LONDON — If there is one interview you must listen to today, this is it. Iraj Abedian, respected and principled CEO of Pan African, isn’t buying spin doctoring from corrupted and deeply implicated KPMG and McKinsey. Abedian says with overwhelming evidence now in the public domain, it’s high time all South African businesses “man up” and follow the lead of Telkom, AVI, TFG, Wesgro and others which have very publicly cut their ties with KPMG. Because the longer they drag their heels, he says, the more society will regard the business sector as having been complicit when the inevitable happens. He praises the belated but unprecedented action by Munich Re but rejects appeasing arguments made by the likes of Old Mutual chairman Trevor Manuel – pointing to obfuscating actions which show KPMG, like McKinsey, will do what it takes to secure its very existence, not just in SA but globally. Brilliant analysis. – Alec HoggÂ
It’s a warm welcome to Iraj Abedian, who is the CEO of Pan African Investment and Research in Johannesburg. Iraj, we are seeing the momentum gathering now for SA companies that are dispensing of the services of KPMG. Yesterday the R30bn TFG, which used to be known as Foschini, they’ve dropped them. AVI, who are an even bigger company, dropped them on Friday. It seems to have taken a while but the momentum is growing.
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Absolutely, and very importantly Telkom also dropping them, and it has to take its time because companies have to go through their internal processes of their Audit or Risk Committee, depending where they are in the cycle of the auditor process, and make sure that they have a back-up so, that’s understandable. It’s the intention for me, which is very critical, that it may take even 6 months to drop KPMG. It’s not as important as saying, ‘we are going to finish this year and move on without KPMG.’ That’s regards to the momentum building up but there are still some chief players that have not made their positions clear.
Yes, we published a list of 70 companies, listed on the JSE, and only 3 of them so far, well now 4 with Telkom, have dropped KPMG. Why do you think the others are waiting?
I do not know. It is totally inexplicable. Obviously, there’s a lot of pull and push behind the scenes. For me the important players who have not come out clearly are the banking and the financial sectors – Standard Bank, Investec, Absa, and Old Mutual (very importantly), they have not yet made their position clear. They’ve spoken in two tongues and it’s really, particularly with respect to the banks, defies or contradicts their own stated value mission that they are not going to deal with corrupt and/or dubious suppliers. Now, there is absolutely no doubt any longer that KPMG fits into that category. So, for Standard Bank not to take a position and yet, on its website to say, ‘we have issued a statement that does not accommodate corrupt suppliers.’ It doesn’t make sense and it is contradictory. That’s a very critical sector for the confidence and for the integrity of the financial economy.
You used to have a very senior position in Standard Bank, as the chief economist, a while back. So, you can talk about the with some authority. What’s happening internally? Because if you think of poor old Chris Hart: he made a seemingly innocent Tweet, which cost him his job and Standard Bank were very quick to act there. Yet, in this case, they’re wavering. What kind of pressures might be bringing themselves to bear, internally?
I think the pressure that I’ve heard, which they seem to justify their actions, and not just at Standard Bank but in the banking sector broadly, is the fact that if they dump KPMG who else will fill in their shoes? There are only three more left. And by, I guess convention, big banks need to have two of these big audit firms at any point in time to provide services for them. The argument that they put forward is that if KPMG collapses then there will be three so, in fact, there won’t be any choice. I have one, and then the only one that is not there has to be the other service provider, and that will create tensions within the so-called audit sector. My counter argument is that that is really a false ethical judgement. If you drop KPMG the next year, audit firms in SA, we have about 4 or 5 of them, will reabsorb the skills that will fall from KPMG and provided they are ethical and provided they haven’t done anything wrong, they can pick up the actual work. Not the name KPMG but the audit load that is required by the banking or the insurance sector. I think that’s what they are doing, at the moment. They’re meandering and the more they take their time to make a decision and they use excuses like ‘IRBA (Independent Regulatory Board of Auditors) hasn’t issued its report’, the more that some of them say that they’re waiting for that. Some of them are waiting for the other independent reports that have been commissioned by KPMG International. So, these are all excuses. All of which puts a big question mark in front of the ethical integrity of those who are sitting on the board or on the Audit Committee of these big corporations, such as Investec, Standard Bank, Absa, Old Mutual, and the like.
