KPMG South Africa stands accused of advancing state capture and has come under immense pressure. Shutterstock
Accounting and consulting firm, KPMG South Africa, is reeling after it was exposed to have played a part in the Gupta inspired state capture activity. The fallout has been remarkable. Some major firms have fired KPMG as an auditor and more Johannesburg Stock Exchange listed companies are expected to follow suit.
KPMG offers tax, advisory and auditing services and is one of the Big Four auditors, along with Deloitte, Ernst & Young, and PricewaterhouseCoopers (PwC).
Despite their integration into the economy, all four of these audit firms have experienced significant lapses of judgement.
The KPMG case provides a potential example of how shareholders can attack the soft underbelly of the private sector state capture enablers. Globally, the number of shareholder challenges has increased dramatically from 520 episodes in 2013 to 758 in 2016. Around two thirds of these challenges were successful, double the rate of just a decade ago.
South Africa’s shareholder activism is following international trends. This is partly function of the fact that that over 50% of the market capitalisation of the Johannesburg Stock Exchange is owned by foreigners.
Shareholder activists are using their powers as company owners to examine company financial reports, monitor executive remuneration, enforce good corporate governance, and push for increased sustainability and transparency.
KPMG has a client base of about 70 listed companies in South Africa. This means that pressure from shareholder activists is likely to pile up. Some companies have already cancelled their use of KPMG services and others have stated that they are reconsidering their relationship. But most of KPMG’s clients have either remained silent. Others said they’re waiting for the outcome of reviews by the country’s regulator, the Board for Auditors, as well as KPMG International.
The directors of companies that have chosen not to take a stand fail to realise one critical thing. In a world of shareholder activism, they may soon face serious questions from their own shareholders about their inaction and ongoing association with KPMG.
Key drivers
A key driver of shareholder activism in South Africa has been the introduction of minorities’ rights in the new Companies Act.
Minority shareholders with as little as 10% holdings can call an annual general meeting. This means that it’s become easier for shareholders to take legal action against directors and officers, including having directors removed.
The King codes of corporate governance have also played a significant role. They emphasise ethical leadership, sustainability and good corporate citizenship.
The codes have entrenched the idea that boards of directors must act in the best interests of the company and that their responsibilities extend to shareholders and other stakeholders. Companies are expected to establish sound governance structures, create “an ethical culture” and ensure that they’re “seen to be a responsible corporate citizen”.
A key factor underpinning these governance principles is the creation of more transparency. By putting more information in the hands of shareholders and the public, these measures create greater potential to hold boards to account for behaviour that fails to meet minimum standards.
KPMG’s Complicity
Alongside other names such as consultants McKinsey, the IT giant SAP, heavy machinery manufacturer Liebherr, and Shanghai Zhenhua Heavy Industries, KPMG has been implicated in alleged large-scale corruption involving the Gupta family. The firm stands accused of:
allegedly overlooking numerous conflicts of interest while auditing 36 Gupta-linked companies until dumping the Guptas in 2016 bywithdrawing their auditing services. A local auditing firm, SizweNtsalubaGobodo, replaced KPMG but seems to have also felt the pressure and has withdrawn its services.
allegedly providing tax advice to ensure that the public funds extracted from the South African fiscus were placed in Dubai to avoid tax payments. KPMG may have thus also become a possible enabler of illicit capital flows in the process.
compiling a report for South African Revenue Services about an alleged rogue spy unit within the tax authority. The report was used as part of a campaign against former Finance Minister Pravin Gordhan, and other senior government officials. By its own admission, KPMG appears to have ignored both sector-wide best practice as well as its own standards of due diligence.
On a wider scale, KPMG seems to have given little consideration to the risks and damage that its activities would do to South Africa’s institutional integrity and governance frameworks.
Pressure has been gathering. Eight senior executives of the South African office, including the CEO, Trevor Hoole, have resigned. The firm has withdrawn all of its findings‚ recommendations and conclusions contained in the notorious “rogue unit” report. It has also instituted an international review of all work done for the Gupta family.
It’s unlikely that these actions will be enough to forestall litigation and possible collapse of KPMG South Africa.
