KPMG: A history up for audit.
Glowing reports masked major unsavoury business.
On several occasions over the years, Noseweek has noted KPMG’s willingness – for a handsome fee – to apply an audit gloss to some or other unsavoury business in order to give it the appearance of probity (For examples, see noses43; 53; 65; 110; 167; 176; 181; 189; 190; 191; 194; 201 & 213).
The drift is always the same. Early on we noted that KPMG had absorbed what remained of Arthur Andersen, the auditing company that collapsed under the weight of its bad reputation. It seems KPMG may have absorbed more than just the remains.
In the light of recent developments (see Editorial in this issue), some examples are worth a recap.
In November 2002 (nose41) Noseweek reported that there was discreet talk in banking circles that the Reserve Bank was sitting on a secret report containing evidence of massive wrongdoing by top executives of failed Saambou Bank.
An early draft of the 600-page report, drawn up by forensic investigators at KPMG, was apparently complete at the end of July 2002. Someone who had seen it confided that it named Saambou executives and detailed how hundreds of millions of rands were moved in highly questionable transactions.
However, at a meeting with the KPMG investigators, Reserve Bank officials were said to have “hummed and hawed” when confronted with the damning evidence, before sweeping it all under the carpet with a vague reference to further investigation being required. Odd, considering the report’s main allegations were against specific individuals and apparently clearly documented. If the Reserve Bank had evidence of illegal actions that could have caused the collapse of Saambou, surely it was the duty of its governor Tito Mboweni and his once-courageously outspoken deputy, Gill Marcus, to place the report before the public and the Director of Public Prosecutions without delay? And had KPMG reported their adverse findings to IRBA?
“We intend examining the ‘secret’ report in great detail and will, at the first possible opportunity report to our readers, so that they can determine who the Reserve Bank is serving with its silence – the public interest, or one less honourable,” Noseweek declared.
The subject was back on Noseweek’s pages three months later – with a twist: on 21 January 2003 Business Day published an almost line-by-line analysis by KPMG of the (nose41) article that had revealed the existence of the secret KPMG report.
KPMG’s analysis was contained in a memorandum written by KPMG’s Dean Friedman. It was aimed at identifying the whistle-blower. So desperate was KPMG to find the source of Noseweek’s story, that the entire 16-strong investigation team was to be submitted to lie- detector tests – at a cost of R350 a head (ex VAT).
Point 10 of Friedman’s analysis deals with Noseweek’s assertion that Reserve Bank officials had met with KPMG’s investigators at the end of July: “Date is correct,” wrote Friedman, “but the curator was also at the meeting. Source is thus not well informed… and possibly was not at that meeting”.
Of course we knew John Louw was there, struggling as he was at the time to flog off Saambou’s assets, Noseweek declared in its very next issue. Who could forget his impassioned plea? “Give me another month, then you can do what you like with it,” he had begged those at the meeting.
Noseweek’s response to KPMG’s analysis: “Friedman reckoned (hoped?) that we did not know what was in KPMG’s report – a challenge to a game of strip poker if ever there was one!”
So, Noseweek upped the ante: “If KPMG’s professional partners were so confident that Noseweek and others did not know what was in their report, and thought they could afford to support and actively cover up unprofessional and dishonest conduct by the bankers, let them continue to do so.
“But here are the odds: if they are wrong, they risk being publicly humiliated, being stripped of their professional status and risk even being sued as co-conspirators to fraud.
“Remember, sirs, you are supposed to be auditors whose function it is to ensure that the public is told only the truth. ‘Strategy’ doesn’t come into it.”
Prophetic words, it now transpires.
From the (nose53) Letters page in February 2004: “The letter from Shelley-Anne Carreira of SARS’s corporate division (nose52) asking for Noseweek’s documents relating to SA Breweries’ Black Label tax fraud makes interesting reading. Did you know she’s the wife of KPMG Johannesburg’s senior partner, Richard Carreira?” (From “Anon”).
