LONDON — In this edition of the Old Firm, David Shapiro and I talk about KPMG’s growing problems – and what happens next; disagree on the bonus paid to the Naspers CEO; revisit David’s dark experiences at Corpcapital; have another look at the Bitcoin bubble bursting; and chat about this week’s Biznews event in London with FW de Klerk. – Alec Hogg
Well it’s a warm welcome to David Shapiro. It’s been quite a week, Dave. Pressure building on KPMG, McKinsey, SAP, goodbye Bell Pottinger – my goodness.
And that continues. You can add to that other issues like North Korea setting off more missiles, which I think is quite worrying but the markets just seems to brush them aside as a ‘non-event.’ But I think the Bell Pottinger and certainly KPMG started to pick up as well McKinsey. I think businesses are now not quite sure how to handle it. Many businesses, I think even our auditors at Sasfin, we have KPMG and I’m not quite sure what kind of stand they’re taking. Whether they’re just taking the status quo and not doing anything but there is certainly an outcry and the media response has been enormous as well. It’s challenging, Alec, you can’t ignore. Businesses have to make a moral stand. These are the people that (as we mentioned last week) act as the guardians or the spokesmen for outside shareholders, for their stakeholders and so on. You’ve got to make sure that they’re conducting themselves morally and doing the right thing.
Dave, you know Iraj Abedian. He spent a lot of time on the radio with us. He’s a measured, very cautious and certainly a deep thinker. For him to come out with a statement, which is on BizNews today, that unpacks KPMG. He says, ‘KPMG did worse things than Bell Pottinger, and McKinsey, and SAP. And McKinsey and SAP stole hundreds of millions of rands,’ he says, ‘from state resources and KPMG is worse.’ Wow!
That’s the whole thing. Where auditors turn blind eyes to it of course, they’re equally as guilty and that’s the worry. We don’t know what they did. We don’t know what they turned a blind eye to. I don’t think they personally stole it but they certainly gave it the blessing and that’s what auditors do. You’re there to check the books, very simple. I’m an auditor by profession and you’re there to report that companies are keeping proper books and records and adhering to rules and regulations, and check.
How many times did we discuss, you know you talk about how you can fiddle provisions and how you can fiddle the books? I still maintain that accountancy is a bit of a fraud because it allows public companies or most companies really, to manipulate the numbers, and that’s the duty of the auditors to say, ‘no you can’t,’ or ‘no, you’re not allowed to.’ I think there’s a huge outcry even over my favourite company, which is Naspers, where the new CEO is paying a bonus out of a write up in one of their investments, which is Tencent. Now, he hasn’t really added to it and yet he’s paying himself a fat bonus from that. I can give it to Koos. Koos was the person who found this investment but this is a passive investment. They don’t really add value to it.
No, we’re going to disagree on that one, Dave. If you have a look, you’ve got to get past Tencent because it is so enormous and have a look at what Bob van Dijk has done elsewhere. In this year he’s done Delivery Hero, which added R1.7bn to the bottom-line of Naspers this year. Then, of course, he’s also been very involved with their investments into India, Flipkart, which is giving eBay a hiding over there so, you’ve got to say, ‘sure we understand the Tencent thing.’ But really, this guy is world class. If Naspers don’t want him then Google will snap him up. That’s the problem.
I’m not arguing that point. I’m not arguing that he has… But to what extent do you pay the bonus, on what value? If it’s on the value of what he added in, in real earnings, yes. But to base it on share price increases, which are really driven by Tencent – I think that’s where the difference is. Do you remember back in the day I still spent a few months at a place called Corp Cat?
Do you remember?
How could I forget it?
We all thought you had lost your mind.
Yes, and David, (I can’ remember his name – I’ve got a senior moment), you had been interviewing him and he came out of the studio. Shame, he died, what was his name? Alec, help me on this one.
I’ll help in a minute. We’ll come back to it.
He was a journalist.
He walked out of the studio and he had said to me, ‘I’ve got a big story coming next week on Corp Cat.’ I was horrified because I was about to join them, this was in 2003/2004. What happened is and that was the story when Nick Frangos resigned and he resigned basically, on the mark up, and there were corporate governance issues.
