The Editor’s Desk: KPMG and VBS – another day, another scandal

DUBLIN — The folks at KPMG complain, sometimes, that their critics (including Biznews) are unfair and too quick to pass judgement. But evidence has emerged that KPMG played a role in facilitating the VBS bank heist. Add this to the auditing firm's role in a laundry list of scandals around the world, from state capture in South Africa to shenanigans at Carillion in the UK, and you have a distinct picture of an organisation with some real ethics problems. Obviously, this is not to say that everyone who works at KPMG is on the take. There are many hard-working and honest auditors there – some even appear in the VBS story, trying to raise questions about the bank's books during the audit process. But with so many problems and so many scandals, it's getting very hard to believe that there is not some kind of rot at KPMG, or at the very least, a desperate need to revise ethics controls and start to take these issues seriously. In this episode, Alec Hogg and I talk about KPMG's role in the VBS heist. We discuss the lessons that the seeming failure of Saudi Arabia's investment push has for South Africa and we reflect on the upcoming Uber IPO. – Felicity Duncan.Hello, and welcome to this week's episode of the Editor's Desk. This is BizNews Radio and I'm Felicity Duncan. With me, as always, is the editor in chief of BizNews, Alec Hogg. Alec, you spent a lot of time this week, and in fact the week before, looking at the unfolding VBS story, studying the report form Advocate Motau. And one of the things that I wanted to pick-up on, which you talked about in your podcast this week, is the role that KPMG played. It's emerging that they actually played almost an active role in facilitating what happened at VBS..___STEADY_PAYWALL___.You're so right, Felicity, it's been so interesting. A little while back I engaged with the guys from Africa Good Governance, and they pointed out that the worst run municipalities in South Africa – they have a list of all the municipalities and they have the best to worst – the bottom 20 were all from previous homelands, Bantustans. And this is another example of how the sins of the past are coming back to haunt us again. This was a building society in the old Venda homeland called Venda Building Society, and as you can imagine it's a small, little building society. It went on for years, with about R200m to R300m in mortgages and deposits and really losing a couple of million Rands a year. It really wasn't doing much..Then a couple of chartered accountants, I was about to say wisely but certainly they saw the opportunity in this and acquired control of it. And then enlisted… I don't know where the second chartered accountant did his auditor training, but the first one, the kingpin of all of this, a chap called Matodzi is a KPMG graduate. So, he clearly knew within KPMG who the people were that he could tap, and he then brought in the head of the financial services of KPMG. Ao, it's not just another partner. This is the big boss. This is the guy who determines who goes on the audits for the major banks, which KPMG did, like Absa. They did an audit in the past and of course they lost that one..So, he brought this guy onboard and then just set about pillaging and plundering by using fictitious transactions and entries. And when a third-year clerk, at the audit in 2017, discovered that he couldn't reconcile the cash and that there was a big hole there, this clerk got hold of his immediate boss and explained this to his immediate boss and she then got hold of the audit partner, who was a director of VBS, and the audit partner said,'no, don't worry – I've got this in hand..So, we all know when we analyse financial statements the one thing you can't lie about is cash. The cash has to be reconciled, if there's a hole in the balance, it's usually by being fraudulent..So, here we had the audit partner, a senior person at KPMG in charge of the entire financial services practice, who was fictitiously changing the figures for VBS so that he and his cronies could benefit. He benefited to the tune of something like R30m. Then they had another two chartered accountants from KPMG who were involved, who also benefited. And as a back story, or a side story here, I was approached about six weeks ago by a public relations lady in Johannesburg who said she wanted to put me together with the two KPMG guys who had been fired to let me hear their side of the story, on the VBS issue. I said, I'd love to do that but I must warn you that I'm not here to serve them I'm here to serve the truth. In fact, there's a lot of questions that I have..No, she said, they're clear. They're very happy to talk about that. Well, as you can imagine that meeting never happened. But the reality of it is that this is very deep, and it is only through the facilitation – again – of KPMG that it was allowed to happen..You know, every time we talk about this stuff, Felicity, we get emails from KPMG old boys saying, how can you continue to attack this organisation? You're going to destroy it, you're destroying the brand, etc., I even had a mail from the now-former CEO to say why are you so hard on us? Can't we talk about these things? The reality is KPMG has misbehaved dreadfully and the culture within the organisation made it possible. So, you put it all together, we're doing our jobs..I agree. One incident, you can sort of put