The Editor’s Desk: After KPMG, Gupta’s, SA needs a dose of truth

DUBLIN — In this episode, Alec Hogg and I discuss why South Africa needs a healthy dose of truth. We look at KPMG's latest series of setbacks in SA and abroad, and ask why some South African companies are still pretending that KPMG isn't the problem. We also ask if Ramaphosa's truth-telling is the dose of reality that the country needs. To wrap up, we take a look at the implications of the global stock market downturn and the return of volatility. – Felicity Duncan.Hello, and welcome to this week's episode of the Editor's Desk. This is BizNews Radio and I am Felicity Duncan. With me, on the line, as always, editor and chief of BizNews and our fearless leader, Alec Hogg. .___STEADY_PAYWALL___.Alec, it was a big week in news for KPMG. So, we saw on the international front, there was some big news breaking about a key KPMG client in the United States, GE, formally known as General Electric. GE is now under criminal investigation for it's accounting practices and GE has been audited by KPMG for a 110 years. So, KPMG really waist-deep in whatever is going on at GE and is now subject to criminal investigation. .Then on the home front, in South Africa, we saw big, prominent South Africa bank, Nedbank, dropping KPMG as its audit partner and announcing that in 2019 it's going to move on to Ernst & Young. Again, a bad news week for KPMG, and again KPMG coming out and saying, there's no news here. In the Nedbank story they said, this is just a planned rotation of auditors – everything is fine. But it's really difficult to believe that. .It's impossible to believe that. It is actually fake news of the highest order because the head of the financial division at KPMG has been caught with his fingers in the till in the whole VBS saga. He's the man in the middle. He's the fellow who told a third-year audit clerk to shut-up, while he signed off the fraudulent accounts. He's the man who has got R32m in his bank account, as a consequence of being complicit and in aiding the thievery that went on at VBS, a small, mutual bank based in the Northern part of SA. .So, clearly, to come out with a statement like that just tells you that they're playing to the lawyers. The lawyers must have said to KPMG – you need to somehow find a way, some kind of defence, against the criminality of the man that you appointed as the head of your financial services operations. .Now, imagine this, Felicity, you're sitting in an audit committee. Your auditors… I've run a public company. I ran one for 15 years, so I know what happens in these things. You get your auditors, who actually roast you on any little mistake that you've made. Whatever you're doing that is slightly off-beam, and it happens when you're a small company of course, the auditors point it out because it's their legislative duty to do that, and they explain to you how you need to fix it. You can argue, but if you argue too much, the auditors will say to you, well, we're not going to sign the accounts. .So, in essence what you have is a policeman, who is checking that you do all your financials correctly. Auditors will pick-up any fraud and in most cases, they do this through the audit process. So, now you're a big financial services company and the guy who heads the finance practice at your auditors, which is a Big Four auditor that you are paying tens of millions of Rands to, is actually right in the middle of one of the biggest scandals ever to hit South Africa. To think that Nedbank was going to retain KPMG as their auditors after that is ridiculous and to actually believe that KPMG's statement is going to fool anybody, who's being paying attention, is also ludicrous..Yes, and you know it's not even just restricted to South Africa, because there was obviously the Carillion scandal that happened in the UK, where you're based, where again KPMG was explicitly complicit in some very troubling behaviour. Now we're seeing KPMG being involved with GE's accounting scandal, which is a really, shocking, huge figures at $22.8bn – a charge that the SEC and the Department of Justice both are investigating. Again, KPMG, ultimately has the final say so and responsibility for these accounts. .So, it really just seems that something about this organisation, something about the way that it's managed, perhaps something about the way that they promote people internally – something is going wrong and we're just seeing problem after problem. Potentially, it's a broader problem with the auditing industry in general but certainly a problem with KPMG. .It is, and something else, for me, a bigger issue than this. Felicity, in my long career I did spend two-and-a-half years as head of communications at Absa, and during that period I got to understand a little bit of why big corporates, or the way big corporates should handle their communications, and to his eternal credit, my boss, Danie Cronje, used to say, 'Let's just tell the truth.' That's the way to do it. Of course, coming from journalism that was what I was completely aligned with, but he was never one to try and hide anything, because he said, the minute you try and hide something you are going to be found out at some point in time, and then the problem is many times greater. He said, apart from that, most people aren't fooled anyway – the most important people know what's going on. .With KPMG it has almost complicity with the companies themselves. And well done to Nedbank. They didn't come out and say, well, its just audit rotation. They said, We are getting rid KPMG and we're moving to Ernst & Young, as you mentioned. But there'll be other South African corporates and I think of AECI, as an example, which came out with their – well KPMG had audited them almost as long as they audited GE internationally – and AECI said, no, it was just audit rotation, which is ridiculous. Tell the truth. Come out there and explain, in this day and age, where everybody knows the truth anyway, or most of it anyway, just explain the