Yes, it was the mark up of an internet company and I remember it very well. There was the NASDAQ boom at the time, and there was a massive increase in the notional value of this company, from zero to gazillions. And bonuses were paid on it and they took that into their earnings and Nick Frangos said, (as the chairman), ‘this was crazy.’ The board refused to listen to him and he resigned. He was the first whistle blower.
He was, and Deloitte’s, I think Deloitte’s were the auditors who sanctioned that.
Well, there we go.
Funny enough, I’ll tell you who else was there was Nigel Payne, also was brought in, as an independent assessor, and he also gave it a clean bill of health.
I get very worried when people pay bonuses out of non-cash gains in assets but you might the right thing. I’ll concede. I love Naspers, I love the business, I love what they’ve done and I love the value they’ve added to the JSE.
And the value they’ve added to the pensioners in SA. If you ever, for a minute think of the increase in the retirement funds from people, the State’s retirements funds, through to pretty much everybody who’s got a retirement fund in SA because Naspers is 20% of the JSE all share index. They’ve added huge value so, I say, ‘don’t knock them.’ They’re doing it great. They’re the gift that keeps on giving. If you want to criticise there are many others to criticise, rather than those who’ve actually been giving to you.
I’ll back off from this one.
Was it David Gleason that you were talking about?
David Gleason, of course man. I never forget, I walked out. He was being interviewed by you and he said to you, ‘I’ve got a big story coming next week.’ This was in the Classic FM studios in Braamfontein. I said, ‘oh my god, I’m joining them next week.’ It didn’t last because 9 months later there was nothing left. They were dis-abandoned but I always… It was an exercise that I remember very clearly and I always look for that in the way that companies pay out money.
But David, it gets back to that thing of Hemmingway’s and I’ve been using that a lot lately, gradually then suddenly. Corp Capital, gradually there was a lot of talk, a lot of sniffing around and then suddenly, after Nick Frangos came out and said, ‘this is wrong,’ and that was the end of them. They went so quickly that you almost had to wipe the sleep out of your eyes and it was over. KPMG, to me, feels like the same thing. The complete disdain with which Trevor Hoole, who’s their SA partner, has been treating people in the media asking very relevant questions and Magda Wierzycka from Sygnia – you’ve got to admire her.
She stood up and she fired them first. She now has been joined by Iraj, who stepped off the board of MunichRe because of what KPMG have perpetrated. He took 3 months to investigate them. After 3 months, he asked them questions. They could not satisfy him and he’s really lambasted them. Not least because they wrote that report on Pravin Gordhan, which actually got Pravin Gordhan fired (if you want to put it that way). They have damaged this country and the report that they wrote on him they now, well everybody knows it was a R23m to write what the people who paid for the report wanted it to be written – this is bad stuff. My question really is, do you remember Andersen’s very well with Enron?
Very, I was at a firm called Schwartz Fine, which is actually merged into Andersen’s. I did my articles at Schwartz Fine. So, Andersen’s was blue blood. You had to qualify to do articles there. They didn’t take anybody, only the best of the best went to Andersen’s, and that’s the kind of name they had and they didn’t last long.
And Enron dropped… What happened with Enron, refresh our memories there?
Well, it was the same issue. They were the people who cleaned Enron’s dealings, which were false. I can’t remember the exact details of Enron but fundamentally it was a sham and the auditors were Andersen’s and they fell. And of course, once they fell, it was not more than the workings of a handful of people – they brought down this international firm because they couldn’t survive. Everybody asked the same questions and they merged into KPMG, which is the irony.
I think it’s the same thing. I don’t think KPMG SA will bring down KPMG International.
I think, well I think there’s going to be a lot of questions. They could be. There are only 4 now, and what surprised me is that I haven’t heard or we haven’t heard anything from the international firm at all. There’s been no attempt to send in the army or the heavy weights and kind of redeem their name. I think you’re right. I think you’re dead right. I think it’s going to be a very tough turnaround for them because people are going to start asking questions and once it starts, the momentum starts it’s very difficult to stop that.