Shareholder Tinderbox
Shareholder activism in South Africa has historically mostly been between institutional investors or individual activists and investee companies. But this may well begin to change. Mounting frustration at the slow pace of investigations into allegations of state capture by state institutions such as the Hawks and National Prosecuting Authority is forcing investors to become more active. Shareholders could start directing their attention to fighting corruption through the private sector.
But are South African shareholders prepared to step up to ensure good governance in the face of governance failures elsewhere in the system? There’s a great deal to lose if they don’t.
If shareholders don’t take a proactive role, South Africa is in far more danger than simply losing its top spot on the World Economic Forum’s Global Competitiveness Report for auditing and reporting standards.
Once trust is lost in both the public and private sectors’ ability to root out or prevent corruption, the country could see further capital flight, greater tax avoidance, and a more pervasive sense that the rule of law is negotiable.
As revelations of systemic failures in governance pile up, the economy may very well depend on shareholders taking up the burden of providing the necessary levels of accountability. KPMG may be teaching South Africa an important lesson. Shareholders can also be anti-corruption activists. Anyone who is connected to the South African economy, must dearly hope that shareholders are up to the task.
Minister of Sport Thulas Nxesi warns workers that pensions may be looted
By GroundUp Staff
27 September 2017 Thousands march under the banner of COSATU in Cape Town calling for an end to state capture. Photo: Ashraf Hendricks
On Wednesday, thousands of Congress of South African Trade Union
(COSATU) members marched in city centres across the country in support
of the federation’s call for a national strike day against state capture
and corruption. The marches were supported by trade unions NEHAWU and
SADTU, as well as the South African Communist Party (SACP), the South
African National Civics Organisation (SANCO), and the ANC Women’s
League.
The march memorandum
stated: “Economic Development continues to be obstructed by the
systemic capture of the state by a well-organised predatory elite”. It
called for President Jacob Zuma to agree on a date to proceed with the
Commission of Inquiry recommended in the Public Protector’s State of Capture report. It also called for the state to “cancel all commercial dealings with the Gupta family with immediate effect.”
Johannesburg
Besides condemning state capture, the COSATU memorandum and
many of the protesters expressed concern about the quantity and quality
of jobs. Photo: Ihsaan Haffejee
About 5,000 people took to the streets of Johannesburg. COSATU
members were joined by members of the SACP, and even some small
contingents of people wearing ANC regalia. The protest started at COSATU
head office in Braamfontein and made its way to the office of
Johannesburg Mayor Herman Mashaba.
A few of the protesters who had joined the march were angry at
Mashaba as they had lost their jobs when he cancelled contracts that
were entered into by the previous administration. Protesters accused
Mashaba of xenophobia and illegally evicting people in the inner city.
Protest leaders called Mashaba a coward for not coming outside to
receive the memorandum. The memorandum was signed and received by
Mayoral Member for Public Safety Michael Sun. A large contingent of riot
police blocked protesters from advancing towards the building housing
the mayor.
Protesters then made their way into the Johannesburg city centre
where they stopped and handed over memorandums at FNB head office, the
office of Gauteng Premier David Makhura, and the Chamber of Mines.
Protesters appeared united in their call for President Zuma to step
down. Many indicated that they would like Deputy President Cyril
Ramaphosa to take over as leader of the ANC. A protester with a hat that reads “Not captured” joined
thousands of other COSATU members as they made their way to various
points in the Johannesburg city centre to protest against state capture
and corruption. Photo: Ihsaan Haffejee
Cape Town
Thousands marched in Cape Town (the City estimated about 2,500
people, but some reporters thought this to be an underestimate). The
city centre was quiet and many businesses were closed. Protesters
marched from Keizersgracht Street through the city centre, making three
stops: the central train station, the Western Cape Provincial
Legislature and Parliament.
Demonstrators in red regalia were in a jovial mood. Placards read:
“Labour broker slavery”, “Zuma must fall” and “Unemployment is a
violation of human rights”. Slogans also denounced the Gupta family.
Tony Ehrenreich, Western Cape Provincial Secretary of COSATU, found
no representative to accept the memorandum on behalf Premier Hellen
Zille, so it was shoved under the door.
At Parliament the memorandum was received by Mabatho Zungu on behalf
of the government and a business representative, Sid Peimer, Executive
Director of the Cape Chamber of Commerce.
