Pro­tect Africans from un­scrupu­lous au­di­tors

The Africa Report - - BUSINESS - Jud de Fe­jokwu Founder, man­ag­ing di­rec­tor and chief an­a­lyst, Thad­deus s In­vest­ment Ad­vi­sors

The most dis­turb­ing busi­ness re­la­tion­ship is where one party com­pen­sates another party that is sup­posed to de­fend the in­ter­ests of the wider so­ci­ety and up­hold fidu­ciary prin­ci­ples. Com­pany A is paid by Com­pany B, but Com­pany A’s al­le­giance is sup­posed to be to a larger en­tity that has not com­pen­sated it but ex­pects the in­tegrity of its pro­fes­sion to pre­vail over purely com­mer­cial in­ter­ests. Au­di­tors are paid by their clients, but the in­vest­ing public is meant to be­lieve that au­dited fi­nan­cial state­ments meet the re­quired stan­dards of hon­esty and trans­parency. His­tory tells us, how­ever, that au­dit firms’ first loy­alty is to the pay­ing client. Africa needs bet­ter au­di­tors if its stock ex­changes are to be­come de­vel­oped mar­kets, at­tract­ing sub­stan­tive lo­cal in­vest­ment. Africa is al­ready on the back foot; neg­a­tive news gets am­pli­fied and pos­i­tive news gets di­min­ished. The au­dited fi­nan­cial re­sults of its com­pa­nies need to pri­ori­tise truth and ac­cu­racy, not al­le­giance to the client. Stock prices of public com­pa­nies in Africa should be driven by sub­stance, not spec­u­la­tion. A grow­ing dossier of ac­count­ing dis­putes and fail­ing com­pa­nies points to the need for a rad­i­cal over­haul of au­dit prac­tices for public com­pa­nies in many of Africa’s big­gest economies. The ac­counts of the fol­low­ing com­pa­nies in­di­cate clearly that there are se­ri­ous prob­lems – of com­mis­sion or omis­sion – but the au­di­tors failed to iden­tify them.

SOUTH AFRICA: African Bank In­vest­ments – De­loitte; Linkway Trad­ing and the Gupta fam­ily – KPMG

NIGE­RIA: Cad­bury – De­loitte; Oceanic Bank – PWC; Stan­bic IBTC – KPMG

KENYA: Mu­mias Sugar – De­loitte; Uchumi Su­per­mar­kets – EY; Haco Tiger Brands – PWC; Im­pe­rial Bank – PKF

UGANDA: Crane Bank – KPMG

GHANA: In­ter­con­ti­nen­tal Bank (now Ac­cess Bank) – PWC

In­vestors and the wider public de­serve bet­ter au­di­tors. Here are some steps that would help:

IEvery African coun­try with a stock e x c ha n g e s h o u l d es­tab­lish a public com­pany ac­count­ing over­sight board (PCAOB) by law to op­er­ate as a pri­vate sec­tor, non-profit com­pany. The PCAOB would over­see the au­dit of public com­pa­nies. The law es­tab­lish­ing the PCAOB should in­clude

Au­dited re­sults should pri­ori­tise truth, not al­le­giance to the client

a clause block­ing its re­peal by suc­ces­sor gov­ern­ments.

II

Public in­ter­est en­ti­ties (PIES) should no longer be able to choose their au­di­tors. The PCAOB should se­lect au­di­tors for each PIE and ro­tate au­di­tors ev­ery eight years, or more fre­quently if need be. III

PIES should no longer pay their au­di­tors di­rectly or de­ter­mine re­mu­ner­a­tion. The PCAOB should de­ter­mine au­di­tors’ fees on a bi­en­nial ba­sis and pay the au­di­tors post-au­dit. Th­ese pay­ments will be ac­com­pa­nied by a de­tailed public ex­pla­na­tion of the fee struc­ture. Au­dit firms would be en­gaged by the PCAOB to au­dit PIES on be­half of in­vestors.

IV

The au­dit firms should con­trib­ute each year into an au­dit mal­prac­tice fund set up by the PCAOB that will be used to fund its op­er­a­tions. V

The PCAOB must be fully in­de­pen­dent of in­dustr y reg­u­la­tors in each coun­try and not be ac­count­able to them. The cen­tral bank should not be able to pre­vent the PCAOB from in­dict­ing a bank’s au­di­tor, cen­sur­ing a bank’s board and de­mand­ing a re­state­ment of the fi­nan­cial state­ments for the years where it is de­ter­mined the au­dit firm failed in its fidu­ciary re­spon­si­bil­i­ties.

