It’s all going South: KPMG gets caught up in the Bell Pottinger storm

Johannesburg
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It’s a very 21st century way to mark something or someone’s death: change all the verbs on their Wikipedia page into the past tense. 

That’s what you’ll see now when you go onto Bell Pottinger’s page: “Bell Pottinger was...” A failed company, of course, isn’t that exceptional. It happens all the time. But the sheer speed at which a renowned and established company like Bell Pottinger switched from “is” to “was” is extraordinary.

What had destroyed them was a political scandal that just a few month’s ago seemed like a distant intrigue. Guptagate, it’s called. The eponymous Guptas are a clan of Indian-born South African business people that have been accused of benefitting financially through close ties to the South African presidency (particularly to do with state tenders). It's a scandal that South Africa’s president Jacob Zuma - the so-called ‘Teflon’ president - hasn’t been able to shake, despite the best efforts of both him and the Guptas.

As part of their efforts to deflate the scandal, the Guptas, by then considered public enemies number one in South Africa, hired Bell Pottinger to deflect attention away from the family. It’s the kind of campaign that Bell Pottinger has some pedigree in, having worked with numerous difficult and politically volatile clients in the past.

Bell Pottinger’s PR blitzkrieg consisted of a secret campaign of dog whistle racism that preyed upon South Africa’s extremely sensitive racial past. The PR firm’s campaign sought to stir up anger about “white monopoly capital” and “economic apartheid”. 

For this, Bell Pottinger was being paid a £100,000-a-month by Oakbay Capital, the innocuous-sounding holding company of the Gupta family.

After receiving a complaint from South Africa’s main opposition party, the Public Relations and Communications Association (PRCA) investigated the matter. After finding Bell Pottinger guilty, the organisation took the unprecedented step of banning Bell Pottinger from its ranks for five years.

Not that the ban matters now, of course, Bell Pottinger has since gone into administration. 

Enter stage right: KPMG

Now, the latest foreign firm to fall face first into this imbroglio is KPMG. The Big Four firm’s South African arm audited the accounts of Gupta-owned firms for fifteen years. They resigned the account in 2016.

But fifteen years is a long time, and just last week the audit firm admitted that it should’ve resigned the contract far sooner. In a statement, KPMG admitted that “there were certain red flags that came to KPMG South Africa’s attention regarding the integrity and ethics of the Guptas that were not appropriately considered and addressed at that time”.

“The firm has a requirement to re-assess its clients annually, and more frequently than that if significant events or matters come to the firm’s attention,” the statement said. “In relation to the Guptas, over a number of years this process lacked the necessary rigour which prevented KPMG South Africa from ceasing work for the Guptas at an earlier date.”

The controversy has already felled KPMG South Africa’s chief executive, chairman and a string of top executives. And now some premium contracts are going sour, too, with a number of blue-chip South African corporates now reviewing their business relationship with the firm.

The most costly business relationship, however, might come to be the one that KPMG had enjoyed with the South African government. Particularly controversial is a report into the South African Revenue Service (SARS) that led to the axing of South Africa’s finance minister in March. The findings of this report, KPMG now says, cannot be relied on and they have offered an apology. 

The ex-finance minister, Pravin Gordhan, however, has vowed to fight back, telling Bloomberg that “the witting and overenthusiastic collaboration of senior KPMG personnel and their collusion with nefarious characters in SARS” was a key part of an insurgent campaign of political corruption in the country.

“It should and must be remembered that this was about attacking SARS as an institution with the main intention being to capture it,” Gordhan said.

It now looks likely that KPMG will be dragged in front of the South African parliament’s Standing Committee on Public Accounts (Scopa), the South African equivalent of the Public Accounts Committee. 

So what's next? Who knows. But it's definitely a big dent to KPMG's reputation in Africa. Whether the reverberations will be felt closer to home is an open question. But as the Imprudent Accountant reminded us in their reflection on the Bell Pottinger scandal: "Almost all established firms of accountants rely on a strong reputation in their specific market for ongoing success". In South Africa at least, KPMG will have a long struggle to recover their reputation. 

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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20th Sep 2017 10:21

Really not surprised

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20th Sep 2017 10:59

A comment on another story about KPMG - FRC has buried its investigation of KPMG and HBOS audit. Of course, revelations in another country should also alert regulators like the FRC. After all, the firms claim to have global standards. How do we know that what went on in South Africa does not happen in the UK?

A little more on KPMG and HBOS audits. The FRC has a history of announcing investigations and then burying them. Where is the evidence to show that the investigation was not worth carrying out? The Treasury Committee found evidence and hence pressurised the FRC to act. Transparency should be a key element in regulation but we don't have that with the FRC. FRC shows no initiative either. It agreed to investigate HBOS audit some 9 years after the event. Clearly, there is no urgency.

FRC is too close to the auditing industry. It is not effective, independent or robust and does not do anything on a timely basis. Its own accounting and auditing standards are also sources of failure (think about accounting for derivatives, expected-loss model, etc.) and under its watch by its own admission, many companies have paid illegal dividends. It makes much of the fines that it has levied on big firms but does not tell people that the fines are passed to the RSB responsible for regulating the firm or the individuals. so ICAEW has been having windfalls whilst the victims of poor audits are left to whistle. FRC is not fit to be a regulator.

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to premsikka
28th Sep 2017 16:18

Hi Prem,

Thanks for the comment. On your point about FRC not being a fit regulator: I've just published a piece on the HBOS audit and the problems within audit itself.

Would love to read your thoughts. See the article here: https://www.accountingweb.co.uk/business/financial-reporting/frc-lets-kp...

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