Ehrenreich said, “We will not replace an apartheid white devil with a
black devil. We want a living wage which ensures [that we can] pay
bills and take good care of our families. We would like both black and
white to benefit from the economy.” COSATU regional secretary for the Western Cape, Tony
Ehrenreich, addresses the crowd outside the provincial legislature.
Photo: Ashraf Hendricks
Cape Town’s marchers also called for improved service from Metrorail
and MyCiTi buses on the Cape flats. Ehrenreich stressed the poor service
and safety of the city’s public transport system. He also called on
workers to play their part by reporting and discouraging vandalism of
public transport infrastructure.
PRASA regional manager Richard Walker accepted the memorandum. Later
he told GroundUp that if criminality in and around stations as well as
attacks on the train infrastructure are not dealt with, bringing new
trains to the Western Cape will be a “futile exercise”.
Durban
COSATU supporters marched from King Dinuzulu Park to Durban’s City Hall. Photo: Nomfundo Xolo
In Durban thousands marched from King Dinuzulu Park. The crowd gained
momentum as more and more people arrived in buses with placards and
banners. Many of the placards raised demands to sack labour brokers,
comparing labour broking to human trafficking and slavery. Placards also
called for decent jobs and the prosecution of those involved in state
capture.
Marchers stopped regularly to chant and dance. At one point people
sang, “We are ready for Ramaphosa” and “Guptas are dogs”. After almost
three hours, the marchers arrived at the City Hall where COSATU
President S’dumo Dlamini addressed the crowd.
Port Elizabeth
COSATU supporters march along Strand Street on their way to Vuyisile Mini Square in Port Elizabeth. Photo: Joseph Chirume
About 300 people marched in Port Elizabeth. Protesters called
for President Zuma to step down. They accused him of wrecking the
economy.
Minister of Sport and Recreation Thulas Nxesi addressed the crowd. He
said, “All labour organisations should know who is managing your
retirement funds.” This was a reference to the Public Investment
Corporation (PIC), which is responsible for the pensions of civil
servants. A key concern of workers is that corrupt people in government
intend to find ways to raid the PIC, instead of investing its funds
wisely. “You should know who decides your pension investments because
the only investment a worker has is his retirement fund. The looting of
workers resources is taking away our lives,” said Nxesi.
“Billions of rands are needed to bail out the South African Airways.
SAA is in crisis. It has been financially mismanaged. Looting of Eskom
has pushed up the price of electricity. We grew up knowing that Eskom,
Prasa and other state owned companies were good employers, but now
thousands of innocent workers are threatened with losing their jobs,”
Nxesi said. “All these companies are the footprint of the Gupta
corruption. Some officials have forgotten why they are in office. We say
to the Hawks: do your job. Look for the people who are doing the wrong
things and arrest them.”
East London
Protesters gather outside City Hall in East London. Photo: Thembela Ntongana
More than 300 people marched in East London from North End Stadium to the city hall.
Many, like Bonana Magayi, a nurse from Pedi, travelled from the rural
areas of the Eastern Cape to take part in the march. “The time to be
silent is over. We as the working class should stand up. We are affected
by every corruption that happens. It is time for us to fight not only
for us but our children and the future generation of this country,” said
Magayi.
A memorandum was received by Joseph Sotshana from the office of the
premier. He apologised for the absence of the premier and promised that a
response would be forthcoming within 14 days. Egyptian Geese wandered through the Cape Town protest. Photo: Ashraf Hendricks
Published originally on
GroundUp
.
South Africa’s intelligence services continue to have more in common with their apartheid-era counterparts 23 years into democracy. shutterstock
Once again South Africa’s intelligence services are embroiled in controversy, apparently involved in dirty tricks and criminal activity.
New evidence of this has come to light against the backdrop of the presidential succession race in the governing African National Congress (ANC). One of the contenders, deputy president Cyril Ramaphosa, has been smeared in an apparent covert operation. It seems that those responsible had access to intelligence resources. In another recent case the country’s minister of police Fikile Mbalula was targeted in an undercover plot.
Since 1994 the intelligence services have been embroiled in many scandals. But because they operate secretly and with minimal oversight, South Africans will probably never know exactly what they are up to.
What is known – from revelations, leaks and investigations over the past 20 years – is that the intelligence services have not been adequately transformed since South Africa’s transition to democracy. The services have more in common with their apartheid-era predecessors than with the principles of the country’s democratic constitution.