reality. Don't add to the fake news fire. But there's a lot of corporates who aren't very well-advised unfortunately, on the communication side, and they think that they can still fool some of the people, some of the time. It's no longer possible in this environment. .So, speaking of truth telling we have, in South Africa today, a president who is really been on the tear, as far as truth-telling is going, and we're really seeing some big announcements coming of the Ramaphosa administration. Some big announcements coming from the finance departments and a lot of quite rapid change. Not only in sentiment but also really in policy and really in the underlying, you might say, the intellectual infrastructure of policy. Now, you wrote about this a bit during the week but I wanted to pick up on it and get your sense of what is the change and why is it important? .You've put your finger on it – truth. If you have a look at Ramaphosa's background and his history, and I urge people who want to understand the SA story with the South Africa leadership of today, to read Anthony Butler's 420-page biography on Ramaphosa. It was written 10 years ago, updated in 2013, and he's busy with another update, but it gives you, in that much time, when you go deeply into somebody's life you actually understand what it is. What their values are, what get's them up in the morning, and what make them tick. This is a man who was brought up according to very appropriate, for the time anyway, principles. He always, apparently, had a Bible in his hand until he was about the age of 22 or 23, when he then didn't turn his back on religion but he felt there was a different way of engaging with the struggle, to use religion and black consciousness together. .Ramaphosa has remained an integrous human being his whole existence. He benefited, financially, from a window in SA's period of BEE, and he knows that. But on the other hand, he also lost a lot of money in the early stages, and he made a lot of mistakes in the early BEE. People forget about this but there was a company called Northern Bakeries, for instance, that he was involved with. There were other businesses that were not successful. What his great asset is, is the ability to understand that the truth will set you free, and that there's nothing more powerful than the truth and to learn, and to listen. To sit and listen and learn, and you've seen throughout his 65-years that that is a consistent process. .Now, I refer you to the National Development Plan (NDP) in South Africa. Again, something that South Africans, instead of commenting, instead of expressing opinions, go and look at the facts. Go and read the NDP. It was painstakingly put together back in 2012. It exposes all of the issues that the country faces in brutal honesty, in complete detail. Ramaphosa was the Deputy Commissioner of that. Trevor Manual drove it and Ramaphosa was the number two. He understands exactly what the situation is. The way he's been handling the South African turnaround and the ability to get rid of the excrement, which is throughout the system, due to the last 9 years, has been impeccable. .He's maintained a position of absolute integrity as well. He has continually allowed well, his own political party, to expose itself in public, and he hasn't acted irrationally or erratically in any way. He's let the process go forward. Now, in a constitutional democracy if you don't do this, if you start bending the rules for political reasons, you will reap the whirlwind in time. He has not done it and that is, I think, one of the great things about Ramaphosa. When you take it from a broader perspective on the economy, he also, because of this honesty, because of this ability to see what's really happening and not to allow himself all those close to him who were making the policies to be deviated by rhetoric and narrative. .By doing so, by focussing on the facts he is now also, addressing the issues in the economy that needs to be address, like SA Airways. Ramaphosa appoints Tito Mboweni, who he knows is like him, an independent thinker, a person who has great international experience and understands the realities of economics. One of the first things that Mboweni does is, in his budget speech, he lays it out. If you read through the mini-budget speech again you will see that to a large degree, Mboweni is saying, these are the problem in SA, here they are, with warts and all. I'm not going to try and obfuscate the situation. .Subsequent to that, out comes Mboweni to say, we need to get rid of SA Airways – we should close it down. Well, hopefully it won't be closed down. Hopefully, there'll be some kind of a rescue package with a private sector operation coming in and assisting. But at the moment anybody who's asked to take SA Airways would have be paid a lot of money to do so. It's not the proverbial R1 deal. It's going to be something a lot more significant than that, for someone to assume all the debts and the huge operating losses and the excessive staffing, and, and, and… But the reality is that Mboweni knows that he can say those things because he's supported by a president who also knows what's happening in reality. .They look around the world and they see the way that the political wave around the world is moving away from a situation where the left-wing had its revival, after the Soviet Union which virtually collapsed. It then rebuilt as happens in the human condition and now that wave is receding as well. We're seeing it in the UK too, here Corbyn has had his day, perhaps. Perhaps, he'll still make another comeback but it does look like Theresa May is now finally starting to get her act together as well, for the Conservatives. And you see it in Europe with elections in Italy, in Austria, now in Germany just this past week, where the old system of allowing people to game the system – be that through taking Social Security grants excessively or by riding on the goodwill of the bulk of the population – that's now ending. The bulk of the population