You mention the next rung, presumably that’s people like BDO, Grant Thornton, SNG, etc. They don’t lack ambition so, you would wonder how they’re feeling about all of this being told that they aren’t big enough to even get a slice of this market – not now, not ever.
Exactly, and that really takes us to another debate, which is a different level of ethical discussion, which is do you want to perpetuate this historic concentrating of 4 big firms? By so doing, encouraging their unethical conduct and assuring them that even when they are unethical they will not collapse, which is exactly the opposite of what in theoretical economics you call market forces. Market forces operate exactly because when a firm does not provide what they should provide, where a firm does engage in unethical conduct, it collapses and the market then reproduces its substitutes as other service providers. So, that’s a major issue from a macroeconomic ethics point of view, if you like. That these banks or corporations that use the argument that KPMG is too big to fall: in effect, they want to reward KPMG, despite its misbehaviour.
Iraj, there’re two guys who have been outspoken in this subject that you know very well. Lesetja Kganyago, the Reserve Bank governor, and Trevor Manuel, the chairman of Old Mutual. Both of whom seem to be taking a somewhat different position to yours. What do you make of their statements?
I think the governor of the Reserve Bank has clarified its position in a statement. That is, that they did not encourage banks or instruct banks that they must retain KPMG. They raised the issue of potential systemic financial instabilities, which I totally disregard. I believe it’s a false argument. It has never happened before and it, theoretically, doesn’t make sense because it’s not the company that matters. It’s the skill base that matters. For all that we know if there is a shortfall in the economy, in the capacity of the existing auditors, some auditors we’ll import if we need to and there’s nothing in their skill base that suggests it’s irreplaceable. So, that argument or that fear of financial instability, for me, is totally false. They have clarified it to some extent and they’ve left it to the banks to make that judgement.
As far as Mr Manuel is concerned, again, his argument is misguided as far as I’m concerned. He has not provided any logic to it and the fact that somebody in Old Mutual may have advised him, on some or other flimsy ground, does not make sense to me at all. In fact, my discussions with the other audit firms, who have come here to educate me on this issue suggests that neither the Reserve Bank’s concern nor Mr Manuel’s concern is a real concern. We do have the capacity to fill whatever gap is left if KPMG falls away and there is no concern of any systemic financial instability whatsoever.
Iraj, your own experience with Munich Re. You resigned because they didn’t fire KPMG but subsequent to that, Munich Re has also taken that position.
Yes, I’m very delighted that they did that. They had to go through their motions but, as they say, ‘rather late than never.’ In my view, they have taken absolutely the right decision and I congratulated them for having made that bold move.
Would you return to the board?
No, I will not return but I must say that in the context of the global spread of Munich Re, its global reach providing the insurance services in so many jurisdictions, it’s the first time in their history that they’ve had to take an ethical decision to separate SA’s mandate from their global mandate. That, for me, was a very important call that they made. I will not go back because there’s no point in going back. I’ve made the statement and in any case, after 12 years, one has to move on and allow new people to come onboard.
Last time we spoke you said you were going to be engaging more with McKinsey. Have you had much progress there?
They came to brief me, I presume from their perspective, to educate me about some of the issues. The more I listened to them the more I was convinced that they are not telling the truth. They are finding excuses for their total abuse of resources over months and months, to the tune of R1.6bn, and after 90 minutes of listening to them I was more convinced than ever. Since that meeting, the more revelations come out, out of Eskom, it confirms that they are more into the game of excuses of prosecution and cover-up than to be truthful, and to help SA remove this cancer of corruption that has spread. The fact that Eskom eventually ended up publicly demanding the money back from McKinsey and from Trillian confirms my conclusion that McKinsey has become a cog in the wheel of State Capture.