The mismanagement of the communications in this case, David, has been spectacular. Having spent a couple of years in that field I cannot believe how useless these guys are at managing public perceptions. It’s almost like everything they do, they’re doing it wrong again. Or they are either terribly incompetent or they are rotten to the core, one of the two, and they know that if they open the door the whole edifice is going to collapse. It’s either incompetence or rottenness but either way, they’re putting that brand massively at risk. If this had happened in the USA, rather than in SA, what do you think would have happened by now?
That’s what’s interesting is that it doesn’t seem to have gone beyond our borders. That’s what I find… Bell Pottinger went. Nor has McKinsey. I’m not sure how McKinsey’s are involved in any way at all but when you’re in that kind of role you can’t let anything slip. Do you know what I mean? It’s not a matter of one deal, whether McKinsey or if they were involved…
David, they were involved. They took hundreds of millions of rands, and they gave it to a front company. That’s cut and dry. You can’t even say, ‘ooh, do we give them the benefit of the doubt?’ They got the contract because they agreed to give the Guptas hundreds of millions of Rands through a front company. It’s that simple and it’s now been authenticated that the Gupta-Leaks are accurate and clear. McKinsey have got a big problem but what I love about the way Iraj unpacks the whole thing and I urge people who haven’t read it yet to go and read it because he explains and says, ‘look as far as SAP and McKinsey are concerned – an open and shut case, we know what they did.’ And everybody does, who’s been following the story. But he says, ‘with KPMG it’s even worse.’ Don’t you, when you become a chartered accountant, have to sign some kind of code of ethics or some kind of a belief of honour?
That’s all part of your training. That’s what you are. You’re there to protect the public and other stakeholders. You’re not there for the convenience for the board of directors. You’ve got to ask the questions and one wonders. Alec, the biggest problem is that these are the people who pay you. It’s a big account, you don’t want to lose it and the problem is once you start to twist your standards and once you start to lower your standards then of course, you’re no longer trustworthy.
A slippery slope.
That’s very hard to do. It’s hard for them because can you imagine you’re the partner and you’re going to lose the account but that’s where… I never forget a story and when I was at Schwartz Fine there was, well we did the Tiger Brands, or what was Tiger Oats, and this was a story that Leonard Fine always tells me. Sorry, it might not be Leonard but some old timer from Schwartz Fine. He always went to Arnold Kane, who was the auditor and partner, and he went to Tiger Brands, (Tiger Oats as it was there) and put the bill down, I think, in front of Rudy Frankel. And Rudy Frankel looked at the bill and challenged it. He said, ‘Mr Frankel, if you don’t like it, we’ll resign.’ In other words, ‘that’s our bill. This is the work we did. We’re not going to horse trade with you.’ End of story. ‘If you want us to resign as auditors, we’ll resign.’ And that’s the kind of attitude you’ve got to do. In other words, ‘here you are, don’t challenge us. We’ve done the work. We’ve done what you wanted to do. Here’s our bill for work done.’ These are honourable people – if you’re going to horse trade or start to negotiate then we’re going and you’ve got to have that kind of attitude. They were prepared to lose the audit over that kind of conduct. It might not be a proper example but I’m saying they were honourable men. You don’t question what they did.
The system only works if they’re honourable, David. Capitalism only works if you have a moral underpin and that’s what Adam Smith wrote in ‘Wealth of Nations’ in 1776, for heaven’s sake, so it’s not like it was written yesterday. If you don’t have that moral undertone it doesn’t work and I’ll ask you though, let’s move onto something else. We had the Bitcoin collapse in the last few days. Now, I hope the people who listened to this podcast were taking careful attention of what you said last week because it reminded you of a bubble. If it walks like a duck, looks like a duck, and quacks like a duck then it usually is a duck.
It is a duck. You can create your own currency that’s all you had. If you had the software, you could create your own currency, it’s crazy. It’s absolutely insane but I think what it does highlight is just how, regardless of what we’ve gone through, whether it was the internet bubble, the subprime crisis, that if you dangle something in front of people that offers them quick money – they drop all kinds of rationality in the pursuit of quick money (greed), and it’s amazing how people fall for it and how they will authenticate or argue against you, in that respect. There are still people who believe in it and there are still people who want to do it. So, Jamie Dimon has come out, the Chinese Government have come out against it. Just leave it alone.