Editor’s response: “Almost as we were speaking, Finance Week published the following little item: “The US Justice department claims that accounting firm KPMG impeded an internal revenue service probe by concealing the full extent of its involvement in developing and promoting tax shelters. The department filed a lawsuit against KPMG in July to force it to divulge tax-shelter information to the IRS.”
Noseweek called KPMG to ask whether they have any relationship with SA Breweries. The switchboard put us through to the person at KPMG who deals with client lists. His reply: “We are not SAB’s auditors, but we do tax work for them, the occasional special internal investigation, and a bit of corporate finance consultancy.” Interesting!
Then a letter from Ms Carreira herself: “I refer to the ‘bundle of documents’ which you state [nose51] reveal ‘a massive fraud perpetrated by SAB against the Receiver of Revenue’.
“I am requesting the above documentation in terms of section 74A of the Income Tax Act, to verify the correctness thereof and to investigate any potential tax evasion. Section 4(2A) of the Act provides that you may not advise the taxpayer [SAB] – the subject of this request – that SARS has requested this information from yourselves. Should the requested information not be provided within 14 days, further legal recourse will be taken. [From] Shelley-Anne Carreira (for General Manager: Corporate Tax Centre) SARS, Randburg,”
Editor’s response: “There was no secret to the fact that we had the information concerning SAB – we had published it!
“For the record: 1. We don’t hold the original documents. They may more productively, and appropriately, be demanded from the directors of the taxpayer and its auditors and tax consultants. 2. We are not the author or the addressed recipient of the documents so we cannot verify or elaborate on them.â€¨3. Were we to make our copies available to you, and you were to confront SAB with them, you would more than likely assist them to identify our source. Under no circumstances would we expose our source to that risk.
“Finally, I am puzzled why you, specifically, are demanding our cooperation in the matter. I understand you deal only with SAB’s current tax assessments. The investigation of historical tax frauds is the responsibility of other divisions of the Revenue Service.
“If this is correct, could you explain your interest?”
Nothing further was heard from Ms Carreira.
In December 2015 the by-then ten-year-old Leaderguard Spot Forex investment scam was back in the news (nose194). The liquidator of Leaderguard was planning to relaunch a court action against KPMG, the company’s auditors in Mauritius.
The Leaderguard Spot Forex scam first surfaced in 2005. It saw 1,200 investors, many of whom were pensioners, stripped of their savings to the tune of $55 million – more than R760m today.
The battle to bring KPMG Mauritius to account had been long and gruelling. KPMG wields enormous power in the Indian Ocean island, Noseweek noted. Over the years it had done its utmost to prevent the airing of evidence, suggesting that its senior partner there, Jean-Claude Liong, lied in order to fend off a massive damages claim.
As one seasoned South African advocate put it: “One doesn’t fully know what’s at play on that little island.”
Leaderguard’s liquidator José Thibaut launched his first case against KPMG in the Supreme Court of Mauritius in 2007. But it was withdrawn following a 2009 court decision that a liquidator cannot sue the auditors of a company whose directors had dirty hands.
Now, years later, Thibaut was returning to the Mauritian courts. Advocate Sydney Alberts from Durban would travel to the island “and ensure that the process is brought back "on track”. The new key witnesses against KPMG were to be two independent brokers from Cape Town, Christo Malan and Michal Calitz.
In affidavits they quoted detailed assurances and safeguards that KPMG’s Jean-Claude Liong had given them when they visited KPMG Centre in Port Louis on 18 February 2003.
In addition to KPMG’s auditing function, they said, Liong promised his firm would monitor and supervise Leaderguard’s Spot Forex trading activities. Liong’s assurances provided him with “a great deal of comfort”, said Malan, and he subsequently recommended investments in Leaderguard to his clients.
Liong denied having met “certain brokers” and/or having made any such representations, but Malan, whose Autus Fund Managers won a Raging Bull award in 2014, told Noseweek: “I’ve still got his original business card, my airline tickets, everything.”
