KPMG’s stance does lit­tle for pub­lic trust in au­di­tors

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

Last week, au­dit­ing com­pany KPMG hosted a break­fast to launch the sec­ond edi­tion of its ed­u­ca­tional hand­book for re­tire­ment fund trustees. The guest speaker was Mervyn King, oth­er­wise known as Mr Cor­po­rate Gov­er­nance.

The break­fast was a bit sur­real in that both KPMG and King were af­fected by the fraud­u­lent strip­ping of sur­pluses from re­tire­ment funds in the 1990s.

Both in their own way are goal­keep­ers for re­tire­ment funds. I asked King and KPMG about their roles in the scan­dal.

King, who was the act­ing chair­man of one of the af­fected funds, the Pic­bel re­tire­ment fund, and a di­rec­tor of the Pic­bel board at the time of the fraud, an­swered my ques­tions.

KPMG, which was the au­di­tor of an­other fund af­fected by the sur­plus strip­ping, the Power Pack Pen­sion Fund, ini­tially ig­nored my ques­tions. It then sent me non-replies (de­tailed later in this col­umn) and made ab­so­lutely un­ac­cept­able im­plied threats that it would take le­gal ac­tion against Per­sonal Fi­nance.

In the Pic­bel case, com­pany chair­man Jan Pickard Jnr last year re­ceived a sus­pended twoyear sen­tence in a plea bar­gain for the theft of a R28.8-mil­lion sur­plus from the Pic­bel re­tire­ment fund. Pickard had to re­pay R31 mil­lion to the fund’s cu­ra­tors.

San­lam, which al­legedly as­sisted with the sur­plus strip­ping, is be­ing sued by Tony Mostert, the cu­ra­tor of the fund, for R300 mil­lion.

King says he was un­aware of the fraud­u­lent trans­ac­tion, which was ar­ranged in Cape Town while he was in Jo­han­nes­burg. He says that, at the time, the founder of the com­pany, Jan Pickard Snr, was sell­ing off the com­pany’s as­sets and this en­tailed nu­mer­ous trans­ac­tions, in­clud­ing merg­ing the re­tire­ment fund with the Life­care re­tire­ment fund.

Mostert has not ac­cused King or his co-trustee, Ti­nus Slab­ber, of any im­pro­pri­ety, nor were they en­riched in any way. They were un­re­mu­ner­ated trustees.

King says “no code or law will stop some­one who is in­tent on break­ing the law”.

POWER PACK AND KPMG

At the time of the sur­plus strip­ping, the Power Pack Pen­sion Fund was spon­sored by a sub­sidiary of the JSE-listed com­pany Cul­li­nan.

In 2008, Cul­li­nan at­tempted to block the pub­li­ca­tion in Per­sonal Fi­nance of re­ports on court ac­tion ini­ti­ated by Mostert in which it was re­vealed how the com­pany had ben­e­fited from the sur­plus strip­ping at Power Pack.

Mostert had ap­plied for the liq­ui­da­tion of a com­pany called Pix We­bsense. This was one of the com­pa­nies, Mostert says, that was used to laun­der the sur­plus of the Power Pack Pen­sion Fund (ini­tially known as the Cul­li­nan Group Pen­sion Fund) for the ben­e­fit of Cul­li­nan.

At the time, Pix We­bsense was a dor­mant sub­sidiary of a com­pany called Mid­ma­cor (which had al­ready ben­e­fited from an­other sur­plus-strip­ping ex­er­cise five years ear­lier). Mid­ma­cor, in tur n, had taken con­trol of Cul­li­nan Hold­ings in a re­verse takeover in 1997.

In an af­fi­davit in sup­port of the suc­cess­ful ap­pli­ca­tion, Mostert says: “The au­di­tors (KPMG) to Power Pack should have re­ported a ma­te­rial ir­reg­u­lar­ity in terms of sec­tion 20(5) of the Pub­lic Ac­coun­tants and Au­di­tors Act 1991, as amended. Had this been done, the ir­reg­u­lar­i­ties as dealt with in this re­port would have been iden­ti­fied by the reg­is­trar [of pen­sion funds] at a much ear­lier stage.”

KPMG had is­sued a num­ber of un­qual­i­fied au­dit re­ports, on May 15 and 26, 2000, for the fi­nan­cial year ended March 2000, cov­er­ing the pe­riod when the strip­ping took place, that ev­ery­thing was in or­der with the Power Pack Pen­sion Fund, de­spite is­sues such as al­legedly false re­port­ing to both the Fi­nan­cial Ser­vices Board (FSB) and the JSE, and al­legedly il­le­gal and im­proper trans­ac­tions by the fund.