It’s too difficult. If it’s too hard to understand and if it looks too good to be true, it usually is but it’s easy to get sucked into those things, Dave.
Yes, well the pursuit of greed, the pursuit of quick money – everybody wants to move beyond the great un-rich. Everybody wants to get rich quickly and there’s no route, there’s no quick route. Even in investing – it’s a long pursuit and if you buy good companies and you just follow simple, rational rules you’ll do fine, you’ll do okay. But no, that’s not good enough for everyone. That’s not good enough for a vast number of the population. Everybody wants it to happen overnight. It doesn’t work that way.
Yes, but Bitcoin offered them that. Their friends have bought. One mate had bought and had suddenly made so many Dollars or so many thousand Dollars, then of course they also wanted to get rich but at the end of the day, you lose money. Trading is very difficult any kind of trading is very difficult. Alec, if you gave me money… Even if you gave it to me and said, ‘here, go and trade it.’ I would not do it. It is so difficult. It’s so volatile. It’s a lot easier in the movies when you watch these shows of people sitting on the desk and picking up phones and that. But in real life trading is very difficult to make money. In fact, you’ll see hedge funds starting and closing all the time and these are very clever men who run these hedge funds. Even there, the formulas just don’t work – stick to what you know.
Talk about trading, yes, stick to what you know, yes. The new Stock Exchange license that was issued this week to the old Equity Express. We’ve now got 3 Stock Exchange licenses, sorry 5 that have been issued. We’ve got A2X who are going to be coming into the game pretty soon as well, taking on the JSE directly. What do you think is going to happen to this market because surely SA is too small to be able to justify 5 Stock Exchanges?
Absolutely 100%, and that’s the worry. One of the things that I do on a day-to-day basis, whenever I look at the market at the end of the day I always check volumes and value trader. If we go into value trader it’s shrinking, and it’s shrinking all the time. I think the absence of SA Breweries has hit us in a big way. We’re trading less than R20bn a day. In fact, right at the end we see a kick-up in trade as people close positions because obviously, there’s a lot of high frequency traders or there’s a lot of traders on this market that give it the volume. But fundamentally, there’s not enough stock. There’s not enough tradable stock to make this Stock Exchange viable. If you look at the Stock Exchange results, the recent results that came out, you’ll start to see the fall in volumes.
We have no new listings. There’s not enough volatility to drive the derivative markets, or single stock markets – that’s all gone so, it’s a very small market and I think to have 5 Stock Exchanges is just insane. It’s hard enough to have one Stock Exchange and Nicky Newton-King will tell you that so, I don’t know how they’re going to survive because you can’t survive on a few trades. The investments that you make in infrastructure and in trading and, also the compliance costs of that – it’s enormous.
To be fair, you don’t need Stock Exchanges any more. You need one Stock Exchange. If you look at the adverts and I’m sure you follow them on different offerings, like a SAXO. We use UBS, or whatever. I can sit here at my desk, or I can go into Tasha’s where we used to be in Moneyweb studios, over there. I can sit down there…
Yes, order a plate of chips and trade globally on an iPad. All the money will be stored either in some guardian, or it could be at UBS. You don’t need to do anything. You don’t need to have a Stock Exchange anymore and it’s available to everyone and a lot of people are doing that so, why we need 5 Exchanges, I have no idea. I think the view of what an Exchange is and what’s out there, I think it’s exaggerated.
Well, we’ll see how that all develops but it certainly is a new world. Going back into the old world though. This week we had a huge event here for us, here at BizNews. We went to the Institute of Directors on Pall Mall. You don’t get more prestigious than that, and we had FW de Klerk in conversation and the transcript is up on BizNews now. We had 140 people, Natie Kirsh was there, Wendy Appelbaum, some other very heavy hitters, who happen to be either passing through or from London. There were quite a few ‘sirs’ and so on, who came along to see this statesman. This guy that they felt was a leader of the world, certainly at the time, and we forget about FW. It was within 6 months of his taking over that he changed SA forever. He unbanned the ANC, released Mandela – the things they’d been trying to do for decades.
