BAA322 BUET6212

Assessment Brief

BUSINESS ETHICS

MODULE DETAILS

MODULE CODE: BUET6212

QUALIFICATION(S): Bachelor of Accounting (BAA322)

NQF LEVEL: 6

PURPOSE OF THIS BRIEF

This assessment brief outlines the required pre-reading for this module, to guide your
preparation for the tests and exam. The test and exam questions will be based on the below
pre-readings respectively.

When considering any ethics related case study, it is important to remember to not just
consider your own opinion, also consider all alternative viewpoints.

You will also be required to reference all sources used when answering assessment
questions. Please familiarise yourself with appropriate IIE referencing guidelines if
needed.

PREPARING FOR ASSESSMENTS: REQUIRED PRE-READING

Preparing for the formative assessment 1 (test 1):

You are required to watch the Netflix documentary about well-known aircraft company
Boeing’s legacy of safety and precision that clashed with corporate goals of efficiency and
profit. The documentary demonstrates how the competing ideals led to tragedy.

© The Independent Institute of Education (Pty) Ltd 2023

Page 1 of 13
BAA322 BUET6212

Downfall: The Case Against Boeing (2022). Directed by Rory Kennedy. Available at: Netflix
(Accessed 25 July 2023).

If you do not have access to Netflix, your lecturer will provide access to a downloaded version
of the documentary.

Preparing for the formative assessment 2 (test 2):

Refer to Annexure 1 to read the KPMG case study adapted from:

Kretzschmar, L., Prinsloo, F., Sander, K., Sieberts, J., van Vuuren, L., Vorster, P., and
Woermann, M. 2019. Ethics for Accountants and Auditors (D. Rossouw, Ed.; 4th
edition). Oxford University Press.

This case study covers the KPMG SA series of alleged ethics breaches referred to collectively
as the KPMG SA Scandal of 2017/2018.

You can also do your own research to enhance your understanding of the case.

Preparing for the summative assessment (examination):

Questions in the summative assessment will be based on both the Boeing documentary and
the KPMG case study.

© The Independent Institute of Education (Pty) Ltd 2023

Page 2 of 13
BAA322 BUET6212

Annexure 1:

Cows, Tax, a Bank and one of South Africa’s ‘big four’ auditing firms

1. Background: The Guptas and state capture

In 1993 Atul Gupta, at the behest of his father Shiv, left India for South Africa seeking business
opportunities. Atul made his mark selling shoes but saw an opportunity for an affordable personal
computer retailer in the country. This was particularly important as, at the time, the South African
economy was just opening up to international markets, allowing for the inflow of foreign investment.
This created the perfect economic environment for the rise of new entrepreneurial concerns and
businesses.

Atul Gupta launched Sahara Computers, named after the family’s hometown in India in 1997. His
brothers – including Ajay and Rajesh Gupta – soon moved to South Africa to help build Sahara and
explore other business opportunities in the country.

It is believed that the Guptas first established their political connections in the South African
government during a trade delegation from South Africa to India in 1996. The trade delegation was
headed by then Deputy President Thabo Mbeki, with Dr Essop Pahad as Parliamentary Counsellor
forming part of the delegation. It was then that Pahad was formally introduced to Atul Gupta, which
opened up numerous opportunities for the Gupta family to liaise with other high-ranking officials in
the South African government. Pahad recommended Ajay Gupta for a position on the board of the
International Marketing Council of South Africa in 2006. This position allowed the family greater access
to government officials and persons of power. Pahad later became a business partner of the Guptas
and still views himself as a friend of the family. How exactly this relationship led to the Guptas’ later
influence in the South African government remains somewhat unclear; what is known is that the
family developed strong ties to then Deputy President, Jacob Zuma and his family in the early 2000s.

Multiple connections existed between the Zumas and the Guptas. Duduzane Zuma, Jacob Zuma’s son,
was a director of numerous Gupta-owned companies, before he stepped down in 2016 due to
increasing public pressure. Additionally, Bongi Ngema-Zuma, one of Jacob Zuma’s wives, worked for a
company controlled by the Guptas, who allegedly paid for her R3.8 million Pretoria mansion. Duduzile
Zuma, Jacob Zuma’s daughter, was also a director of Sahara Computers; she started working for the
company six months after her father was elected President of the Republic of South Africa.