This alarming state of affairs was exposed in a report based on an inquiry into the intelligence services in 2006-2008. The inquiry, known as the Matthews Commission, was established by then intelligence minister Ronnie Kasrils after the domestic intelligence agency was caught spying illegally on senior ANC members and other politicians.
The commission produced a 300-page report that revealed the various ways in which the intelligence services were failing to comply with the constitution and legislation. The report also included numerous recommendations to ensure compliance.
The public release of the report was potentially a watershed moment. It shone a glaring spotlight on the normally dark corridors of the secret world of intelligence operations and offered a rare opportunity to clean out the rot. But the cabinet and parliament buried the report. This inflicted lasting damage on South Africa’s constitutional democracy.
What’s gone wrong
The intelligence scandals that have plagued post-apartheid South Africa are symptoms of a distressing lack of transformation, which is due to five factors.
First, the intelligence services are closely aligned to the ruling party and enmeshed in its factional politics. The constitution insists that the services must be politically non-partisan. But the executive and the ANC constantly blur the boundary between the party and the state.
This malaise is reinforced by the enduring affinity between ANC politicians and intelligence officers who were comrades during the liberation struggle.
It’s also relevant that the minister of intelligence and the heads of the services are appointed by the President. These appointments appear to be based on personal loyalty to him rather than on professional integrity and loyalty to the constitution.
The second reason for the lack of transformation is that the intelligence services have a culture of disregard for the law. The Matthews Commission was shocked to discover that the head of the National Intelligence Coordinating Committee believed that intelligence officers could legitimately “bend the rules” when confronted by serious security threats.
“Bending the rules” is a euphemism for breaking the law. Even if it is well intentioned, the problem is obvious. Disrespect for the law inevitably creates an environment in which misconduct flourishes. It also inevitably leads to intelligence officers lying to their minister and to parliament about breaking the law.
Third, the intelligence services are shrouded in excessive secrecy. They obviously need to keep certain matters secret, such as lawful investigations and the names of undercover agents. But the South African intelligence community is vastly less transparent than its counterparts in many other democratic countries.
Higher levels of secrecy lead to less public scrutiny and a greater risk of abuse of power.
Fourth, the intelligent oversight bodies lack the stomach to do their job. The Office of the Inspector-General of Intelligence is empowered by exemplary legislation. The office has all the authority and powers it needs to conduct thorough investigations into alleged misconduct by the intelligence services. Sadly, it is scared to exercise these powers.
The office’s website asserts that “confidentially is the overriding principle” governing the work of the inspector-general and her staff. This reflects a deeply flawed understanding of the role of statutory oversight bodies. The overriding principle ought to be accountability – that is, the accountability of both the inspector-general and the intelligence services to parliament and the public.
The website itself is a perfect example of non-accountability and lack of transparency. It doesn’t provide any information about any investigation conducted by the inspector-general since 2008. It merely includes a list of media reports, the most recent dated 2010.
The joint parliamentary oversight committee on intelligence also has substantial authority and powers to deal decisively with intelligence mischief. But it too resembles a bunch of sheep guarding a pack of wolves.
The only entities that have made a serious attempt to hold the intelligence services accountable are non-governmental organizations. The most notable has been the Right to Know Campaign.
Finally, the experience of South Africa confirms a general lesson from newly democratic countries: the security services will be transformed if, and to the extent that, the executive wants them to be.
If the executive is not committed to transformation, the security services will be loyal to the president and the ruling party. They will not be loyal to citizens and the constitution. And they then pose a severe threat to democracy.
South African protesters hold placards as they march against corruption. Reuters/Siphiwe Sibeko
Moses came down from the mount with tablets inscribed with 10 commandments. Most of us know (most of) them, and most of us fail to live by (most of) them. But if Moses had turned them over and looked in the fine print on the back, he’d have found the 11th Commandment:
Don’t get caught.
That in essence summarises the rise and fall of the South African arm of the international accounting firm KPMG which has been caught with its hands in the slush fund jar. It stands accused of taking money from companies owned by the politically connected Gupta family.
Even more damaging is the charge that it submitted formal reports “confirming” that a “rogue” unit was operating inside the South African Revenue Service (SARS) – accusations that were used as the smoking gun to remove ministers and senior public officials who were seeking to hold the line against state capture.