down to a rogue player with an organisation but when it appears to be as systemic as it is, and as widespread throughout the different function and arms of the organisation, you really, absolutely have to be saying where are their controls? Where is the ethics training? There has to something wrong at the organisational level. You can't just say, oh, it's a few bad eggs when it's so widespread and when the name of KPMG just comes up over and over again in these things. .Well, the issue that probably triggered my concern or deep concern about this was that the two auditors, chartered accountants from KPMG that I was supposed to be meeting with, which never happened. Their story, according to their communications facilitator was that there was nothing wrong in their wives' being granted loans from VBS. I asked, what are the loans for? The response was 'for property development' and I said, do the wives have any experience in property development? And of course, you know the answer to that. So, clearly once these questions were asked, not to the people directly but to their facilitator, I think they realised that maybe what they had taken for granted – what's wrong with our wives getting mortgages to do property development, even if they've had no experience in that field, from a client – maybe the penny started dropping there. But within South Africa you have this rot where politician's family members have been able to participate in Black Economic Empowerment (BEE) transactions. There's obviously a conflict of interest, but it isn't one that has ever been considered much less been outlawed..So, there's a lot of work for South Africa to do, to go back and to understand the learnings from this awful period that we've just been through and to instil new disciplines for the new democracy. And I'm delighted to see now that the parliamentarians are starting to call for lifestyle audits of not only those who are directly implicated in this whole event but throughout, just as a standard practice. Because until you start having lifestyle audits and asking how politicians who are earning R1m a year can be driving fancy cars and living in houses that cost a multiple of their annual income, until you start doing that, you're actually not going to get to the bottom of corruption..Absolutely, and you know, we see time and again that this really matters. That a country's reputation for cleanness and for fair and transparent process and for the rule of law – all of that is actually, really vital to the country's ability to attract foreign investment, for its ability to implement large-scale projects, and to really get economic development off the ground. .It makes me think a bit about what's being happening with Saudi Arabia. They're doing a big push to change their economy from reliance, almost complete reliance, on oil. They're trying to diversify away from that because the oil is not going to be there forever. And they arranged a big investment conference and they had people from every global bank who were going to attend. Then the Jamal Khashoggi story broke and a lot of questions were raised about the Saudi government's role in the disappearance – and now it's been confirmed, the death of this outspoken dissident journalist. .As a result of that, we have seen this investment conference – which was billed as 'Davos in the desert' – has essentially collapsed. Almost all the high-ranking, both business and government officials have withdrawn, and it's really dented Saudi Arabia's international reputation and, therefore, its ability to attract the investment it needs to diversify its economy. So, again, you see the behaviour at the government level really has a very direct relationship with how a successful a country is going to be at attracting investment and developing economically..You've got to wonder if Khashoggi did not have a regular column in the Washington Post, what would have happened? Or you have to also wonder what happens to other Saudi dissident journalists? This is a guy who had a very loud voice and he was someone who, as you say, was trying to shine a light on the dark areas of a very strange country. Only recently have women being allowed to drive there. This is really not a liberal democracy by any stretch of the imagination. As a consequence of all of this, you are now finding the rest of the world looking at it and saying, do I really want to support that kind of cultural situation?.I've been reading a lot, lately, about the apartheid years and there's a very good obit in The Economist this week about Pik Botha. It's about how Pik Botha was supposedly the liberal in the National Party government, but how his approach to the rest of the world was 'just give us time – we will change. I'm the liberal – I'm going to be the one making the difference.'