© The Independent Institute of Education (Pty) Ltd 2023

Page 3 of 13
BAA322 BUET6212

The Gupta family flourished in South Africa, with numerous business entities either purchased or
created. Some of these entities included the Oakbay Investments and Oakbay Resources and Energy
(listed on the Johannesburg Stock Exchange (JSE) in 2014). Oakbay Investments acted as a holding
company for numerous other Gupta-owned firms in the mineral resources sector, such as Tageta Coal,
and Imperial Crown Trading, which were both involved in questionable tender dealings and mineral
rights disputes respectively. Other entities related to the Guptas included Linkway Trading, Accurate
Investments, and Estina, all of which were directly involved in the Estina Dairy Farm Scandal, which
will be discussed in further detail below, as it involved auditing firm KPMG.

The Gupta family was alleged to have been involved in a phenomenon called state capture, a phrase
that began appearing with increasing frequency in the South African media from mid-2015 onwards.
State capture is a “situation where powerful individuals, institutions, companies or groups within or
outside a country use corruption to influence a nation’s policies, legal environment and economy to
benefit their own private interests”.

The shock removal of Nhlanhla Nene as Finance Minister in 2015 by then President Jacob Zuma was
interpreted by many to have been at the behest of the Guptas. Indeed, then Deputy Finance Minister
Mcebisi Jonas alleged that the Guptas offered him a bribe to take up the position of Finance Minister,
further cementing the perception that there was undue influence by the family in state affairs. Jonas’s
testimony was officially considered at the Commission of Inquiry into State Capture in 2018.

This undue influence was further elaborated on in the State of Capture report published by the Public
Protector in October 2016. This report outlined numerous dealings, and allegations of dealings,
between the South African government, state-owned enterprises, and Gupta-owned entities. The
report concluded that there had been interference from the Guptas in key state appointments, such
as the position of the Minister of Finance.

The State of Capture investigation was however not created in a vacuum. Numerous incidents led to
the investigation by the Public Protector. The most salient of these were the Waterkloof Air Force Base
incident in 2013, which made the influence of the Gupta family in various arms of government widely
known. This incident involved the landing of a Gupta-owned private jet (an A380), carrying guests for
a family wedding, at the Waterkloof Air Force Base in Pretoria.

© The Independent Institute of Education (Pty) Ltd 2023

Page 4 of 13
BAA322 BUET6212

This special treatment – the use of an exclusively military purposed installation as a private airstrip,
and the fact that many of the guests were not subjected to proper immigration procedures when
entering the country – sparked public outrage. It was later discovered that the wedding was likely
financed using public funds allocated to the Estina Dairy Farm Project by the Free State Provincial
Government.

These and other allegations resulted in a major South African bank terminating their engagements
with all Gupta-owned entities in December 2015. Auditing firm KPMG SA ended relations with the
family in March 2016. Other major South African banks ended relations with the family thereafter.

In 2018, a commission of inquiry into state capture was set up to investigate and follow up on the
recommendations made in the State of Capture report. This inquiry, headed by Deputy Chief Justice
Raymond Zondo, was provided with evidence of large-scale bribery of public officials, including
officials in charge of the Hawks Special Investigative Unit and the Ministry of Finance. These
revelations cemented the claims of Gupta interference within government affairs to the South African
public.

2. Introduction to KPMG SA
KPMG is one of the big four auditing firms, along with Deloitte & Touche, Ernst & Young (EY), and
PricewaterhouseCoopers (PwC). The organisation operates internationally, with its head office
situated in Amstelveen, the Netherlands, and employs approximately 189 000 people. Although each
of the international branches of KPMG operates relatively independently, oversight is provided by
KPMG International.

KPMG SA had its origins in 1895, when Alexander Aiken opened a public accountancy and auditing
firm in Johannesburg. Many mergers and acquisitions later, the organisation became known as KPMG
Aiken & Peat in 1986. In 2002, after the fall of Arthur Andersen for accounting and auditing fraud due
to the Enron scandal, Andersen and KMMT merged with KPMG in South Africa, which actually stands
for the surnames of the founding members, Klynveld, Peat, Marwick, and Goerdeler.