VI

The PCAOB should bar firms for a 10-year pe­riod from au­dit­ing in any in­dus­try in which they are found to be de­fi­cient in their au­dit of a PIE. VII

Global au­dit­ing firms (PWC, EY, KPMG and De lo it te) should no longer be al­lowed to be legally dis­tinct from the lo­cal firms us­ing their names. If a firm re­fuses, it must sever all busi­ness ties from the lo­cal au­dit firm and a name change must im­me­di­ately be made. Af­ter the le­gal dis­tinc­tion be­tween lo­cal af­fil­i­ate and in­ter­na­tional com­pany is ended, po­ten­tial ag­grieved par­ties should be able to sue both en­ti­ties. If an in­ter­na­tional au­dit firm is re­ceiv­ing money from the use of its name, it should also be legally and fi­nan­cially li­able when the lo­cal firm us­ing its brand name is de­fi­cient.

VIII

Au­dit fir ms should be barred from do­ing board cor­po­rate gov­er­nance and in­dus­try re­views in­volv­ing PIES. KPMG Nige­ria reg­u­larly does rank­ings, sur­veys and anal­y­sis of the most cus­tomer­fo­cused banks in Nige­ria. Zenith Bank typ­i­cally wins, and KPMG is the au­di­tor of Zenith Bank.

When free­dom is abused re­peat­edly, it should trig­ger sanc­tions. Au­dit firms have been op­er­at­ing freely, and the time has come to rein them in to pro­tect fi­nan­cial mar­kets. Gov­ern­ments gave us prisons to pro­tect us from dan­ger­ous peo­ple. Gov­ern­ments in Africa should give us PCAOBS with the pow­ers to pro­tect us from a net­work of au­di­tors re­garded as un­trust­wor­thy and un­re­li­able. Their weak­ness is their de­pen­dence on ris­ing rev­enues; their strength is their statu­tory pro­tec­tion.

Mean­while ten­sions in the gov­ern­ment grew be­tween Pres­i­dent Zuma and Gord­han, who had be­come highly crit­i­cal of the Gupta fam­ily busi­nesses. A row blew up when the South African Rev­enue Ser­vice (SARS), which came un­der Gord­han’s purview, started in­ves­ti­gat­ing to­bacco-smug­gling op­er­a­tions and loss of tax rev­enues. When SARS probed Amal­ga­mated To­bacco Man­u­fac­tur­ing (ATM), in which Pres­i­dent Zuma’s son Ed­ward had a ma­jor stake, po­lit­i­cal sparks be­gan to fly. In De­cem­ber 2013, SARS con­fis­cated two large con­sign­ments of to­bacco prod­ucts on ATM premises, on which du­ties of “sev­eral hun­dred mil­lion rand were payable.”

STATE CAP­TURE

Af­ter win­ning elec­tions in 2014, Zuma launched a purge. Gord­han was moved to lo­cal gov­ern­ment and in came close Zuma ally Tom Moy­ane to run SARS. Quickly Moy­ane set up an in­ves­ti­ga­tion into what he called the “rogue unit” at SARS that had sanc­tioned Ed­ward Zuma’s cig­a­rette com­pany. Moy­ane re­cruited KPMG to run a foren­sic probe into the rev­enue ser­vice. Sev­eral months later he an­nounced that the SARS “rogue unit” was a crim­i­nal en­ter­prise and its man­agers – some of its most se­nior in­ves­ti­ga­tors – would face charges. Leaked ex­tracts from the re­port falsely claimed that SARS of­fi­cials were run­ning a brothel and spy­ing on Pres­i­dent Zuma. Th­ese bat­tles at the heart of gov­ern­ment con­tin­ued, with public pro­tec­tor Thuli Madon­sela launch­ing an in­quiry into the Gup­tas’ po­lit­i­cal in­flu­ence la­belled as “state cap­ture”. Zuma and the Gupta fam­ily deny all wrong­do­ing. As more rev­e­la­tions sur­faced about the fam­ily’s fi­nan­cial clout, KPMG fi­nally an­nounced it was cut­ting all ties with Gupta en­ti­ties in April 2016. It has taken KPMG another 18 months to with­draw its re­port on the so-called “rogue unit” and is­sue a qual­i­fied apol­ogy for its ac­tions. And to take the saga full cir­cle, Moy­ane an­nounced on 18 Septem­ber that he would be su­ing KPMG for with­draw­ing the re­port with­out con­sul­ta­tion, and would seek to have the com­pany barred from South Africa. Stuck in the mid­dle of this storm, KPMG In­ter­na­tional set up an in­ter­nal en­quiry and has pushed out most of its top man­agers in South Africa, in­clud­ing one seen as par­tic­u­larly close to the Gup­tas. An­drew Cranston, parachuted into South Africa as chief op­er­at­ing of­fi­cer, con­ceded at a press con­fer­ence on 15 Septem­ber that the com­pany had “fallen short of its own stan­dards” but in­sisted: “we found ab­so­lutely no ev­i­dence of any il­le­gal acts or any cor­rup­tion on the part of any em­ploy­ees or part­ners of our firm.” Cranston and KPMG’S new chief ex­ec­u­tive in South Africa, Nh­la­mulo Dlomu, seem de­ter­mined to move the com­pany on. Eas­ier said than done. Some of its big­gest clients – Stan­dard Bank, Bar­clays Africa, In­vestec – are re­view­ing whether to drop KPMG. Al­ready Magda Wierzy­cka, CEO of Syg­nia, has dropped the firm. So can KPMG In­ter­na­tional dis­tance it­self from the rep­u­ta­tion wreck­age of its South African

