KPMG SA chair Wiseman Nkuhlu says the audit firm enabled state capture through its rogue unit report which gave credibility to then SA Revenue Service (Sars) commissioner Tom Moyane's agenda of hollowing out the tax collector.
"His agenda was to erode the capacity of Sars to follow criminal syndicates evading tax. This was seen as enabling state capture, and as a result of this rogue unit report KPMG was caught up in the state capture project."
Nkuhlu, 77, who has announced that KPMG will pay reparations to those who were purged from Sars as a result of its report, was brought in by KPMG International in March 2018 to rebuild its shattered reputation, which saw its revenue fall from R3bn in 2017 to R2bn in 2018 and R1.6bn today.
KPMG SA's current revenue, from
R3bn in 2017
— R1.6bn
He has just published his memoir, Enabler or Victim? KPMG SA and State Capture, which he says was motivated by the loss of public trust in KPMG and the auditing profession in general.
It was not only through its rogue unit report that KPMG became closely associated with state capture. The firm audited Gupta companies for 10 years and approved the use of R30m of taxpayers' money for a family wedding as a business expense.
Nkuhlu says the company's relationship with the Guptas was an inexcusable failure of risk management.
"When media reports of the Guptas' involvement in state capture began emerging in 2011 and KPMG failed to end their relationship with the Guptas, that led to them being perceived as enablers of the state capture project."
Was this perception justified?
"Newspaper reports were consistently saying that the Guptas were involved in state capture. KPMG should have seen that this would damage their brand, but their risk management failed to establish that connection. So unintentionally KPMG was caught up in the state capture agenda."
Nkuhlu says this was a consequence of audit firms becoming commercial enterprises driven by revenue and profits for the partners.
The rogue report happened because when Sars changed the scope of the KPMG investigation and told them who to talk to and who to avoid they went along with it because all that mattered was continuing the relationship and earning the fees.
"The fact that their work would harm society was not a major concern. Their major concern was to make more revenue and profits."
Nkuhlu blames SA's major corporate scandals, including Steinhoff, Tongaat Hulett and the VBS Bank heist, on this attitude.
"Their business model is anchored on building strong relationships with big companies and sustaining those over extended periods of time. They're obsessed with maintaining these long-term relationships."
This, he suggests, is why the Steinhoff auditors ignored what was going on.
The fact that their
— Wiseman Nkuhlu,
work would harm
society was not a
major concern
KPMG chair
If the "driving motive" of an audit firm is to maintain a strong relationship with the client and its executive leadership then independence and scepticism go out the window.
"If you're just focused on doing the audit then you appreciate that your relationship with the client must be distant and you must be sceptical and suspicious."
The longer the relationship lasts the more difficult this is. Which is why he supports mandatory rotation every seven to 10 years and joint audits so that second-tier firms can be mentored by the big four until they're ready for the major league.
"There's over-concentration in the auditing profession. All the listed companies in SA are audited by four firms."
This encourages the kind of cosy relationship between auditors and clients that leads to massive corporate scandals.
When KPMG International investigated the Sars rogue unit report in 2017 they fired all nine executives who were in charge of KPMG SA at the time and brought in Nkuhlu, SA's first black chartered accountant, former professor of accounting, economic adviser to president Thabo Mbeki and past president of the South African Institute of Chartered Accountants (Saica).
He found there had been "a complete breakdown of all controls" at KPMG, which he says have been tightened.
The head of the risk committee now reports to an audit quality committee composed of independent non-executive directors, and not to other partners as before.
The risk committee is also now made up of independent directors.
"The audit firm is no longer managed just by the partners but by non-executive directors as recommended in the King IV codes of corporate governance."
Compliance with King IV would have "significantly reduced" chances of the KPMG disaster, he says. "All audit firms need to appoint independent non-executive directors and place risk and ethics and audit quality under the oversight of independent non-executive directors."
Few, if any, apart from KPMG, do so.
"There's a long tradition of these firms being managed by their own owners, the partners. But recent developments, including the global financial crisis and the enabling of state capture by KPMG through its rogue unit report, has shown that this model needs to be changed.
"Independent non-executive directors have to be brought in to provide more effective oversight."
What about the regulators?
"There's an audit committee, there's the board, there are the auditors and there's the regulator. There should be increased capacity and effectiveness in all these layers of governance. Each of these layers must carry responsibility for these corporate failures.
"They've all failed society, and they need to be reviewed and their effectiveness significantly enhanced."
Even that won't be enough to prevent the next Steinhoff, Nkuhlu says.
"It comes down to the individual. That's why there must be consequences for that individual, and they must come very fast."
One strong criticism he does have of Saica and the Independent Regulatory Board for Auditors is the time it takes to do investigations before the culprit's membership is revoked or he is jailed.
Only last month did Saica strip former Eskom CFO Anoj Singh of his membership.
Would it have mitigated the Eskom disaster if the regulator had acted sooner?
"There was a board of directors there, there were people directly responsible for exercising oversight over Mr Singh. They were better positioned than Saica to detect that there were irregularities and act on that.
"But Saica should have acted much earlier than it did. It would have sent a message."
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