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Who audits the auditors?
South Africa's 'state capture' scandals involving the politically connected Gupta family shone a light on the opaque role of auditors in the engine rooms of global capitalism.
Pressure is mounting on accounting firms. In the UK, a parliamentary committee said the the ‘Big Four’ – PricewaterhouseCoopers, Deloitte, EY and KPMG – should legally separate their ‘cash cow’ consulting work from the auditing side. From our archives, a piece that looks at how the auditors are behaving in Africa and calls for reform after KPMG was embroiled in the Gupta scandals.
The book club at KPMG international auditors should consider putting Ernest Hemingway’s The Sun Also Rises on their reading list. Just over halfway through they would find this telling exchange:
“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” “What brought it on?” “Friends,” said Mike.
The decline of KPMG in South Africa was gradual, at first. For 15 years, the auditors numbered Gupta companies such as Leadway and Oakbay as important clients: fast-growing with outsize political influence.
Then came a tsunami of internal emails leaked from the Gupta companies pointing to KPMG’s involvement in illicit financial transfers and a political campaign to denigrate ex-finance minister Pravin Gordhan. Then the KPMG fall was sudden. A public apology on 15 September and a culling of its management by a team sent in from London.
Iraj Abedian, one of South Africa’s foremost economists, led the charge for companies to sack KPMG as their auditors. “You are not just talking about in-competent accounting,” Abedian tells The Africa Report. “This is a company whose actions have contributed to South Africa losing tens of billions of dollars through ratings downgrades, undermining investor confidence, damaging financial governance.”
So who is responsible? Who audits the auditors?
You are not just talking about incompetent accounting. [KPMG]’s actions have contributed to South Africa losing tens of billions of dollars through ratings downgrades”
- Iraj Abedian
The Big Four (Deloitte, EY, KPMG and PwC) act as ‘quasi-regulators’ at the heart of the global financial system, according to researchers Richard Murphy and Saila Naomi Stausholm – yet they enjoy “significant opacity about their own operations”. In Africa, as elsewhere, there is growing recognition that the current system of auditing and accounting is not working.
The credibility of most of the big firms has been hit by a succession of scandals. There was PwC’s key role in setting up tax shelters for private companies as documented in the Panama Papers scandal last year. Or KPMG’s role as auditor for FIFA. Or the collective failure by the audit companies to sound alarms ahead of the financial crash in 2008.
“There has been a swing in accounting over the past 50 years,” says Alex Cobham, chief executive of Tax Justice Network. “Then, the view was accounting was a public good. Now, it’s the capture of accounting by the market. Everyone freaked out when Arthur Andersen went down after Enron. But then a complacency crept in and another monopoly grew up.”
Abedian agrees that the issues go way beyond South Africa. “Enron’s role in the US economy was tiny compared to the combined role of KPMG and the Gupta companies in South Africa.”
He is worried about the coalescing of the auditing and accounting function of the Big Four with corporate consultancy and tax advisory services. More problematic still are those auditing companies lobbying for tax cuts. “There’s a great risk of conflict of interest […] auditors are nothing if people don’t trust them.”
Abedian goes on to explain how KPMG’s affiliate companies in South Africa helped structure the Gupta companies, particularly their Dubai-based precious-metal trade operations, so they could avoid paying South African taxes.
He calls KPMG an “efficient enabler” of illicit financial flows against the spirit if not the letter of the law. Such claims, if proven, could result in penalties to KPMG International in Europe and North America.
Already South Africa’s former finance minister Pravin Gordhan is mulling further action: “I will be seeking legal advice […]. The real issue that confronts is the significant damage to our hard- won democracy, to our state institutions, and ultimately to the South African people.”
How did South Africa get to this? It seemed clear in 2009 when Jacob Zuma became President that his friendship with the Gupta family could translate into spectacular commercial advantage for both sides.
The first evidence was a grand family wedding with a price tag of over $3 million, organised by the Gupta clan over four days in April and May 2013.
What caught the headlines was that the Guptas flew their guests on a private jet into South Africa via Waterkloof Air Force Base, a heavily fortified military area.
Wedding bells toll
A subsequent inquiry laid the blame on a hapless underling. Since then, the Gupta wedding has become still more problematic for KPMG. A paper trail from the Guptas’ leaked emails showed the wedding had been financed from the family’s Estina farming project.
As the Gupta drama played out, the family used its ties with President Zuma to win billions of rands of contracts from state companies, expanding its influence over the African National Congress government. KPMG continued to audit the family’s accounts in South Africa and Dubai.
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 un- der 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 $5m 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 deter- mined 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 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,’merelyrepresentingthe accounting position for multina- tionals and developing aggressive tax avoidance practices,” he told Michael West, Australia’s top expert on transfer pricing.
African financial analysts such as Jude Fejokwu 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 anti-graft 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.