the mechanical problem for free. That response doesn’t deal with the psychological need of their customers to drive around with complete peace of mind. If you are St John’s school and you confirm through an investigation that a teacher was racist, you cannot simply allow them to continue to take classes.

It all boils down to appropriateness. KPMG was very quiet for a very long time, which made it seem like it only responded so publicly when it was forced to, to prevent the bleeding of clients. Beyond that, the response, while wide-ranging and including the departure of several executives as well as compensation, was simply wholly inadequate.

According to the company’s own report, it was contracted to perform a document review by SARS in 2014, essentially collating data about the problematic unit. A version was leaked in September 2015 (two years ago) and the report was finalised in January 2016.

KPMG admits the scope of the work expanded and its risk management efforts did not. From initially collating documents, it was eventually hired to include conclusions, recommendations and legal opinion in a report. It says it should not have presented external legal opinion as its own, and that quality control for the other sections fell short. Now here’s the breathtaking part:

KPMG admits that it did not follow its own standards because a second partner did not review the work done. So, even after the report was leaked and serious questions were raised two years ago, the other partners didn’t jump all over it. Two years have gone by during which the report affected people’s reputations and lives, and KPMG admits to this as if it is saying “oops”.

Even worse, KPMG confesses that the language used in sections of the report is “unclear” and “open to more than one interpretation”. Essentially it suggested that Gordhan knew or should have known about a unit that was operating beyond the bounds of the law. KPMG now says, “To be clear, the evidence in the documentation provided to KPMG South Africa does not support that Mr Gordhan knew, or ought to have known, of the ‘rogue’ nature of this unit.”

So the findings do not match the evidence. They are essentially made up. This is a travesty across a range of professions and it’s even serious for a first-year student writing a report at varsity. Nothing new has come up in two years but it has taken this long for KPMG leaders to confirm a fundamental flaw in the report.

Given the staggering nature of what is, at the very least, negligence, KPMG’s attempts to minimise are dangerous crisis management indeed. The company tries to be reassuring by saying that the partner responsible for the report has left and, oh ja, it’s going to repay SARS the R23-million fee, as if that is worthy of a round of applause.

A more appropriate response is contrition of the highest order. That includes apologising unconditionally and committing to compensate the individuals concerned for all damage, financial or reputational, whether or not they pursue legal avenues as well. SARS says KPMG did not give it much warning of its plans and it’s clear that the company did not consult individual “victims” which allowed Gordhan to tell the world no one had even bothered to apologise to him personally.

When it comes to the Guptas, KPMG has essentially been accused of facilitating the theft of taxpayers’ money by giving Gupta entities clean audits for years. It’s a grave claim. In its response, KPMG says there is no evidence that any of its staffers were involved in criminality or corruption. The company suggests they were simply “misled” by Gupta entities and failed to apply “sufficient professional scepticism”. Again it has the ring of “oh dear” rather than horror, and it falls dismally short.

KPMG keeps on emphasising that it fell short of its “own standards”, as if these are some special order of accountability and it is being oh-so-righteous to subject itself to this higher level. The rhetoric does not acknowledge that auditors should be subject to extreme standards by the very nature of their work, by the trust placed in their findings and their impact on decision-making, and by the fact that they are the enforcers of ethical practice and should be beyond reproach themselves. High standards are not an optional extra as implied, but a means to survive, and this sort of minimisation is a recipe for a backlash.

KPMG has taken the low-lying fruit which is to replace a tarnished leadership with a squeaky clean new one that journalists and the public will find hard to blame. Incredibly, they seem to have waited a day before deciding to field their new CEO for interviews, when she was their best bet at humanising the response and building confidence. The leadership change was required, but this should no longer be a get-out-of-jail-free card for companies that do not respond adequately when they cause harm, be it financial, ecological or simply psychological.

In my experience many older executives are simply stuck in the old world where crisis management was more civilised. Information could be more easily hidden, shredded or otherwise contained. Now a smartphone can capture a secret document or catch a CEO in a compromising position, at any time, on any given day. At one stage the worst that could happen was landing in the papers or on the nightly news, but the recordings and the newspaper clippings usually eventually faded out of public consciousness. Now they live for ever. When investigative journalists weren’t doing their jobs properly, companies often had a louder voice than the victims of a crisis, who were usually less powerful. Now everyone has a voice.

The biggest wake-up call for global companies is that they can no longer focus their crisis management efforts on the bigger, richer markets and treat economies like our own with less respect. Given the half-hearted response of KPMG International, Gordhan was right to say the company portrayed a “colonial attitude” last week. The fact is that one family and one sloppy report in South Africa could now impact on KPMG’s global operations. The alarm clock won’t stop ringing until companies find a new way of dealing with crisis in a changed world. DM

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