Among other things, Mostert says in the court pa­pers: “I re­viewed the work­ing pa­pers of the au­di­tors KPMG for the pe­riod Au­gust 5, 1999 to March 31, 2000. KPMG did not doc­u­ment the pay­ment of R38 mil­lion on Au­gust 13, 1999 in re­spect of the ac­qui­si­tion (by the fund) of Pix We­bsense, as well as the trans­fer from Old Mu­tual of R42 806 539 …”

The fund used the R38 mil­lion sur­plus to pur­chase Pix We­bsense, which was not trad­ing and had no value, to al­legedly laun­der, in a se­ries of com­plex trans­ac­tions, the pen­sion sur­plus for the ben­e­fit of Cul­li­nan.

Mostert says “had KPMG ver­i­fied the pay­ment of R38 mil­lion of the pur­chase of Pix We­bsense, a ma­te­rial ir­reg­u­lar­ity should have been re­ported” to the FSB.

KPMG’S RE­SPONSE

Danie van Heer­den, KPMG ex­ec­u­tive di­rec­tor of risk man­age­ment, re­jects the al­le­ga­tions made by Mostert about KPMG.

Last year, the ar­chi­tect of the sur­plus-strip­ping schemes, Peter Ghavalas, who at the time of the sur­plus strip­ping was an ex­ec­u­tive of Fi­nans­bank, a Ned­cor sub­sidiary, was sen­tenced to 15 years in prison, sus­pended for five years, and a R6-mil­lion fine, sus­pended for six years, for his part in the strip­ping of sur­pluses from a num­ber of re­tire­ment funds, in­clud­ing the Power Pack Pen­sion Fund. Ghavalas had R18.5 mil­lion con­fis­cated from him in terms of the Pre­ven­tion of Or­gan­ised Crime Act. The money was dis­trib­uted among the af­fected pen­sion­ers.

In an ex­change of emails with Per­sonal Fi­nance re­gard­ing KPMG’s al­leged fail­ure to take ac­tion, Van Heer­den says: “On re­flec­tion, let me be civil in my re­sponse. In ad­di­tion to what I have stated in my email dated June 1, 2010, we are not at lib­erty to com­ment or dis­close any in­for­ma­tion, as this mat­ter is the sub­ject of a num­ber of le­gal pro­cesses and is there­fore sub ju­dice. KPMG is co-op­er­at­ing fully with the reg­u­la­tors and pros­e­cut­ing au­thor­i­ties ...”

Per­sonal Fi­nance does not care much whether or not Van Heer­den was civil. His re­sponse is, in ef­fect, quite mean­ing­less.

When it comes to KPMG an­swer­ing ques­tions about its role in this mat­ter, the is­sue is not sub ju­dice in the opin­ion of two lawyers to whom I have spo­ken, be­cause there is nei­ther a civil claim nor crim­i­nal charges against KPMG.

MAT­TER OF CON­CERN

Un­til there is clar­ity on the al­le­ga­tions made by Mostert, the mat­ter should be of con­cern to any fund trustees and mem­bers who use or are con­tem­plat­ing us­ing the ser­vices of KPMG or its ed­u­ca­tional hand­book.

Trustees are en­ti­tled to com­pre­hen­sive an­swers to ques­tions about KPMG’s role in this af­fair and to know what KPMG has done to en­sure this does not hap­pen again. The point of ap­point­ing an au­di­tor is to stop abuses such as sur­plus strip­ping.

The al­le­ga­tions about KPMG’s au­dit­ing pro­cesses raise ques­tions about the value of its hand­book for re­tire­ment fund trustees.

There is not a sin­gle word in the hand­book about the sur­plus strip­ping, which should be a case study for ev­ery trustee on how to pro­tect re­tire­ment sav­ings.

Even worse, the hand­book does not de­fine the pre­cise du­ties of an au­di­tor, apart from say­ing that a fund should be au­dited.

For mer fi­nance min­is­ter Trevor Manuel was ex­tremely concerned about the fail­ure of the au­dit­ing pro­fes­sion to pro­tect both share­hold­ers in com­pa­nies (many of whom are re­tire­ment funds) and re­tire­ment funds and their mem­bers.

He also expressed con­cer n about the level of train­ing that re­tire­ment fund ser­vice providers give fund trustees, be­cause the providers may train trustees only to a cer­tain level. The con­se­quence is that the trustees can­not ask the right ques­tions of the ser­vice providers.

Au­di­tors around the world have gained a bad rep­u­ta­tion for their fail­ure to pro­tect share­hold­ers and re­tire­ment fund mem­bers. KPMG’s im­plied threats do noth­ing to im­prove pub­lic con­fi­dence in the pro­fes­sion.

In­stead of its cur­rent stance, KPMG should con­sider re­pay­ing Mostert the fees it charged the Power Pack Pen­sion Fund so that they can be dis­trib­uted to the im­pov­er­ished pen­sion­ers and their de­pen­dants.

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