Gordhan on warpath against KPMG
Clients and staff weigh their options as audit giant comes clean
Axed finance minister Pravin Gordhan is preparing for war against KPMG, and said the international audit firm would have to do more than issue a half-hearted statement when the truth came out.
Lashing out at the firm’s 11-page statement released on Friday — in which it admitted missing red flags in dealing with Guptaowned companies and said it was withdrawing its report on the South African Revenue Service “rogue unit” — Gordhan said yesterday that the “facts” would be out in the open soon.
“What actually happened between their forensic investigators and SARS managers from 2015 and onwards [will soon emerge]. We will talk about that in the next 10 days . . . When those facts come out, KPMG will have to issue a 10- . . . 20-page statement to explain themselves,” he said.
“There were a number of problematic instructions and interactions between people in SARS, their lawyers and KPMG investigators, which raises serious concerns over the level of independence that was exercised.”
Nine senior KPMG staff, including CEO Trevor Hoole, chief operating officer Steven Louw and chairman Ahmed Jaffer, have resigned. KPMG promised to repay the R23million paid by SARS for the “rogue unit” report and give to charity the R40-million it made from the Gupta-linked accounts.
KPMG apologised to Gordhan, but he said this was not enough. He blasted the firm for its “half-hearted, so-called regret” and said its statement was nothing more than a “cover-up”. KPMG’s flawed report was part of the reason Gordhan was removed as finance minister. It led to him, and others, being the subjects of a Hawks investigation.
Gordhan said the Hawks’ and the NPA’s response to the KPMG revelations would determine how the agencies were seen by South Africans.
Hawks spokesman Brigadier Hangwani Mulaudzi said the KPMG developments did not mean the investigation was over. Acting Hawks head Yolisa Matakata was looking into the KPMG statement.
Gordhan said that if President Jacob Zuma disapproved of KPMG’s conduct, he should say so.
South Africa’s major banks are adopting a wait-and-see attitude on relations with audit and advisory giant KPMG South Africa after a wholesale clear-out of the firm’s top ranks on Friday, accompanied by a cringing mea culpa for “failings” in work done for Guptalinked entities over the past 14 years.
The dramatic development, which may claim the biggest corporate scalp so far in the unfolding Gupta implosion, is potentially bad news for the new CEO, Nhlamu Dlomu, who now faces the prospect of the firm collapsing in her first full week in office.
This week, nine senior executives at the local operations of the Netherlands-based firm resigned, including its chairman, Ahmed Jaffer, and CEO, Trevor Hoole, stoking fears of an exodus of business from its top clients.
“It’s going to consume them in trying to reassure clients they can still service them,” an industry insider said.
An exodus of staff and clients would not only cripple the audit firm, which is on joint audits with four of the top five banks in the country — FirstRand, owner of FNB, is the only exception — but could also pose a litmus test for the stability of the entire industry. Miners Sibanye Gold and Lonmin plc are also among its clients.
“We have an audit committee that will consider the statement and make a recommendation to the board. We’ll probably be convening sometime next week,” Stephen Koseff, Investec CEO, said in an interview with Business Times from London.
Careful consideration
Standard Bank said it was committed to doing business ethically and in accordance with all applicable laws. “We exit relationships where that commitment is lacking,” the lender said in a statement.
Barclays Africa said it would carefully consider the information it had requested and the findings of KPMG before it could be “in a position to make a decision as to whether to continue to engage KPMG”.
Alexander Forbes was unavailable for comment, as was another significant client, Nedbank.
KPMG SA, which has 3 400 employees, refused to say whether it had been served notice by clients who declined to renew their contracts.
“It wouldn’t serve the profession well to lose a firm of KPMG’s size. Reducing the number of firms is not something that’s going to help any of us . . . there is a significant threat,” said an industry insider.
In a profession the very foundations of which are built on trust and integrity, the problems faced by KPMG’s local arm had some commentators wondering if the firm could stem the loss of confidence that could topple it in much the same manner as US auditing firm Arthur Andersen in the early 2000s.
That remains one of the biggest global corporate scandals, when the almost 90year-old auditing firm helped Enron to cover up losses. Enron closed its doors in 2001 and, a year later, the auditing company, founded in 1913, followed suit.
KPMG SA bought the local operations of Arthur Andersen after it collapsed in 2002. With memories still lingering over the fate of the Andersen firm, many who lived during that time are fearful of a repeat of the same.
“Those partners still have the memory of what it means to have a collapsed firm. They wouldn’t want to wait for it to collapse. The minute there is uncertainty they would want to bail. We haven’t seen sign of it yet but if you have any of the major clients decide to bail on them it would have a ripple effect and have other clients following suit. The ability for this market to absorb a failure of KPMG would be very, very difficult.”
“You’ve not had a number of big clients bail out on KPMG but all of them are asking questions,” said an industry insider.
Reduce competition
A collapse would be a disaster for the economy, affect its customers and reduce competition in the auditing profession.
South Africa has been ranked number one worldwide for its auditing profession standards by the World Economic Forum for the past seven years in a row and this could be marred.
Globally, KPMG’s parent company has also hit the headlines negatively recently. Last month it was fined $6.2-million in the US by that country’s Securities and Exchange Commission for the overvaluation of assets by an oil and gas company by 100 times.
The parent has been subject to fines and investigations by UK authorities for other transgressions over the past few years.
KPMG International said it would donate the R40-million in fees it earned from the Gupta accounts to charities and refund SARS R23-million for the work it did to produce a report for the taxman on the “rogue unit”.
Undercover intelligence
An alleged rogue unit in SARS was accused of conducting undercover intelligence operations and allegedly spied on others, including the National Prosecuting Authority.
Conclusions in a report KPMG submitted as final in January last year suggested that former finance minister Pravin Gordhan ought to have known of the unit. KPMG apologised for this on Friday and said, “This was not the intended interpretation.”
Gordhan acknowledged the apology but said he was still seeking legal advice.
The troubles faced by KPMG provide support to calls for firms to adopt the rotation of audit companies in the interests of transparency and efficiency.
In June this year the Independent Regulatory Board for Auditors (Irba) issued a rule prescribing that all South African “public interest entities” including all listed companies have to rotate their audit firms after a period of maximum tenure.
Although it is understood that the Irba is investigating specific partners’ actions, the depth of the problem lies in how KPMG overall will be able to regain public confidence.
Under scrutiny
Tara O’Connor, executive director of Africa Risk Consulting in London, says KPMG’s scandal would not be enough to result in a “second” Bell Pottinger turn of events, where the audit firm would have to close shop like the London-based PR firm.
“While it is unlikely to close down, its global compliance systems and mechanisms will likely come under more scrutiny as a consequence,” O’Connor said.
Tim London, a senior lecturer at the University of Cape Town’s Graduate School of Business, said unlike 15 years ago, events in South Africa were watched throughout the world.
“The KPMG concern globally is if we can’t trust you there in South Africa, what makes you think we can trust you somewhere else? The value of their work then becomes greatly diminished,” he said.
We have an audit committee that will consider the statement and make a recommendation to the board Stephen Koseff Investec CEO