Professional service industries: Facilitating malfeasance for a fee (III) – What has gone wrong?
THIS BRIEF SERIES LOOKS AT FOUR PROFESSIONAL SERVICES INDUSTRIES - LAW, AUDITING, ACCOUNTING, AND MANAGEMENT CONSULTING - AND THE ROLE THAT THEY PLAY IN FACILITATING CORRUPTION AND MALFEASANCE.
27 June 2019
This brief is the third of four considering the role of lawyers, auditors, accountants, and management consultants in facilitating corruption. The first explored the roots of the concept of “professionalism”. The second considered the constraints, or lack of them, on professional behaviour. This brief discusses instances of malfeasance by members of these professions. The fourth will consider potential next steps for professions to guard against further misconduct.
Egregious cases of wrongdoing associated with state capture have been uncovered, raising questions about the soundness of regulation in the legal, auditing, accounting and management consulting professions. The second brief outlined the regulatory environment and notes attempts to combat unethical and illegal behaviour. This brief discusses some of the misdeeds committed by professionals in recent times.
PROFESSIONALS AS ENABLERS
At the 2018 conference under the title State Capture and its Aftermath hosted by the Public Affairs Research Institute, Mr John Githongo, a prominent anti-corruption activist from Kenya, described the “usual suspects” in state capture. One category of persons he singled out as responsible in furthering the state capture project was “private actors in the service industry” – the people who “design the architecture” that enable corruption by bankers, lawyers, and accountants.[i] This category of persons, he warned, are often not held to account in the same way as other actors.
His comments were a timely reminder that corruption and state capture are two-way streets. A corrupt transaction requires at least two parties – on one hand, the person seeking to improperly induce (such as a private business owner seeking a tender) and on the other, the person who is improperly induced (such as the public official who improperly favours a tendering party).
An analogy: if the inducing party is a driver, and the induced party is the vehicle that takes the driver to his chosen destination of self-enrichment, then service industry actors (including those in the professions) are those who plot the route or oil the gears. When corruption is exposed, it is the transacting parties (the person offering the bribe and the person who accepts it) that bear the brunt of legal sanctions. Rightly so. That said, very little thought is given to those whose efforts enabled the transaction and, in doing so, may well have breached a duty to prevent it.
Who are the main culprits? The primary focus of this brief is limited to the professions of auditing, law and accounting. Management consulting will also be considered, even though – as was discussed in the first brief – it does not satisfy the criteria that would place it within the formal meaning of “profession”. It is important to note here that listed professions are by no means the only professions that can be implicated in furthering corruption.
There are ample examples of professionals in the fields of auditing, law, accounting, and management making use of their expertise and position to help others achieve improper ends, a few of which are detailed below.
The auditing profession has been in the spotlight as allegations of involvement in corrupt activities continue to come to light. There has been particular focus on “Big Four” auditing firms KPMG, PwC, Deloitte, and EY. These four firms have become international behemoths, expanding their service offerings beyond auditing to include tax and legal advice, management consulting, entrepreneurial advice, risk consulting, and more. This expansion – while not without criticism[ii] – is not the focus of this brief, which focuses on auditing firms as auditors.
Of the Big Four, KPMG has received the most attention in the context of corruption in South Africa. The firm’s alleged missteps include:
- facilitating alleged tax evasion by Gupta-linked businesses, in particular, overlooking the characterisation of wedding expenses as business-related;[iii]
- involvement in the valuation of one of the Gupta-linked companies, Oakbay Resources and Energy Limited, at the time of that company’s listing on the JSE. It was later alleged that the share price was fixed[iv];
- the issuing of the so-called “Rogue Unit” report, which claimed that a rogue unit was operating within the South African Revenue Service at the beck and call of then Finance Minister Pravin Gordhan. The report played a role in Minister Gordhan’s ousting;[v] and
- covering up fraud by granting an unqualified audit opinion to VBS Mutual Bank, with the lead auditor allegedly receiving some R34 million in “soft” undeclared loan facilities for his trouble.[vi]
KPMG has since had to answer for its conduct, facing an investigation[vii] by the Independent Regulatory Board for Auditors (IRBA). The conduct of certain KPMG auditors is also the focus of an inquiry instituted by the South African Institute of Chartered Accountants, chaired by senior advocate Dumisa Ntsebeza. KPMG has since apologised[viii] after facing considerable backlash, including job losses and having some of its major clients replace it with other auditing firms, and has pledged to donate some R47 million in fees received from Gupta-related entities to civil society organisations.[ix]
Auditors have facilitated malfeasance in the private sector too – with knock-on effects that affect the public at large. One example is Big Four auditing firm Deloitte, which has been the subject of a disciplinary inquiry by IRBA.[x] The inquiry, now in its fifth year, relates to alleged misconduct by Deloitte’s auditors in relation to their signing off on the audit of African Bank in 2013. The bank collapsed and was placed under curatorship in 2014 while having to be “rescued” by the South African Reserve Bank. Deloitte’s auditors are charged with having ignored the firm’s own report raising concerns about the bank’s overestimation of its cash flow in forecasts.[xi]
But that is not the only allegation of impropriety facing Deloitte. IRBA also initiated an inquiry into whether the auditing firm knew of the accounting irregularities in the books of Steinhoff Holdings that led to the company’s share price plummeting by over 85% - but, despite this knowledge, still produced unqualified audit opinions.[xii] The fallout at Steinhoff wiped out billions from government employees’ pension fund investments.[xiii] More recently, Deloitte’s work for sugar producer Tongaat Hulett has come under scrutiny after the company admitted that may need to restate its audited financial statements.[xiv]
Global auditing firm PwC also found itself in hot water with regulators two years ago for overlooking failures in the procurement process conducted by South African Airways. It was ordered to pay a fine of R200 000, R50 000 of which was suspended.[xv]
These are only the most widely-publicised instances of alleged impropriety. IRBA reported that 112 new investigations into disciplinary matters were initiated in its last reported year.[xvi]
The auditing profession is expected to maintain the highest standards of conduct regarding observance of procedure, avoidance of bias, and reporting of irregularities. This is, after all, the reason that audit reports are trusted as authoritative sources in the financial condition of audited entities. The regrettably improper actions of certain auditors – particularly those at large, well-resourced firms which should have had mechanisms in place to detect and eliminate such behaviour - have jeopardised the public’s confidence in the profession generally. The auditing profession needs to undertake sincere introspection and display a firm commitment to reforms in order to regain that trust.