KPMG has miraculously grown a conscience. Suddenly – having broken the 11th commandment – it was reborn as a hand-wringing, apologetic company living up to high ethical standards. It was now willing to fire its CEO and some senior managers, to reject its own findings and to “donate” Gupta-company earnings to education and anti-corruption NGOs. The latter gesture was a revolting display of supine reprehensibility – we got caught in corrupt deals so we’ll hand the profits over to anti-corruption NGOs. Really? Go to jail would be a better outcome.
KPMG isn’t alone. Throughout South Africa’s history, and across the globe, the litany of private sector corruption is breathtaking.
Private sector corruption
South Africans can recall an unending litany of private sector corruption. In the recent past, there was the case of Tiger Brands making bread more expensive so the poor would pay more to eat. Tiger Brands paid a fine and carried on trading. And a clutch of major construction firms were found looting monies for the construction of stadiums for the 2010 Fifa World Cup in South Africa. They also paid fines and carried on building. The list continues.
The private sector, contrary to those who believe that ‘market forces’ will regulate the ethics of capital, is not taking a strong line against corruption. Those on the front line include, more recently, the portfolio committees in parliament, and previously, the Public Protector and a dwindling cluth of Ministers, MECs and the like.
So let’s not fool ourselves that the private sector has set a benchmark for anything more than export-class venality.
South Africa’s state is corrupt – “captured” makes it sound as if this occurred against its will. But - it has found a multitude of willing partners in the private sector. The match between corrupt state and corrupt private sector is perhaps South Africa’s most functional display of “willing buyer, willing seller”.
KPMG executives have not set any benchmark for probity, as claimed by some – they simply acted when they got caught. Their focus was on maximising profits, even if it meant signing off on the use of public funds for a private Gupta wedding (among other sins of commission), and now buying their way out of the mess with a few heads rolling and dirty money being donated to NGOs. If this is the standard for the private sector, South Africans are in more serious trouble than initially thought.
The KPMG “apology” can’t come close to compensating for the damage done. Its report “confirming” that a rogue unit had operated in the South African Revenue Services fuelled developments towards state capture and triggered events that have had a disastrous impact on the country. These included the axing of ministers, deputy Ministers, and the subsequent haemorrhage of senior public servants from the state.
Everyone in South Africa is paying for the sins of KPMG.
Holding power to account
Governance is about the distribution of power in society, and the ability of citizens to hold power to account. This requires an engaged citizenry – whether in NGOs, ratepayer associations, street or block committees or faith-based organisations – who are sufficiently organised to call officials to account.
What is fascinating about South Africa is how engaged its citizen are. They kicked out the ruling party from running cities after just two decades of democracy and they’ve given the middle finger to e-tolls. They don’t behave the way they are told to. And they’ve reached a tipping point. When South Africans of all shapes, colours, sizes, creeds share simply being gatvol (fed-up), there’s trouble.
Ask the British public relations firm Bell Pottinger what it feels like. The company faces foreclosure following a concerted campaign - domestically and abroad - to shame it for stirring racial hatred.
Ask the Guptas how it feels now that all of South Africa’s banks have said they aren’t willing to touch their money.
South African residents and citizens have become acutely aware that they’ve been screwed. By many in the state, to be sure. But by as many or more in the private sector, for decades. And they’re sick of it.
The world is watching – South Africans brought down Bell Pottinger. They’re now going after the likes of McKinsey, KPMG and SAP, all of these companies tangled up by allegations of corruption.
The only way South Africans will ever get governance and accountability is by being organised, vocal, obstreperous, and demanding. So keep it this way – private and public sector are both on terms. And South Africans will hold them accountable, or if necessary, break them.
As revelations of systemic failures in governance pile up, the economy may very well depend on shareholders taking up the burden of providing the necessary levels of accountability. KPMG may be teaching South Africa an important lesson. Shareholders can also be anti-corruption activists. Anyone who is connected to the South African economy, must dearly hope that shareholders are up to the task.
If the executive is not committed to transformation, the security services will be loyal to the president and the ruling party. They will not be loyal to citizens and the constitution. And they then pose a severe threat to democracy.
The only way South Africans will ever get governance and accountability is by being organised, vocal, obstreperous, and demanding. So keep it this way – private and public sector are both on terms. And South Africans will hold them accountable, or if necessary, break them.