is saying, 'no, we're not prepared to keep subsidising idealistic policies if those who are benefiting from it are not taking or not playing their part as well. .So, these are very complex issues but in South Africa this move to the right is very pronounced. However, it's not just a South African move to the right. It's something that's happening globally and in South Africa it needs to be done, desperately, if the country is to grapple or to tackle on a very real, very problematic issues. Moody's came out with its latest job figures on Friday, and unemployment in the US is 3.7%. Unemployment in Britain is 4%. Those are 40-year lows. In South Africa, unemployment, if you take it all together is 37% – ten time what it is in the US. The US is doing something right and South Africa is doing something wrong, and Ramaphosa has the principles, he has the values to understand that and to apply what needs to be done..So, before we wrap up here, Alec, I just wanted to very quickly touch on global markets. Now, this week we had our Global Portfolio Webinar, where it was an opportunity to discuss the fact that over the last month, there's been a correction in global markets, in some markets more than others, and in some sectors more than others. In particularly we saw growth stocks or big tech, whatever you want to call them, we saw a fairly significant correction, not necessarily just over the last month but in the last while. Of course, this may have some people worried, particularly people who have been following the portfolio and investing in these counters. But of course, the goal here is to have a rational long-term calm, sensible, perspective on what's happening in markets and what it means for the long term..In that respect, some of the news that came out later in the week was encouraging. We had strong results from Facebook, much higher than expected revenues or rather profits. It was much better than expected results and similarly with Apple. Very strong revenues on the back of risking average selling prices for iPhones. .So, again, these companies that have been battered a little and these sectors that have been battered a little are actually still delivering results and still delivering growth. Perhaps not as strongly as they were 18 months ago, but the growth is still there and the cash is still there, and the profitability is still there. So, perhaps not necessarily saying that the correction is overdone, it might have been a much-needed correction. But really, what we're just seeing is a return of volatility to global markets. We had a 10 year stretch where volatility was at historical lows, and we're seeing volatility reassert itself, which is a natural enough phenomenon in markets. .Yes, indeed, and it reminds us why we invest in stocks. You're not investing in shares so that you can sell the to the next fool for more money. Investment in stocks is exactly what Warren Buffett reminds us of, which you're holding period there is forever. Now, on Tuesday, for instance, Amazon, and again I apologise to our Premium Subscribes, who more than 100 people who signed into the webinar and then there were technical issues that were unfortunately, not of our making, but some of the things that we just couldn't address. So, as a consequence of that I did the webinar as a podcast and put that onto the site and hopefully people have had the chance to listen to it and to look at the slides. .But just to give you an example – on Tuesday, when we did the webinar, Amazon, which is our biggest stock in the portfolio was trading at $200 a share lower than it is, and it closed the weekend. So, from Tuesday to Friday, that stock went from $1,480 to nearly $1,680. So, it gives you this huge… And remember, we only bought the Amazon shares at $317 so, in almost three days you got about two-thirds of the share price value for what you bought it four-years ago. Now, the point about this is that as you bought it four years ago, at a price of $327 and you're now holding on, it really, within the context of the current share price, and with the profits that you've made, it doesn't really matter. That's what investing is about. If you, however had just bought it a couple of weeks ago and wanted to trade it – of course you would have panicked at the decline in the share price. .So, investing is all about doing your homework beforehand. Buying the stocks, riding with the stocks and trying your very, very best to ignore volatility and emotion. Knowing that in the long-term you will get a return on your investment, which far surpasses what you can get elsewhere. And I think that's just the time, always in times of volatility – it's a time for cool-heads. You get the scare headlines. Remember, this was the day before Halloween as well, in the Northern hemisphere – we had enough people who were already feeling a little bit jittery. Thankfully, the 1st of November did see things improving again. .We saw Apple's share price coming down a little on the results, which were excellent. But that's the way it is. You're at a phase in the market where people are not sure if the exponentiality of these companies is over. My advice is that keep looking at the fundamentals. Keep looking at what are the companies delivering. Amazon says, they're going to deliver to us between 10% and 20% growth in their year-on-year sales figures for the fourth-quarter of the year. There are reasons why it's come down from over 20%, and those are articulated in the statements and in the conference call. You're at that stage now, in the markets, where these are the companies that you own. Understand what the companies are doing and when Mr Market gets into a panic mode – that's the opportunity, as you could have done in the past week with Amazon, to get in if you had missed the boat first-time round, or to add to your stake on the panic of those who aren't as well informed or haven't done their homework as you have.

The Editor’s Desk: After KPMG, Gupta’s, SA needs a dose of truth

Related Stories