What happens from here?
I think what happens is the process. As we discussed earlier, SA has woken up to the fact that there is a complex, sophisticated, and highly professional networks or infrastructure of looting, which involves lawyers, and bankers, and real business people and pseudo businesspeople. As well as auditors and as well as global advisors so, it is not a simple corruption of a few people who want to extract a few pennies from the supply chain. This is mega-corruption, global as well as national, and the fact that SA has woken up to that – different players are now acting in different sectors to combat this spread of cancer. The churches are doing their thing. Corruption Watch is doing their thing, the intellectuals are doing their thing, and businesses, in my view, need to be super alert and play their role. Even ministers, by enlarge, are either neutralised, implicated or complicit. We don’t know who or where but what we do know is that the lack of action by the Cabinet and the ministers suggest that it’s a mix of all of the above.
Crime fighting agencies, such as Hawks and NPA, based on what they haven’t done, suggests that they too have been neutralised, to say the least. So, it then leaves a space for the civil society and for business, and in the balance of power civil society can revolt and it can express their disgust in this but it’s business that can do something about it. If business takes ethical, moral, or patriotic decisions they can put a stop to this corruption relatively quickly.
Just to close off. The engagement that I’ve been having with some CEOs, which as you can imagine has been quite vibrant – has been a point that they want to wait for the KPMG appointed investigation into KPMG, paid for KPMG, to come out with a report and then they will make their decision on whether or not to continue with the audit firm. It sounds disingenuous.
You can’t expect KPMG International to come and close down KPMG SA. Particularly, Alec, that in this case there is more than enough indications that KPMG International is liable. If facts come out the firm is liable for the damage that they’ve caused to SA. We’re now talking about, let’s say, getting R1.6bn from McKinsey but if we are going to put a claim against KPMG – it will run into hundreds of billions, (at the very least) so, KPMG International understandably, is trying to manage the agenda, and manage the process and cover up as much as it can get away with. Potentially, and I emphasise ‘potentially,’ destroy the evidence but if they appoint an independent external forensic team, as opposed to an internally managed process – they could end up being liable for all of this. So, for the SA companies to wait for the fox that is guarding the henhouse, to come up with a different result is quite bizarre, it’s quite irrational. I don’t understand this and I don’t understand the fiduciary responsibilities and, quite frankly, I’m beginning to doubt if some of them have got what it takes to be a CEO, managing in the times of crisis to the benefit of the corporation that they’re entrusted with. It’s really a serious endarkenment of some of the pronouncements. Wait and see, is not what SA need. What we need now is clear, ethical, and patriotic decision making – to stop the rot.
And leadership.
Every day that they don’t, the rot gets wider and deeper.
Just on that point, on the international point. If KPMG starts admitting that it’s done wrong is there an issue there perhaps with its insurers that they will then not be prepared to pay? I suppose, you could have every KPMG partner around the world having to fund this massive, potential claim?
Absolutely, for me, more and more it becomes clear that that’s exactly what KPMG International is trying to avert, and it will go to any lengths. For example, IRBA reported a couple of days back to the Parliament of SA that KPMG SA is not cooperating with them. They are not giving them the evidence and whatever evidence they give, it comes in bits and pieces. As a result, IRBA is unable to finish its report as expeditiously as they would like to. So, here is another example of a company that wants to reboot and restart, and says there were just a couple of rotten apples. Yet, it refuses to provide the information so that they can put this nightmare behind them. They seem to have stumbled onto something big that they think if they provide it, it will have bigger global implications. Therefore, they would rather go through another bout of unethical conduct and not collaborating with the regulatory body, not giving the information as wholesomely. In order to prologue it and hope that somehow something else and more drastic will happen and forge, and that is really very distressing.
Iraj Abedian is the CEO of Pan African Investment and Research – talking to us from Johannesburg.
