KPMG – Criminal Prosecution Or Institutional Censure

It is deeply distressing that the actions of a few partners and associates at KPMG will lead to a significant loss of confidence in the profession as a whole. In auditing the Gupta-owned Linkway and Oakbay companies, in cosying up to foreign thieves in attending the Gupta wedding, in aiding and abetting the destruction of state institutions, a few individuals at KPMG eroded and potentially permanently damaged their own firm. The idea that an audit firm could bill SARS ZAR 23 million for a report that is completely false, and that led to the Minister of Finance of this country being fired, is beyond comparison in the industry, ever.

To be clear: elements within Arthur Anderson – previously one of the largest audit firms in the world – assisted Jeffrey Skilling at Enron in the destruction of documentary evidence of fraud, anti-competitive practice, and outright theft on a massive scale, and the result was both Enron’s and Arthur Anderson’s complete demise. KPMG South Africa, some commentators believe, has done something potentially worse.

Putting aside the false audits of Gupta-linked companies, and putting aside their unholy relationship with the family, and putting aside the fact that they priced the Optimum Coal deal, which was stolen out of Glencore’s hands, the single report they wrote on the so-called rogue unit within the South African Revenue Service is sufficiently cynical, and had such significant impact, as to warrant the right to be called the worst instance of corporate institutional fraud ever.

This is not meant lightly; even taking account of the largest and most cynical corporate fraud cases ever – WorldCom, Valeant, Galleon, and the entire Michael Milken junk-bond era – there has never been a case in which a globally-recognised auditor – who is held to a higher ethical standard than any hedge fund manager, investment banker, or corporate CEO – has to such an extreme degree so deleteriously affected the integrity of the financial core of a nation, its tax collection capability and its financial and fiscal organs of state. The fact that the report garnered KPMG South Africa such a dismally small fee of only ZAR 23 million in the context of the many billions of Rand they generate in fees in this country annually, only amplifies the crime. So much was given up, for so very little.

In citing the cases of Enron and WorldCom, and the extent of the crimes committed in those firms, a single report on a state institution in respect of a fake story regarding a fictitious rogue unit may seem like small fare in comparison. However, there is a significant and undeniable difference in the loss of integrity and the smear of fraud in a single corporate entity, and the repercussions that that entity has on the world around it, to the undermining of the institutions that sit at the very heart of an entire economy.

Note that, should the South African Revenue Service, as an example, be robbed of its key executives, it does not lose only its integrity as an institution, it also loses over time its intellectual capital and its operating capability to collect tax. In countries like Greece, the institutionalisation of lax tax laws has led to the implicit assumption in an entire population that tax is an optional expense. There simply is no future for a country like South Africa, with such dire economic inequality – in which very few pay taxes on behalf of the very many unemployed – if individuals and organisations stop paying their taxes. This may seem histrionic, but it takes only the loss of a few key executives who had their hands on the rudder of revenue collection, to begin the process of erosion. Imagine, for example, that the Revenue Service was run with the kind of dire inaccuracy and inefficiency that Eskom demonstrates.

Ideally, to save the integrity of the audit profession, and to save the general public’s confidence in the integrity of the entire financial and fiscal system – which is governed under the assumption that veracity is maintained through the integrity of the audit fraternity – KPMG should be strongly sanctioned in South Africa at the very least. Either, specific individuals should be criminally prosecuted and imprisoned, or the firm should be excommunicated. As an auditor to many of South Africa’s largest firms, as well as to the banks, it is the former recommendation that should prevail. In criminally prosecuting the individuals involved, there would be no question as to the integrity of the profession, since it would have proved itself to be self-correcting in its behaviour and it would have proved itself to be capable of amputating its own gangrenous limb when necessary.

Also, the removal of KPMG South Africa as a company would be grossly unfair to the many thousands of good men and women who work there, who did absolutely nothing wrong. Many of these men and women have spent years, perhaps decades, working their way up through the firm in order to achieve partner status, only to have the rug pulled from underneath them. Their careers, particularly in the audit space, are now significantly curtailed owing to the actions, ironically, of a rogue element within their own firm.

There are individuals also within the advisory units of KPMG who have studied very hard at university, who have been picked by KPMG as the very best of their class, who have been working long hours for many years in consulting, to be promoted and remunerated within the firm, and who have believed in the firm. Their careers are now also hindered by the actions of a very few. It is not too melodramatic to assert that the authors of the KPMG rogue unit report and their direct bosses, have ruined the lives of many partners and other personnel too far advanced in their KPMG careers to easily move to an alternate firm.

Hopefully, for this reason alone, the firm will survive; and hopefully, for those who stay on at the audit firm, their clients will understand that the egos and greed of a very few do not reflect on their own integrity. It is not these good men and women who should be worried, although it is they who suffer; it is the industry body, IRBA, as well as SAICA – which confers the professional designation required to be an auditor and ensures the ethical standards of the profession – who should be most concerned.

It is also the CEOs of South African corporate business who should be most worried, for the under-mining of the rectitude of audit is also an erosion of trust in financial reporting and thus in the ability for firms in this country to raise equity. If Moody’s and Standard & Poor’s rating agencies were not sufficiently concerned before, they will most certainly be at this juncture. If you are a London-based emerging markets investor, you are going to think twice now before putting equity up into a South African firm.

Finally, those who should be most concerned are the general public, the man in the street. He or she now no longer knows, for certain, that the big, neatly-designed signs that adorn our highways, that the brands of firms that these signs represent, that the impressive buildings that these firms occupy, signify trust. It has now long been inherently assumed – and even accepted – that within politics and government there will always be an element of corruption. But within the borders of South Africa, business could be trusted. Not quite so anymore – not if the highest order of professional designation in this country can be conferred upon those who, for the measly sum of ZAR 23 million, turn in their souls at the door.