$5m Money Estina trans­ferred to two Gup­taowned en­ti­ties in Dubai SOURCE: KPMG

af­fil­i­ate? A study by Mur­phy and Stausholm for Lon­don’s City Univer­sity on the Big Four points to their prom­ise of be­ing glob­ally in­te­grated firms, with cen­tral man­age­ment or­gan­i­sa­tions. On closer in­spec­tion, they are not un­der com­mon own­er­ship but only bound by con­trac­tual ar­range­ments to op­er­ate com­mon stan­dards un­der a com­mon name. Such a sys­tem is de­signed to re­duce le­gal and reg­u­la­tory risk. For ex­am­ple, it raises the ques­tion about whether KPMG in Lon­don can be held li­able for what hap­pens with its South African part­ners. In the US, af­ter En­ron’s crash in 2001, the Sar­banes-ox­ley Act tight­ened au­dit­ing rules again. The Public Com­pany Ac­count­ing Over­sight Board it set up now ap­pears to be threat­ened by the Trump White House. Mur­phy and Stausholm see a para­dox be­tween the au­di­tors’ func­tions and their op­er­a­tions: “The Big Four are cen­tral to the op­er­a­tion of global cap­i­tal­ism […] de­pen­dent upon the logic of share­holder cap­i­tal be­ing ac­count­ably used by man­age­ment, which is dis­tinct and sep­a­rate from those who own the en­ter­prise and whose ac­tions are re­viewed by in­de­pen­dent au­di­tors.” If those au­di­tors’ op­er­a­tions are opaque, there is a prob­lem.

AC­COUN­TANTS OF FOR­TUNE

Oth­ers, such as Ge­orge Roz­vany, a former staffer at Ernst & Young (now called EY), PWC and Arthur An­der­sen, see a slow de­cline in au­dit­ing stan­dards: “The Big Four have, un­der a Rasputin cloak of il­lu­sion, strayed from their orig­i­nal and crit­i­cal role of ver­i­fy­ing the role of fi­nan­cial ac­counts for all stake­hold­ers to be ‘ac­coun­tants of for­tune’, merely rep­re­sent­ing the ac­count­ing po­si­tion for multi­na­tion­als and de­vel­op­ing ag­gres­sive tax avoid­ance prac­tices,” he told Michael West, Aus­tralia’s top ex­pert on trans­fer pric­ing. African fi­nan­cial an­a­lysts such as Jude Fe­jokwu (see page 68) ar­gue for more back­ing for fi­nan­cial whistle­blow­ers and for all African states to adopt a sys­tem of Ac­count­ing Over­sight Boards like the US. He gives the ex­am­ple of a former ex­ec­u­tive di­rec­tor at Forte Oil, who was sacked in 2010 af­ter he ac­cused De­loitte of aid­ing and abet­ting ac­count mis­rep­re­sen­ta­tion. “Af­ter the furore, the com­pany changed its name to Forte Oil from African Pe­tro­leum and re­moved De­loitte as its au­di­tor.” Soji Apampa, another Lagosian who is the founder of In­tegrity Or­ga­ni­za­tion, says that some anti­graft in­ves­ti­ga­tors are be­gin­ning to fo­cus on the fa­cil­i­ta­tors of cor­rup­tion and cor­po­rate malfea­sance, among which au­di­tors and ac­coun­tants fea­ture along with lawyers and real-es­tate agents. “We have to un­der­stand that in most of the big cor­rup­tion cases, like that of Gov­er­nor James Ibori, a com­plex fi­nan­cial struc­ture was built that re­quired the com­plic­ity of sev­eral tech­ni­cal ex­perts in Nige­ria and over­seas,” says Apampa. Apampa’s group has just signed a five-year con­tract with the Nige­rian Stock Ex­change (NSE) to es­tab­lish a Cor­po­rate Gov­er­nance Rat­ing Sys­tem (CGRS) for all listed com­pa­nies in the coun­try. Once it’s es­tab­lished it will be clear which of Nige­ria’s listed com­pa­nies are well or poorly man­aged, says Apampa: “There are go­ing to be some shocks, with some of the big­ger com­pa­nies get­ting poor rat­ings, but our as­sess­ment cri­te­ria will be trans­par­ent.” The project has the en­thu­si­as­tic en­dorse­ment of Os­car Onyema, chief ex­ec­u­tive of the NSE. Apampa hopes it will start to counter the idea that all Nige­rian com­pa­nies are cor­rupt – and if sun­light is the best dis­in­fec­tant, clean com­pa­nies will at­tract the most in­vest­ment.

In Au­gust UKZN stu­dents protested against a gag­ging or­der on a KPMG re­port de­tail­ing cor­rup­tion at the med­i­cal school

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