Gord­han on warpath against KPMG

Clients and staff weigh their op­tions as au­dit gi­ant comes clean

Sunday Times - - FRONT PAGE - By NIVASHNI NAIR

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

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