You just get the feeling… David, it was so good sitting talking with him. I met with him in the afternoon beforehand, just to make sure that he was at ease, and he certainly was. The humility of the man shone through. That was the big thing for me. He’s achieved so much and he’s really reshaped a nation. We could have been Syria and yet there are people who knock him and people who don’t give him the rewards or the respect perhaps, that he demands but it was nice to have that opportunity with him.
Look, he was a very bold man and what that ushered in was a period where we really thought SA would be the shining beacon of Africa, and for a bit we believed it, and we were. Unfortunately, I think in the last few years, I think we’ve gone backwards and we’ve lost a lot of that momentum and it’s very difficult to recall that and to remember that. It’s sad because I think that SA… Everybody looked upon us as being a great nation. I don’t know how we get back that spirit of 1994. We need to go there, we need to go back to that and relook at those days.
I asked him, Dave. I asked him, ‘how do we get back there?’ Because he remains optimistic and he says, ‘it’s all going to happen in the change in leadership.’ He also said some really good stuff. He said that when he was the leader of the party he tried to get strong people around him. He tried to get the very best he could. For instance, he used the example of Derek Keys, who he brought in as Finance Minister. Derek Keys was never a National Party member. However, he was a brilliant businessman. I think he came top of the year in his CA, when they wrote the CA so, it just shows he certainly had the brains and Derek Keys made a lot of difference to many people’s’ thinking. He made a huge impact, which again has not really been recognised. But that’s what FW says, ‘new leadership in SA.’ ‘The institutions have held, the civil society is coming at the bad guys, like in an almada of ships, and they’re crumbling.’ The bad guys are starting to waver and they’re on the backfoot, in other words. But with leadership, be it in December, be it through splitting of the ANC, be it whatever – will come a rejuvenation. He’s very excited and after listening to him I think it’s very hard not to be.
Leadership is one thing. The economy is another and I don’t want to throw cold water on what you’ve been saying but I’ll tell you what bothers me, and with new leadership has to come new thought, new economic thought. Alec, when I looked through Impala’s results yesterday and when you go through it, ‘mine-by-mine’ you realise how difficult conditions are here, how difficult economic conditions are. Mines that we knew, well we saw this earlier. Remember, we saw it earlier with AngloGold Ashanti, with the South African mines that should have been closed at the turn of the Century.
And suddenly we’re starting to see issues in platinum as well. It’s a very difficult place to make money and we’re beginning to question, not only platinum now but gold and other areas so, if we’re going to turn this economy around we’ve got to start laying the plans of a completely different way of making money. There’s still so much emphasis on hopes that mining is going to get us through and that shocked me – it shocked me to look at Impala’s results and to see the issues. Not only is it bad mining or old mining but also, you’re getting the threat today of electric cars after the announcement of Volkswagen.
So, I think leadership is one thing but I think you need a new economic order here as well, which has got to bring this economy in line with the kind of move that we’re seeing internationally. That, to me, remains (perhaps), our biggest threat. How are we going to address unemployment with what kind of economy is going to allow us to do that? It’s a very difficult challenge and we’re seeing also, some very poor results coming through as well, which point towards an economy that’s labouring a lot. We see that in traditional industries, and the confidence is very low here. It’s expressed in Sun International’s results. We’re expressing it in the fast food companies’ results and in all the retail results as well so, we need it urgently, we really do. I think from an economic point of view, I think there’s an imperative to look at this very carefully and the chaps who are in charge, at the moment, to be honest, they don’t give a damn.
David, it’s always darkest before the dawn, and it’s pretty dark right now.
It is, and unfortunately my job is we’re risk managers. We look at news. We look at company’s results and we have to decide on where to put client’s money. Where’s the best place? Look, SA, and we say it all the time, and it’s a magnificent country. We’re so blessed but we’ve got to go back to 1994. We’ve got to find that same spirit, and think of the chaps who were around the table at the time of CODESA. They all abandoned their posts for money and to me, that was the biggest tragedy.
Not all of them. Pravin, never abandoned his post for money.
And there were others like him too. Anyway, David, let’s just leave it with that thought that it is always darkest before the dawn and FW, he’s lived 81 years, a little bit longer than you and a lot longer of me, of course. He says we’re going to get through it so, let’s just grit our teeth and look ahead. David Shapiro, in Johannesburg – with the Old Firm.