Protect Africans from unscrupulous auditors
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.
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.
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.
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.
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.”
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