But after this, a deafening silence and essentially, a news blackout for investors. In Mauritius, Thibaut refused their phone calls and, in Durban, Advocate Alberts’s phone played – and still plays – a recorded message: “Please will you send me an SMS as I do not listen to messages.”
To this day the Leaderguard investors have not been made aware of the case’s demise, but a well-placed senior lawyer told Noseweek: “There was a summons issued, then it was withdrawn because at the time the presiding officer of the commercial court was a Chinese guy and the two primary shareholders of KPMG Mauritius are Chinese. It’s a small island. The concern was: where would the loyalties lie?”
Chief Justice when the Leaderguard summons was filed was Yeung Sik Yuen. KPMG Mauritius was established in 1985 and for 25 years its managing partner was Wilfrid Koon Kam King, a powerful Sino-Mauritian and Freemason (member of the Lodge of Friendship No.1696). Jean-Claude Liong (aka Jean-Claude Liong Wee Kwong) was elevated to take the senior partner’s position in 2010. The appointment of Kheshoe Parsad Matadeen as the new Chief Justice from the beginning of 2014 neutralised any possible danger of Sino-Mauritian intrigue. Advocate Alberts urged Thibaut to relaunch Durban Leaderguard investor Sergio Domiro’s test case in Port Louis.
But then Leaderguard investors received a puzzling communiqué from KPMG management in Mauritius. It referred to a September 4 meeting between Jean-Claude Liong, Trevor Hoole (senior partner and CEO of KPMG South Africa) and Roshi Bhadain, the Mauritian minister of financial services. It emerged from the communiqué that a week after this meeting, Minister Bhadain had announced in a live TV programme that at the meeting, KPMG (Liong) had agreed to pay fines and penalties relating to another controversial financial fraud, the so-called “Bramer debacle”.
This statement by the minister was untrue, declared KPMG’s communiqué. “KPMG did not commit or agree to any settlement or compensation at that meeting.” Surprising, considering that Minister Bhadain was a barrister and chartered accountant who returned to Mauritius in 2008 after a glittering career – with KPMG Forensic in London! There he led fraud risk management projects for blue chip clients.
And, if KPMG Mauritius is responsible for its own obligations and liabilities, as tediously asserted by KPMG International’s deputy general counsel from Zug in Switzerland, what was Trevor Hoole, senior partner of KPMG South Africa, doing involving himself in Liong’s problem with the Bramer debacle? And what was his recollection of what was said at the meeting?
Hoole is both the CEO of KPMG South Africa, and CEO of KPMG Africa Ltd, a separate legal entity incorporated in the distant Cayman Islands and comprising 14 national practices across sub-Saharan Africa, including Mauritius. The company’s literature states these are all sub-licensees of KPMG Africa, managed “from a client’s perspective” as one firm. (Doubtless, from KPMG’s perspective, when the paw-paw hits the fan, they are not.)
Leaderguard liquidator Thibaut; Liong, senior partner at KPMG Mauritius; Bhadain, Mauritian Minis-â€¨ter of Financial Services; and Hoole, senior partner KPMG SA all failed to respond to Noseweek’s written questions.
Editorial (nose201) of July 2016: “Justice Malala’s choice of ‘Loser of the Week’ in his weekly TV show on eNCA, broadcast on 13 June this year, was SARS boss – and Pravin Gordhan’s bête noir – Tom Moyane.
There are no doubt many reasons why Moyane might aspire to this accolade, but the one that moved Malala to despair was the fact that he had agreed to SARS’s paying auditors KPMG R23 million for a short and totally useless report on the so-called “rogue” spy unit. No slander here: KPMG had, themselves, certified it useless and not for publication. (It was published and used by SARS to justify the firing of Gordhan’s leadership team at SARS.)
