2021/04/16

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

1
 2021/04/16

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:
➢Shock removal of Nhlanhla Nene as Finance Minister in 2015 by
then President Jacob Zuma
➢Deputy 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 (Adv Thuli

Madonsela) in October 2016:
➢Waterkloof Air Force Base incident in 2013 : Gupta wedding
➢Estina Vrede Dairy Farm Project by the Free State Provincial
Government

2
 2021/04/16

Introduction to KPMG SA
KPMG’s Values:
• KPMG is one of the ‘big four’ auditing “Our values are all about how
firms globally we do what we do and what
we believe in:
• Independent branches overseen by We lead by example
KPMG International We respect the individual
We work together
• Services including auditing and We are open and honest in
assurance, enterprise services, tax and our communication
legal services, and advisory services We seek the facts and
provide insight
• It operates across numerous industries, We are committed to our
including manufacturing, healthcare, communities
Above all, we act with.”
the public sector, mining, retail, integrity
investments, and financial services

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:
➢ Wedding expenses
➢ Estina Vrede 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”

Tax manager at KMPG to Jacques Louw, KPMG partner

3
 2021/04/16

Images from the four-day long Gupta wedding festival at

Sun City, South Africa in 2013

KPMG SA and the

‘SARS Rogue Unit Report’
• SARS ‘Rogue Unit’: Intelligence unit investigating
high-profile tax offenders

• KPMG 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
8

4
 2021/04/16

KPMG SA and the

‘SARS Rogue Unit Report’

KPMG SA and VBS Mutual Bank

• May 2018: VBS placed under curatorship of South African Reserve
Bank (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:
➢ Two KPMG partners resign after disciplinary charges
➢ Curator of bank withdrew unreliable financial statements of
previous year
➢ Sipho Malaba (KPMG auditor allegedly paid R34m to cover up
looting at VBS) 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‘

10

5
 2021/04/16

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

11

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

12

6
 2021/04/16

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

13

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

14