KPMG SA offers a number of services including auditing and assurance, enterprise services, tax and
legal services, and advisory services. It operates across numerous industries, including manufacturing,
healthcare, the public sector, mining, retail, investments, and financial services, to name a few.

© The Independent Institute of Education (Pty) Ltd 2023

Page 5 of 13
BAA322 BUET6212

KPMG’s purpose statement reads as follows:

“Our purpose is to inspire confidence and empower change in your business. We firmly believe that our
purpose is not just how we energise and engage our people – it’s how we operate in the marketplace
and society at large”.

KPMG has the following values that guide its behaviour:

“Our values are all about how we do what we do and what we believe in:
• We lead by example
• We respect the individual
• We work together
• We are open and honest in our communication
• We seek the facts and provide insight
• We are committed to our communities
• Above all, we act with integrity.”

KPMG states that its vision is not to be the biggest professional services firm, but to be the “clear
choice of professional services firm”. It further reiterates that it wants to do so by “attracting and
keeping the best people; winning the best mandates; doing the best work for the best clients; and
being the most trusted firm”.

3. KPMG SA and the Gupta entities

It is believed that KPMG did work for Gupta-owned entities as far back as 2008. However, the 2014
auditing of Gupta-owned Linkway Trading, a project management company, is probably the most
direct connection between KPMG and the Gupta family. Irregularities in the audit of Linkway first
emerged in 2014 when a tax manager working on a tax compliance service raised concerns about
funds being written off as wedding expenses related to the 2013 Gupta wedding at Sun. Emails that
were later leaked to the media show that the tax manager wrote to Jacques Wessels, a KPMG Audit
Partner, stating that: “We are of the opinion that these (wedding-related) costs are most probably not
in the production of Linkway’s income”.

© The Independent Institute of Education (Pty) Ltd 2023

Page 6 of 13
BAA322 BUET6212

It was later found that some of the funds for the wedding, amounting to approximately R30 million,
were allegedly indirectly siphoned from a public works farming project, called the Estina Dairy Farm
Project, operating out of Vrede in the Free State. A relatively unknown company, Estina, which is now
believed to be a shell company operated by the Guptas, was awarded the tender from the Free State
Provincial Government for the development and administration of a dairy farm, including a 99-year
lease. The provincial government provided approximately R114 million over a three-year period to the
project, with the stated purpose of empowering local beneficiaries and boosting agriculture in the
province.

It was alleged by numerous sources that approximately R84 million of the Estina funds were
transferred to another Gupta-affiliated entity called Gateway Ltd. in the United Arab Emirates. From
there, money was allegedly transferred to another Gupta-affiliated entity called Global Corporation,
and then to Accurate Investments, another Gupta-owned entity in the United Arab Emirates. Accurate
Investments later covered the costs of the Gupta wedding paid for by Linkway Trading in South Africa.
Additionally, because this money was written off as a business expense, no tax was paid to the South
African Government.

Trevor Hoole, CEO of KPMG at the time that the audit was completed on Linkway, responded in 2017
to allegations that Linkway was used to launder money from the dairy project by stating that:

“We conducted our audit of Linkway Trading in accordance with International Standards on Auditing.
At no stage, based on the facts at our disposal, did we consider that any transaction required to be
reported under South African or foreign legislation. We stand by our audit opinion issued.”

Furthermore, Hoole (2017) indicated:

“KPMG in South Africa resigned as auditors and advisors in April 2016 to the Oakbay Group entities.
Our last sign-off as auditors was in respect of the February 2015 year-end. At no stage were we the
auditors of any of the offshore entities mentioned in the media, including Accurate Investments or
entities related to the Free State Dairy project, including Estina. We therefore cannot comment on the
Free State Dairy Project, these entities, or the flow of related funds. We strongly refute allegations that
KPMG was involved in, or condoned, any alleged money laundering activities.”