Look at their past record and you will see KPMG’s SARS forensic report – that challenge to sanity – was just business as usual. But what (that we don’t know about) justified a R23m fee? Were there gold coins stuck to each page, as Malala facetiously suggested? If KPMG can get away with that, they can get away with anything.
(More recent events suggest they might not.)
Investec and its auditors “contrive an AGM that isn’t really, to approve a clutch of annual accounts that also aren’t really,” read the story blurb in the July issue of Noseweek (nose213).
On 10 June 2017 JCI held what it called its “Annual General Meeting”. Accompanying the notice of the meeting was a document titled “Group Financial Statements for the periods ended 31 March 2013, 30 June 2014, 30 June 2015 and 30 June 2016. Prepared by Guy Patron (JCI Group Accountant)”.
These “Group Financial Statements” were not prepared according to International Financial Reporting Standards (IFRS) or in accordance with the Companies Act. The document did not contain a Statement of Financial Position or a Statement of Comp-â€¨rehensive Income, as required.
Instead it contained what it called “a Group Statement of Net Assets”. To help sustain the illusion of compliance, the ever-loyal KPMG provided an “Independent Auditor’s Report” stating that the “Group Financial Statements” had been prepared in accordance with “the basis of preparation”, a meaningless phrase. In the smallprint, JCI’s directors took the precaution of inserting the following disclaimer: “…the financial position, results of operations and cashflows of the Group may materially differ from those presented [here], had the financial statements been prepared in accordance with IFRS and requirements of the Companies Act”.
The JCI “AGM” story was the culmination of a long series of Noseweek reports over the past ten years which cumulatively raised the question: “Has KPMG been captured by Investec?” And is it the auditors’ attitude that: “conflicts of interest be damned – anything for more fees!”?
In October 2005, when Investec contrived to take control of arch-fraudster/corruptor Brett Kebble’s empire, the bank appointed its own auditors, KPMG, as external auditors of both JCI and Randgold & Exploration Company (Randgold) – two of the three pillars of the Kebble empire. (The third being Western Areas, already a long-standing KPMG audit client.)
The bankers had gained control of the perpetrator, the victim and the ultimate beneficiaries of the biggest commercial theft and fraud perpetrated in South African history.
KPMG rashly accepted these appointments, despite the obvious multiple conflicts of interest involved, just two months after Kebble was ousted by Investec, who then took control through deft board appointments at both JCI and Randgold and by pledging all the empire’s assets to itself, against an already amply secured loan.
Randgold was a public company listed on both the NASDAQ and JSE, and had no overt connection to Investec.
Also in October 2005, the boards of JCI and Randgold launched separate forensic investigations aimed at establishing the true state of their affairs. KPMG Services was appointed as the forensic accountant to JCI and forensic audit firm JLMC was appointed to conduct a forensic audit at Randgold.
The scope of JLMC’s investigation into Randgold’s affairs was severely restricted to a limited series of transactions. Its investigation, completed in March 2006, nevertheless confirmed that Kebble, the controlling mind of both JCI and Randgold, had engineered a massive looting of Randgold’s listed investments, valued at the time at approximately R1.9 billion.
Thereafter KPMG Services, in May 2006, not only participated (with Peter Gray, the Investec-appointed CEO of both the victim and the thief and previously Kebble’s stockbroker) in reporting the Kebble crimes to the Scorpions, but, amazingly, also accepted the appointment as investigator for the Scorpions. Clearly the fact that KPMG was the forensic accountant and auditor for the thief and for one of the major beneficiaries of the crime (Investec) was withheld from the Scorpions, as no regard was had to KPMG’s blatant conflict of interest.
Kebble’s looting resulted in a claim being formulated in June 2006 by Randgold against JCI for R5.9bn on the condictio furtiva basis (an action arising from theft).
