Removing the stench of state capture easier said than done

Cleaning up after state capture is turning out to be difficult. Some companies just can’t get clean. They seem not to know how to do it. Others, having belatedly realised how important a thorough scrubbing is, have found themselves frustrated by unexpected obstacles. No matter how they try to do the right thing, the system just won’t let them.

Audit firm KPMG is having the most difficulty. There is no doubt that new chairman Wiseman Nkuhlu and new CE Nhlamu Dlomu want to clean up. On Sunday they spent more than an hour at a media conference at their office in Parktown expressing and confirming and reconfirming their profound commitment – but in real life they haven’t got it right yet.

So, while the auditing firm has instituted “integrity checks” of all senior partners and is to audit its own auditors; and since the Gupta wedding scandal has revised the risk profile of the business with the result that some of its client contracts were terminated, no one at KPMG thought to go back and take a thorough second look at the auditing work done at VBS Mutual Bank, despite the bank’s unusual behaviour and startling rise to political prominence.

INCREDULITY

While the entire country received with incredulity the news that VBS had granted the most politically exposed person in the country – the president – a R7.8m bond for a house built on land without title, it did not raise a red flag at KPMG. Apart from the political exposure, this was the bank’s largest single loan and was also almost twice the size of its annual profit.

Now, it will pay for that neglect dearly.

With VBS in curatorship, it is becoming known that the bank lent money to its own directors and shareholders, a “cardinal sin” of banking.

It has now emerged that among those related to the bank to whom loans were made were the two KPMG senior partners who supervised the VBS audit. The two resigned last week ahead of a disciplinary inquiry.

With that failing, KPMG’s problems have grown from being caused by a few bad apples – after the Gupta scandal, eight people, including the CEO, left the firm – to a trend that is indicative of a wider culture.

After September 2017’s events, many banks and other firms stuck with KPMG. It lost only 10% of its clients over the ordeal. Now it seems likely more will follow.

Over at McKinsey in Sandton, the problems are different but the fallout also refuses to go away. Since October, McKinsey has tried to pay back the R900m it received for nine months’ work at Eskom, in a partnership arrangement that saw the Gupta-related firm Trillian score R500m for its section of the contract.

While Eskom told McKinsey it had Treasury approval for the contract, this later turned out not to be true. Eskom and McKinsey now agree that the money should be returned to Eskom, but this cannot easily be done until the contract is set aside by a court.

Just as Eskom made its application to review the contract, the asset forfeiture unit – a division of the National Prosecuting Authority charged with the power to seize criminal assets – popped into the picture, with a preservation order to recover the fees paid by Eskom to McKinsey and Trillian as the proceeds of crime.

KPMG’S PROBLEMS HAVE GROWN FROM BEING CAUSED BY A FEW BAD APPLES … TO A TREND THAT IS INDICATIVE OF A WIDER CULTURE

McKinsey has done pretty much all it can to persuade the Asset Forfeiture Unit that it intends to return the money and wants to do so as soon as possible. The unit’s stance, though, is that it will “strenuously contest” any attempt to oppose the preservation order.

Should the asset forfeiture unit go ahead and win, McKinsey will be left with one or two problems. It will either have to pay back the R900m twice, once to Eskom and again to the Asset Forfeiture Unit, or it will be “taken” by the unit, leaving an ugly blot on the financial statements, reflecting that R900m in fee income was seized by the South African government as the proceeds of crime.

For the unit, McKinsey’s R900m is low-hanging fruit that will enable it to give effect to its newfound resolve to fight corruption and state capture.

Other than that there is no reason really to pursue its order, as the R900m has been set aside and is not about to be secreted away.

To this extent one can sympathise with McKinsey. But to the extent that the firm got itself into a dubious arrangement with some dubious people (McKinsey insists it was duped by Eskom into the arrangement with Trillian) it is not altogether unfair that the stain will not easily be covered.