© The Independent Institute of Education (Pty) Ltd 2023

Page 7 of 13
BAA322 BUET6212

Emails that were leaked to the media revealed that KPMG Chief Executive Moses Kgosana attended
the Gupta family’s Sun City wedding in 2013, along with other senior KPMG partners. The email below,
by Kgosana to Atul Gupta in April 2014, was sent in response to allegations made in the New Age
media platform.

“Subject: Re: Seeking your views and advice

Atul Good morning, we have not met again or spoken since the world class wedding of your daughter
which my wife and I were privileged to attend and enjoyed every moment and every occasion. I have
never been to an event like that and probably will not because it was an event of the millennium. I
left a message on your mobile phone and I am not sure if you are in town and have received the
message. I am seeking your advice and views about an article that was published on New Age
yesterday authored by Mayihlome, the spokesperson of Minister Gigaba where KPMG and I were
personally attacked without a right of reply. The views expressed and retweeted widely are
inaccurate and not representing my views or that of KPMG. I was aware that the author intended
publishing an adverse article like that on Daily Maverick but never thought he will use New Age
platform which I respect and support. I called the author few weeks ago to have a discussion but he
blatantly refused. I know that his views are not the views of your editor or your newspaper but
thought I should seek your advice on how to proceed with this to correct the inaccuracies. I am aware
of how you and Ajay have suffered miscommunication on 2 other platforms, accused of wrongdoing
that you knew nothing about and it is with these knowledge that I seek your views and advice.”

KPMG responded to the wedding attendance of their partners and executives by stating that: “The
wedding took place in 2013 and attendance by some of our Partners was approved at that time by our
Risk Management team and Executive Committee. The accommodation and travel costs were borne
by KPMG. We are satisfied that our independence was not impaired at any stage”.

4. KPMG SA and the SARS rogue unit report

In 2014, KPMG was approached by the South African Revenue Service (SARS) to complete an extensive
investigative document review regarding allegations of irregularities within the public entity. The
report was officially entitled Report on Allegations of Irregularities and Misconduct and was finalised
by 26 January 2016.

© The Independent Institute of Education (Pty) Ltd 2023

Page 8 of 13
BAA322 BUET6212

The report was commissioned by then SARS Commissioner Tom Moyane, who wanted KPMG to
investigate an intelligence unit within SARS that was established to investigate high-profile tax
offenders and was believed to have gone rogue, operating outside the mandate of SARS and the law.
This intelligence unit later became known informally as the SARS rogue unit. The report garnered
public attention in 2015, when it was mysteriously leaked to the public. It indicated, among other
findings, that this rogue unit was responsible for certain ethics breaches, and that then Minister of
Finance, Pravin Gordhan, should have known of its existence.

The existence of the rogue unit report was used as part of the justification for later removing Pravin
Gordhan as Finance Minister.

On 15 September 2017, following an inquiry into the action of KPMG SA spearheaded by KPMG
International, parts of the SARS report were withdrawn and an apology was made to Pravin Gordhan.

KPMG explained that:

“The mandate [of the report] involved an extensive document investigative review and a collation of
documentation. At a later stage, this mandate was extended to the provision of a report which included
conclusions, recommendations, and legal opinions. As a result, during the course of the engagement,
the scope of the work changed. KPMG International has concluded that KPMG South Africa did not
properly grasp the new risks associated with this change and consequently the appropriate
consultation with risk management did not take place”.

KPMG further reiterated that the report was not “performed to the standard we expect” and “was not
subjected to a second partner review”. Additionally, KPMG indicated that “expressing legal opinions
was outside the mandate of KPMG South Africa and outside the professional expertise of those working
on the engagement”.

Regarding findings related to Pravin Gordhan, KPMG admitted that “the report is unclear and open to
more than one interpretation”, and that the report implies that Pravin Gordhan “knew, or ought to
have known of the establishment by SARS of an intelligence unit in contravention of the rule of law
that was ‘rogue’ in nature”. KPMG also admitted that this “was not the intended interpretation of the
report”.

