CHAPTER 1 Introductory case study: Cows, Tax, a Bank and one of South Africa’s “big four” auditing firms Outcomes • Understand ethical issues in the context of real-life situations • Appreciate the complexity of such situations and how easily they can occur • Understand the different interests that exist in the world of work • Appreciate the ethical factors at work in the case study Overview •Unethical conduct can threaten the very survivability of a business •The KPMG SA scandal of 2017 had dire repercussions for KPMG Background: The Guptas and state capture • Series of alleged ethics breaches: the KPMG SA Scandal of 2017/2018 • The Gupta family’s alleged involvement in a phenomenon called state capture • Suspicious incidents: ØShock removal of Nhlanhla Nene as Finance Minister in 2015 by then President Jacob Zuma ØDeputy Finance Minister Mcebisi Jonas alleged that the Guptas offered him a bribe to take up the position of Finance Minister • ‘State of Capture Report’ published by the Public Protector in October 2016: ØWaterkloof Air Force Base incident in 2013 : Gupta wedding ØEstina Dairy Farm Project by the Free State Provincial Government Introduction to KPMG SA • KPMG is one of the ‘big four’ auditing firms • Independent branches overseen by KPMG International • Services including auditing and assurance, enterprise services, tax and legal services, and advisory services. It operates across numerous industries, including manufacturing, healthcare, the public sector, mining, retail, investments, and financial services KPMG’s Values: “Our values are all about how we do what we do and what we believe in: We lead by example We respect the individual We work together We are open and honest in our communication We seek the facts and provide insight We are committed to our communities Above all, we act with integrity.” KPMG SA and the Gupta entities • Believed that KPMG did work for Gupta-owned entities as far back as 2008 • Earliest irregularities emerged in 2014 auditing of Gupta-owned Linkway Trading: ØWedding expenses ØEstina Dairy Farm Project • Money laundering: Gateway Ltd – Global Corporation – Accurate Investments • KPMG partners and executives wedding attendance • KPMG SA denied wrongdoing “We are of the opinion that these (wedding-related) costs are most probably not in the production of Linkway’s income” Jacques Wessels, KPMG partner. KPMG SA and the ‘SARS Rogue Unit Report’ • SARS ‘Rogue Unit’: Intelligence unit investigating high-profile tax offenders • Report commissioned to investigate the Unit • Leaked to public in 2015, revealing ethics breaches • Justification for later removing Pravin Gordhan as Finance Minister • September 2017: Parts of the SARS Report withdrawn KPMG SA and VBS Mutual Bank • May 2018: VBS placed under curatorship of SARB • SARB investigations into VBS’s affairs revealed irregularities of approximately R900 million • VBS and Public interest: Deceased mineworkers’ beneficiaries, public sector pension funds, municipalities • April 2018: Ø Two KPMG partners resign after disciplinary charges Ø Curator of bank withdrew unreliable financial statements of previous year Ø Sipho Malaba held undisclosed loans with VBS Mutual Bank • Report released in October 2018: ‘VBS Mutual Bank – The Great Bank Heist: Investigator’s Report to the Prudential Authority‘ KPMG SA: Investigations and corrective action After 2017: KPMG SA took rapid steps to rectify the situation: • Independent investigations by IRBA and SAICA • Resignations and new executive leadership and board members • Corrective actions based on KPMG International’s recommendations KPMG SA: Investigations and corrective action KPMG International’s recommendations: • King IV Report’s recommendations • Would appoint a senior, independent, non-executive director to board • Roles of the Risk Management Partner and COO would be separated • Annual Transparency Report • Forensic Practice would make changes to its controls and methodologies • Forensic Practice would also use engagement teams to provide report subjects time to respond • Additional audit controls • Review of all tax compliance work • Integrity and background checks KPMG Baseline Report ‘KPMG Baseline Report: Embracing Change and Rebuilding Trust’ (2018) recommends additional changes: • • • • • • Additional senior management/leadership resources from the global KPMG network Separating the Executive Committee from the board to ensure independence Appointing additional non-executive directors to the board Termination of some client engagements following a review of the entire client portfolio A comprehensive review of the services KPMG SA provides Providing training to auditors and consultants on exercising professional skepticism and understanding risks Conclusion • Unethical conduct can threaten the survivability of an organisation • Severe damage to KPMG SA’s reputation • Loss of many high-profile clients in the process • Rebuilding trust with stakeholders • Ethical conduct should be the driving force for long-term sustainability.
