KPMG’s stance does little for public trust in auditors
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.
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.