In one of the most widely anticipated books about corporate SA during the time of state capture, Prof Wiseman Nkuhlu writes about his time as chair of KPMG SA, under the title Enabler or Victim? KPMG SA and State Capture.
The book is all the more unusual as Nkuhlu remains the chair of the auditing and consulting firm that in the eyes of many had morally failed through its long association with the Guptas and its infamous report on the “rogue unit” at the SA Revenue Service (Sars).
The second fascinating aspect regarding the origins of the book is why Nkuhlu was there in the first place. His association with KPMG was tenuous at best — he knew the firm as a client through his chairmanship of corporate investment adviser Rothschild.
Like many others watching the firm’s reputation unravel in the media, Nkuhlu’s inquiries led to a meeting with the KPMG hierarchy in a bid to seek reassurances from them. This resulted in an invitation by the company to chair the board, one which he officially took up on March 1 2018.
Given the headlines at the time, this was a difficult decision and came at the most inopportune of times as Nkuhlu was drawing the curtains on a long and distinguished career in the public and private sector, which had begun with his qualification as the first black chartered accountant in 1976 and founding of his own accounting firm, Nkuhlu and Associates, in Mthata.
On the public service side, Nkuhlu served as economic adviser to president Thabo Mbeki from 2000 to 2005 and then as CEO of the Nepad Secretariat. In academia, he established the department of accounting at the University of Fort Hare in Mthatha and later served as principal and vice-chancellor of the University of Transkei, the reason he is often affectionately addressed as “Prof”.
He accepted the appointment at the troubled firm purely from his sense of duty to his profession. “It has been very good to me, and throughout my career I have both defended and promoted the CA (SA) professional accreditation, so I felt obligated to assist,” he said in an interview accompanying the launch of the book.
He describes his initial impression of how completely in denial KPMG was of the gravity of the situation. In a typically studious way, the professor describes how he begins to diagnose the problems at the firm by referring back to a philosophy of what drives human behaviour. This is complemented by extensive engagements among the board he chairs, the firm’s executive team and a wide swathe of regulators, legislators, clients and his own confidants.
“There was an overwhelming focus on financial performance and hitting targets and there was a very narrow interpretation and understanding of their role to stakeholders like those reliant on our audit opinions,” Nkuhlu says, adding that the culture was also directly the result of pressure on the local firm from its international head office.
Nkuhlu’s remedy was to get the firm to reconnect with its primary auditor function, and ensure that focus and quality returned as strengths of its audits. But just as he was getting a grip on things, what he describes as a “disaster of unimaginable proportions” occurs with revelations of the firms’ involvement with VBS Mutual Bank.
This was made all the worse because the firm had gone to great lengths to reassure its anxious clients that it had “exited” high-risk relationships after a comprehensive review in the months after September 2017. This had led to the departure of nine senior executives, including its CEO and COO.
“It showed them our review was not as deep as it should have been, and that is when clients like Barclays and Nedbank and Gold Fields started walking. Partners and staff started leaving because they didn’t want to be associated with us, and this in turn affected our budgets and we had to begin retrenching. That was near to the bottom for me. It was painful,” Nkuhlu says in the interview.
Nkuhlu describes in the interview how his good friend at Rothschild, Martin Kingston, called him after the news broke.
“He says to me, ‘Wiseman, these things have happened under your watch. What do you say now? We told you this firm was not serious about making any meaningful changes — they just wanted you to give them credibility.’ Even some people I had worked with, and mentored, moved away from me and said no, no, no. Now you are part of the problem. It was serious,” Nkuhlu says.
This souring of personal relationships and the firm’s continued denialism and reluctance to address the seriousness of the situation prompted Nkuhlu to resign on March 29 2018. Had KPMG International’s chair, Bill Thomas, not boarded a flight that weekend and persuaded Nkuhlu to rescind his resignation and persevere, KPMG SA would simply not exist today, as chronicled in later chapters.
“He put it beyond doubt that I was at the firm to help it deal with the crisis. Now I could take the insults and the criticism from outside because I was clear in my own mind that I have the power to effect change,” says Nkuhlu of the engagement.
Once again, Nkuhlu opted to take the hard road out of his sense of obligation and responsibility. With the reins now firmly in his hands, Nkuhlu initiated one of his largest interventions when he committed the firm to undertaking quality reviews of all audits performed during the 18 months preceding March 30 2018. No single audit partner was to be spared.
The screws got even tighter — for audits of the year ending December 2018, the review was to be conducted by an international partner of the firm in an effort to introduce a greater degree of independence and objectivity.
Thomas put it beyond doubt that I was at the firm to help it deal with the crisis. Now I could take the insults and the criticism from outside because I was clear in my own mind that I have the power to effect change.