© The Independent Institute of Education (Pty) Ltd 2023

Page 9 of 13
BAA322 BUET6212

KPMG SA was paid R23 million for the production of the report, which the organisation reimbursed to
SARS after the findings of the report were withdrawn. Later, newly elected President Cyril Ramaphosa
relieved SARS Commissioner Tom Moyane of his position, indicating that: “developments at SARS
under your leadership have resulted in a deterioration of public confidence in the institution and in
public finances being compromised. For the sake of the country and the economy the situation cannot
be allowed to continue, or to worsen.”

Moyane, for his part, lashed out at KPMG’s withdrawal of the findings of the rogue unit report,
indicating that the report was accurate. Moyane described KPMG’s withdrawal of the report as “an
attempt to portray SARS and its leadership as incompetent, corrupt, inefficient, and involved in a witch
hunt”.

Although KPMG SA took decisive steps to address the shortcomings identified, and to improve
corporate governance, the 2017 scandal took its toll on the organisation. To rub salt in the
organisation’s wounds, a further scandal broke involving VBS Mutual Bank in 2018.

5. KPMG SA and VBS Mutual Bank

In May of 2018, VBS Mutual Bank (Venda Building Society) was placed under curatorship of the South
African Reserve Bank (SARB) after it came to light that the bank was in financial trouble and lacked
liquidity to survive. The SARB then commissioned investigations into the bank’s affairs to evaluate
where and how the funds shortfall took place in order to possibly rehabilitate the bank.

The SARB discovered that approximately R900 million of the bank’s funds could not be accounted for.
This led to investigations where it was discovered that bank executives may have used some of the
bank’s funds for their personal gain, or through other forms of irregular expenditure and investment.

The bank is of great public interest within South Africa as it holds funds for various public interest
programmes, government departments, and municipalities. For example, VBS acts as curator of R370
million of funds for beneficiaries of deceased mineworkers. The Public Investment Corporation (PIC),
which is a government owned investment institute that invests public funds including public sector
employee pension funds, had invested about R368 million of its funds in the bank. Additionally, over
14 municipalities heavily invested public funds in the bank to the amount of about R1.5 billion which,
after the bank was placed under curatorship, were no longer available.

© The Independent Institute of Education (Pty) Ltd 2023

Page 10 of 13
BAA322 BUET6212

To make matters worse, the Democratic Alliance (DA) laid charges of fraud against these municipalities
indicating that these municipalities breached the Municipal Financial Management Act (MFMA),
although it is still unclear how. What is clear is that Treasury executive Ismail Momoniat instructed
these municipalities not to invest funds with the bank as he felt it was in violation of the MFMA. The
municipalities in question ignored him. These municipalities were made to publicly explain their
financial situation to their constituencies by Minister of Cooperative Governance and Traditional
Affairs (COGTA) Zweli Mkhize after the incident. Mkhize urged the municipalities to explain to the
public what core services would be affected by their financial losses at VBS.

KPMG South Africa announced on 15 April 2018 that two partners, Sipho Malaba and Dumi Tshuma,
tendered their resignations with immediate effect when faced with disciplinary charges brought
against them. Their resignations have been accepted. Both cases are conduct charges connected to
VBS Bank and include, but are not limited to, failure by the partners to comply with the firm’s policies
and procedures regarding the disclosure of relevant financial interests.

KPMG SA acted as the external auditor for VBS. The engagement partner, Sipho Malaba, issued an
unqualified audit opinion dated 31 July 2017 on the bank’s financial statements for the year ended 31
March 2017. On 16 April 2018, the curator of the bank withdrew the financial statements with
immediate effect as the financial statements contain material misstatements and are no longer
considered to be reliable. Additionally, it was discovered that Sipho Malaba held undisclosed loans
with VBS Mutual Bank, which severely questioned his independence regarding the audit of the bank’s
financials in the public eye.

The Prudential Authority of South Africa also commissioned an investigation into the VBS Bank scandal
that was released in October 2018 entitled VBS Mutual Bank – The Great Bank Heist: Investigator’s
Report to the Prudential Authority. The report was authored by lead investigator Advocate Terry
Motau.