.And what we're seeing from the Saudis at the moment is a similar argument. Just give us time, we'll change, we will modernise the economy. We will get rid of this misogynistic approach that we have to our society. What The Economist concludes is that Pik Botha actually did massive damage to South Africa by staving off the inevitable, by staving off the new democracy that did come in, in 1994. And I wonder if we're aren't seeing something similar here, where the rest of the world needs to, at some point in time, take a stand. Not just because a journalist has been murdered, but to take a stance on countries that are really suppressing their people and not participate in allowing that suppression to continue. These are obviously philosophical issues, but it's quite interesting that once the light is shone onto these types of systems that exist, you also then start wondering whether the companies that are, in effect, keeping it going, as happened with apartheid SA, are doing the right thing?.Absolutely, and what does this mean for the country's long-term prospects, because you've got to have some sort of rule of law and some sort of way of exploiting all the talents and abilities of the people in your country, if you want to progress and develop. And policies such as those in Saudi Arabia really prevent that from happening. It's hard to imagine a very innovative, creative, tech sector, for example, emerging in a country where – as you point out – half of the people in the country, all the women, are not allowed to participate in the economy. You're just really hobbling yourself with these policies, beyond anything or beyond these questions of human rights – it's just short-sighted, in my opinion. .It's an interesting world we live in, isn't it, Felicity? But we live and learn, day by day. But I still wonder if Jamal Khashoggi had not been a columnist on The Washington Post whether we would even have heard about this story?.Absolutely, and I think that again shows how important it is to have these lights shone on these things. Thank goodness that Jamal Khashoggi was who he was because otherwise we wouldn't probably be having a serious discussion right now about the nature of the regime and whether it's the right thing or not to support it. .Alec, before we sign off, we've got to talk a bit about some big news that came out this week about Uber and their planned IPO. They're looking at doing an initial public offering in the US in the second half of 2019, and a couple of investment banks, including Morgan Stanley, have put together proposals that value Uber at $120bn. Now, that is equal to the market capitalisation of Fiat Chrysler, Ford, and General Motors, added together – that's the valuation they've put on Uber..Wow, and Uber has also just finished a corporate bond issue – well, they were looking for $1.5bn and they got $2bn so, that was oversubscribed. It is a hot company and once they got rid of the controversial, colourful Travis Kalanick, the CEO and founder – it just seems to have taken on a new life. And you wonder whether Tesla would not be similarly advised? If Elon Musk were to depart and you had serious managers coming in, like happened at Uber, whether it would be a positive rather than the way everyone calls it at the moment, a negative? But it's going to be an amazing IPO and on top of that, don't forget that there's South African connection here because Naspers has invested heavily in the distribution of convenience foods, fast foods, and its big competitor in that market globally, is Uber Eats. So, everywhere you look nowadays you've got some kind of a South African interest..It's interesting the point you make there about the leadership change at Uber. Because one of the things that we saw this week was some big investors at Facebook are looking to split the role of chairman and CEO. So, they want Zuckerberg to continue in his role as CEO, but to have an independent chair, which is exactly what has happened at Tesla – the role of CEO and chair had been split and they're looking for an independent person to fill that role. .And you're right, the point you make about getting rid of, or rather, the change in management at Uber and what that's done for the company. One does wonder if there's sort of a mood shift against these high profile, big, innovative names and a desire among investors now to see serious managers with a good track record, who really understand process, and understand what it means to run a big company. You see that type of management coming, if not to replace, at the very least to support these creative and innovative types who may not necessarily be the best people for the job of managing a growing or rather a large business – a large established business..That's a very good point and it's a similar point to the kind of person or the skills that are required to win an election and the skills required to govern are not necessarily, in fact, are very rarely the same skills that are needed to run a country. We can see what's going on in Italy and Brexit here in the UK and Donald Trump..When you have a look at the most successful people they, over many years, they are low profile. They are the people who are under the radar. They're the quiet ones. It's the heroic CEOs who are loved by the media and given this extremely high profile, who tend to often have feet of clay, as we all do. We are all human being. We only have a certain capacity. Some of us are a little bit smarter than the rest of us, or some of them are smarter than the rest of us, but the reality of all of all of this is that you do need to have a team and a team is always more powerful than the individual. Sometimes, particularly in business, the individual given hubris and ego and other kinds of failings that comes with lots of success can be a negative force for the longer-term development of that business. So, I think you're on the money.

The Editor’s Desk: KPMG and VBS – another day, another scandal

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