— Wiseman Nkuhlu
Nkuhlu saw this as the linchpin of getting the firm to reconnect with its primary purpose by shifting the focus away from revenue and profit generation back to the quality of audits. As noble as this sounds, it was not well received.
“There was almost a revolt. Some partners left because they thought this was undermining their integrity. But this was a big breakthrough for us, because after we implemented this intervention the denialism was over. But by the end of 2018, they were asking to be reviewed because they wanted to make sure the quality was there,” he says.
As stated in the book, 26 audit files had “red” ratings — reflecting work in which there was “substantial non-compliance” with either KPMG’s own standards or international accounting/auditing standards that warranted some form of sanctioning. Given the size of some of the clients of the firm, this is a mind-boggling admission.
While VBS effectively saw society withdrawing the firm’s licence to operate, an even more serious threat to the firm’s very existence was on the way.
Judging from the professor’s description, the Independent Regulatory Board for Auditors (Irba) and its CEO, Bernard Agulhas had, up to this point, been slapped away like an irritating fly by KPMG’s previous leadership.
Nkuhlu describes how Irba began an inspection of the firm in September 2018, and how it appeared to descend into acrimony on the shop floor as Irba’s inspectors perceived being treated dismissively and disrespectfully by the KPMG staff assigned to assist them. This was at odds with the more cordial relationships between Agulhas, Nkuhlu and KPMG’s CEO at the time, Nhlamu Dlomu.
This contributed to Irba’s board resolving, in November 2018, to bar KPMG from providing audit and assurance services for a period to be determined. A formal letter of notice was delivered on December 4 2018, giving the firm seven days to respond.
This undoubtedly sounded the death knell for KPMG.
Nkuhlu notes rather wryly at this point that “there had been a distinct trend during my time at KPMG SA of things somehow getting worse even under the most trying circumstances. This trend would continue during this extremely stressful time.”
To the professor’s credit, he candidly admits to using his vast network — some might say “political connections” — to contact the finance minister (Tito Mboweni) and plead for time to implement the renewal measures he had put in place. He justifies his reasons for doing so by stating the collapse of KPMG “would not be in the interest of the economy”, but many people reading this passage might differ with his assertion.
Nkuhlu does not describe what did or did not happen after this conversation with Mboweni, who apparently agreed with him, but as it turned out, Agulhas and Irba later rescinded their letter.
Post memoir
The book extends beyond the parameters of a memoir as Nkuhlu concludes the book with some thoughts on how to reform and strengthen the auditing and accounting profession he holds so dearly. The 18 numbered points will also be required reading for executives managing corporations through scandals that involve near-fatal damage to reputations.
As previously described, KPMG SA was in a complete state of denial regarding how far and how deep the firm had erred, with the denial rooted in a tendency to view the publicised contraventions involving the Guptas and Sars as isolated or “one-off” events.
Tread carefully when seeing these red flags, Nkuhlu warns.
“The incidents that are revealed should serve as a wake-up call for deeper introspection that is not clouded by conscious or unconscious denialism. Doing this right and fearlessly determines whether a firm recovers quickly or not,” he writes.
To pierce the veil of misperception leads to another of the professor’s recommendations. Nkuhlu insists credible executives “with no previous involvement with the firm” must be appointed to lead any turnaround from the outset. “[The scandal involving] VBS Bank was missed because of familiarity and loyalty among partners who had been in leadership positions for an extended period of time,” he states to ram home the point.
When asked if there was anything he would change looking back, the professor made one additional recommendation, saying as the incoming chair, he would have explicitly requested the ability to review decisions taken by the board before he got there.
“I sensed a lot of resistance because I was coming from outside and they thought they had already decided the strategy,” he says, in reference to the decisions taken by the board to eject nine senior executives and withdraw the findings of the Sars “rogue unit” report in September 2017.
If there is one bone to pick with the book, it is with the title. The portrayal of the company and the conduct of many of its senior executives during its most compromised periods reminds one of the person driving the getaway car during a bank heist. The driver may not be directly involved in the crime, but he is assisting the criminals in escaping.
So despite Nkuhlu’s brave, if rather optimistic, assertion that KPMG did not enable state capture, it must have come damn close.
In conclusion, the book is an informative account of developments behind the scenes at the centre of a tumultuous period in SA corporate history. It details the studious methods Nkuhlu applies to diagnose the problem, his personal struggles in getting the firm to see the error of its ways and the measures taken to reform the company that almost certainly would have gone belly up without him.
The endearing impression I have of the book is of a man in the sunset of his career who got involved in cleaning up the filthiest of messes out of a sense of duty to his profession. As he himself admits, the work is far from over, but the patient is breathing again. For that, we salute him.
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