In this report Motau indicates that Sipho Malaba, who was a chartered accountant and the
engagement partner on the 2017 VBS audit for KPMG SA, was found to have “obtained very substantial
facilities from VBS which cannot be regarded as arm’s length borrowings and which were not declared
to KPMG”. Additionally, the report indicates that Malaba gave an unqualified audit opinion when he
knew that the financial statements of VBS were misstated. Motau also claims from interview
testimony that Malaba provided regulatory audit opinions which he knew to be false.

© The Independent Institute of Education (Pty) Ltd 2023

Page 11 of 13
BAA322 BUET6212

Interestingly, Philip Truter, the CFO and Executive Director at VBS who by his own admission stated
that he (Truter) was “an essential participant in the manipulation of VBS’ banking systems”, testified
that in a meeting with Malaba:

“He [Malaba] did make the comment to say: ‘Do you want to tell me there is this hole of half a billion
Rand?’ He [Malaba] did seem surprised, but it didn’t seem like it was the worst thing that he’s ever
heard type of thing. His [Malaba’s] response was: ‘Do you want to tell me there’s half a billion Rand
that’s missing, or a difference?’”. Truter further elaborated on Malaba’s reaction indicating that: “You
know, he [Malaba] didn’t seem to – how can I put it – he didn’t go and say: Philip, this is it, we have to
now call the Reserve Bank and tell them about this, and all of that. That was not his response”. Truter
also admitted that when he first engaged Malaba on the missing funds, he purposely used words such
as ‘unreconciling amounts’ and ‘capacity issues’ to obfuscate the illegal movement of funds.

6. KPMG SA in the aftermath: Investigations and corrective action

After the scandal broke in 2017, KPMG took rapid steps to self-correct. KPMG International stepped
in to investigate the allegations of unethical conduct, while independent investigations were
conducted by the Independent Regulatory Board of Auditors (IRBA) and the South African Institute of
Chartered Accountants (SAICA).

Within a very short space of time, a swathe of senior people had left the organisation, including the
CEO, the COO, the chairman of the board, and a number of partners. The lead partner on the Linkway
audits was pursued by KPMG with disciplinary action seeking the dismissal of this partner.

KPMG SA quickly appointed new executive leadership, with Nhlamu Dlomu as the new CEO, and
Andrew Cranston as the new COO. New board members were also appointed, including Professor
Wiseman Nkuhlu as Non-Executive Chairman of the Board, and Ansie Ramalho as an Independent
Director on the Board. These appointments were a significant change from the previous governing
body arrangement at the firm – which was comprised of mostly executive directors. This was expected
to greatly assist KPMG SA in maintaining independence and objectivity in its decision-making.

In addition to these new appointments, KPMG took the following corrective actions based on KPMG
International’s recommendations:

© The Independent Institute of Education (Pty) Ltd 2023

Page 12 of 13
BAA322 BUET6212

• KPMG would adopt additional recommendations set out in the new King IV Report on Corporate
Governance for South Africa 2016.
• KPMG would also appoint a senior, independent, non-executive director to complement the
current board members.
• The roles of the risk management partner and COO would be separated going forward, enabling
the risk management partner to focus on this role.
• KPMG would publish an annual transparency report detailing the firm’s quality processes and
controls.
• The Forensic practice would make changes to its controls and methodologies, including
approval being required by the Executive Committee regarding contentious engagements or
work.
• The Forensic practice would also use engagement teams to provide anyone who is the subject
of a report time to respond to relevant findings before the final report is signed off.
• KPMG International committed that it would work closely with KPMG SA to improve audit
quality and risk management processes.
• Additional audit controls would be instituted to ensure KPMG’s standards are met consistently.
• All tax compliance work would be reviewed to ensure that it adheres to the quality and
professional scepticism required.
• All employees would be subject to expanded integrity and background checks, including their
spouses and partners.

The KPMG Baseline Report: Embracing Change and Rebuilding Trust (2018) recommends additional
changes the organisation has made to its management systems to reduce ethics risk. Some of these
changes include numerous leadership, governance, and management process reforms such as:
• Embedding 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 to ensure independence.
• 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 scepticism and
understanding risks which may be encountered in the audit and consulting practices.

© The Independent Institute of Education (Pty) Ltd 2023

Page 13 of 13