Dodging the fraud bullet
OPEN SECRETS: REPORT PUTS AUDITORS IN CROSSHAIRS
‘Most auditors are too close to their clients to ask the right questions.’ Moneyweb
Of the roughly 1 000 people attending the virtual release of the latest Open Secrets report titled The Auditors, a good number were likely from the accounting profession.
For example, in 2005 KPMG was fined $456 million (R10 billion) for defrauding the US tax authorities by designing, marketing and implementing illegal tax shelters to help wealthy individuals and corporations escape tax liabilities.
For this, KPMG received a deferred prosecution and paid a fine much smaller than the profits it made from the schemes.
KPMG wasn’t alone. The Big Four were all in on one of the biggest profit spinners of the last 20 years – “tax shelter” structuring. In 2013 Ernst and Young paid $123 million (R2.1 billion) after admitting to US regulators that it had helped clients dodge taxes worth $2 billion (R34 billion). The other two members of the Big Four cartel – PwC and Deloitte – were likewise involved in schemes to escape tax.
Not all of these were illegal, but they were pervasive to characterise the Big Fours’ institutional behaviour as “skirting the rules and placing profit above principle”, said the Open Secrets report.
All this is lent a patina of respectability using terms such as “tax neutrality” and “tax minimalisation” – euphemisms for paying no tax at all.
Nor are these tax avoidance schemes without human cost. They deprive the state of tax revenue for spending on social development, healthcare, education and pensions.
There’s no shortage of fodder for a report into the audit profession’s malfeasance in South Africa, most of it well reported, but when compiled into a single document it reads like a well-crafted crime novel.
The Open Secrets report said: “In early 2019, former VBS chairperson Tshifhiwa Matodzi was allegedly trying to hide his Ferrari from liquidators and to stop them selling his R7 million mansion. They had already secured and were planning to sell at least four other luxury vehicles Matodzi owned. It is little surprise he was sitting on so many luxury assets: Motau’s report alleges that Matodzi was the number one beneficiary from the looting of VBS – taking R325 million.”
The VBS heist was not particularly sophisticated. Its financial statements in 2018 were signed off by KPMG, already under a monsoon of devastating evidence related to its involvement with the Guptas. For that you need to look at Steinhoff and its dazzling bouquet of complex financial instruments designed to hide the relative absence of actual value inside the company.
One of the Open Secrets authors, Michael Marchant, said at the launch of the report on Thursday that audit firms are faced with a clear conflict of interest when allowed to conduct both audits and consulting for the same client.
Outgoing chief executive of the Independent Regulatory Boards for Auditors, Bernard Agulhas, said auditors had stopped being sceptical and asking the right questions of clients.
“We’re very strong on this. Internal audit committee members are also telling us that they have been hoodwinked by management. Those charged with governance should be equally sceptical.
“Most auditors are too close to their clients to ask the right questions,” said Agulhas. “Lack of independence is a major reason for the failures where they happen.”