Included in the claim against JCI was the theft of 5.46 million Randgold Resources shares that JCI had stolen from Randgold using a fictitious scrip-lending agreement. JCI then raised R270m from Investec Bank UK (IBUK) in 2004 by “lending” these stolen shares to IBUK. This was nothing more than a collaterised loan by IBUK to the cash-starved JCI, disguised as an onerous scrip-lending agreement in favour of IBUK (fully explained in previous issues).
By accepting the appointment as auditors to Randgold, KPMG had walked into a hornet’s nest.
By March 2006 KPMG Services and forensic accountants JLMC, were both fully aware of the extent of the debilitating theft of Randgold’s listed portfolio, including the Randgold Resources shares. So, too, were KPMG as the auditors to both the thief, the victim and the ultimate main beneficiaries of the theft proceeds, Western Areas and Investec. And those beneficiaries were both clearly determined not to have to return the loot. When it came to advising the Scorpions, whose interests, dear reader, was KPMG most likely to protect?
The Investec loan had yet to run its course and the “borrowed” Randgold Resources shares were still there to be retrieved by the true owner (Randgold).
But the (Investec-controlled) JCI and Randgold boards failed to put in place a strategy to recover the stolen 5.46m Randgold Resources shares “lent” to Investec Bank (UK); the latter, as a consequence, was allowed to seize the shares and sell them very profitably for its own account. Randgold was the loser. Investec once again scored big-time.
The loan, it soon became clear, had been a massive money-laundering scheme, yet KPMG somehow failed to pick this up despite the materiality of the transaction.
In August 2008, more than two years after the JLMC forensic report was completed, Randgold issued summonses against i.a. Investec and Western Areas (both recipients of part of the proceeds of the thefts). But no summons was ever served on JCI, the thief. Randgold’s auditors were evidently asleep at the wheel.
On 27 November 2009 Randgold published unaudited, disclaimed, consolidated annual financial statements for the years ended 31 December 2004, 2005 and 2006. Does KPMG actually believe this format relieved them of any obligation to report the theft of Randgold’s listed investments as an irregularity? KPMG simply went AWOL until 27 November 2009!
Here are just some of the questions that arise:
1. Why did KPMG fail to insist that Randgold immediately recognise the basic formulated claim in its books?
2. Why did KPMG fail to insist that JCI immediately recognise the basic claim made by Randgold?
3. Why did KPMG favour JCI (an audit client) over Randgold (another audit client)?
4. Why did KPMG fail to report, in 2006, the reportable irregularities in the theft of Randgold’s listed investments to the Independent Regulatory Board for Auditors (IRBA) and simultaneously report as reportable irregularities the theft of such investments by its audit client, JCI?
5. Why did KPMG not insist that JCI comply with the Companies Act by publishing annual financial statements in accordance with International Financial Reporting Standards (IFRS)?
6. Why did it take several years before KPMG reported the late publication by JCI of its annual financial statements?
7. Why does KPMG continue to con-sent to JCI’s non-compliance and not report it to IRBA as an irregularity?
8. Is KPMG complicit in aiding and abetting JCI to withhold key information from its shareholders?
9. Why did KPMG not resign as auditors of Randgold (the victim) when it became clear in March 2006 (both from an audit and forensic perspective) that Randgold had been plundered by its audit client, JCI (the thief)?
10. Why did the forensic division of KPMG accept appointment as forensic accountants to both the NPA and the JSE, in the face of its serious conflicts of interest as auditors of Randgold (the victim), JCI (the perpetrator), Western Areas and Investec (major beneficiaries)?
11. Why does KPMG continue as auditors of JCI, a clearly corrupt company?
12. Should KPMG have demanded that Investec, whose bank has had KPMG as its auditor for the past 41 years, consolidate JCI and Randgold in its books as, having stepped in and reconstituted both boards, it clearly was in control of both companies?
Is this a case of greed for fees at the cost of a defenceless and emasculated audit client, Randgold? Or is the reason far more sinister, such as protecting JCI from being liquidated because this would have been a-too-ghastly-to-contemplate outcome for Investec?
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