People’s attitudes towards ethics in the legal profession can be quite polar: lawyers are characterised either as morally bankrupt manipulators[xviii] or virtuous defenders of rights and freedoms.[xix] The reality is that practitioners within the profession can fall on either side of this spectrum, or (as is more likely) somewhere in between. However, the blemish left by the conduct of lawyers in the context of state capture will be difficult to remove, and will likely endure in public consciousness for some time to come.
One prominent character in this unfortunate narrative is the South African operation of UK firm Hogan Lovells, which has attracted disapproval from both within South Africa[xx] and abroad.[xxi] The firm was criticised for issuing a report that was used by former SARS Commissioner Mr Tom Moyane to clear Mr Jonas Makwakwa of wrongdoing. Mr Makwakwa was accused of money laundering after R1.7 million in cash deposits into bank account was flagged by the Financial Intelligence Centre.[xxii] Hogan Lovells has refuted the allegation that it was involved in impropriety, arguing that the investigation mandate it received did not include criminal conduct.[xxiii] More recently, a former lawyer from the firm was implicated by whistleblower Angelo Agrizzi in testimony before the Zondo Commission regarding corrupt payments to government officials.[xxiv]
Last year, a report by Daily Maverick investigative unit Scorpio questioned the movement of R80 million by Gupta-owned company Trillian Management Consulting through the trust account of attorneys Stein Scop Incorporated.[xxv] The report described the “basket of legal services” that Stein Scop provided to Trillian, including that “it was responsible for executing the company’s devastating legal strategy against Mosilo Mothepu, one of the country’s key State Capture whistle-blowers.” Stein Scop’s response to the allegation that it had acted improperly was as follows:
“It is important to distinguish the role the legal profession plays as distinct from other service providers such as accountants and consultants. We do act for unpopular clients from time to time. Our job, as attorneys, is to ensure that even these clients are entitled to protect or enforce their rights under law (as guaranteed in the Constitution).”
This brings us to an important consideration when considering lawyers’ conduct. Stein Scop’s statement is not wrong. It can equally serve as a response to the many members of the public who question how any lawyer can act in defence of those charged with capturing the state. Lawyers have a duty to uphold the law, even where the law operates to protect those others consider unsavoury. Even those responsible for state capture are entitled to legal defence.
However, at least two caveats must apply. The first is that attorneys and advocates have obligations as officers of the Court. They swear oaths before admission to the profession to “truly and honestly” conduct themselves in their practice of law, to do so in to their best of their abilities, and to “be faithful to the Republic of South Africa”.[xxvi] This means that they are not entitled to use their knowledge of the law to circumvent the law to favour their clients. Where law is open to interpretation, they may propose interpretations that advance their client’s interests. They may not, however, act unlawfully. If they do, they are subject to severe sanction.
But there is another type of conduct that is deserving of criticism, even if not technically unlawful: the adoption of what has come to be known as the “Stalingrad defence” strategy.[xxvii] This strategy involves avoiding the merits of a charge being heard and decided by a court by instead mounting a series of procedural challenges. Many of these challenges ultimately prove to be without basis and serve only to delay proceedings and/or exhaust the pockets of the person bringing the charge through frivolous litigation.
In South Africa, the prime example of the use of the “Stalingrad defence” has to be the legal strategy employed by former President Jacob Zuma’s legal team in response to his various legal challenges.[xxviii] The use of this strategy was described by a court as having cost the taxpayer up to R32 million.[xxix] This style of legal defence should be called what it is: an abuse of procedural safeguards, an unnecessary burden on the already overloaded court system, and an unfair advantage conferred on the wealthy as a means to avoid justice. Litigators who advise their clients to engage in Stalingrad tactics are deserving of censure. The courts could consider making punitive costs orders – including those against lawyers themselves – a real possibility in such circumstances.
The influence of management consultants has had profound effects on South Africa in the past few years. That influence extends to state capture as well. One example of this is international consultancy Bain & Company (Bain), who was found to have been involved in the “seizing” of SARS. Judge Nugent, in his final report following the Commission of Inquiry into Tax Administration and Governance by SARS, described in detail that company’s role as follows:
“We think what occurred can fairly be described as a premeditated offensive against SARS, strategized by the local office of Bain & Company Inc, located in Boston, for Mr Moyane to seize SARS, each in pursuit of their own interests that were symbiotic, but not altogether the same.”[xxx]
The disastrous restructuring of SARS under Bain’s advice has had real and deleterious effects on the South African public, including the acutely felt increase of the value-added tax rate.[xxxi] The repayment of its consulting fees[xxxii] in respect of the restructuring cannot undo the damage caused – and even if the consequential damage is huge, it is impossible to quantify accurately.
Another global management consulting firm, McKinsey, undertook consulting work for Eskom without a proper contract in place. The firm has now repaid R902 million paid to it by the state-owned entity. The process of recovering funds paid by Eskom to its local development partners, the Gupta-related local management consulting firms Regiments Capital and Trillian, is still far from over[xxxiii] – although the recent judgment of the North Gauteng High Court ordering Trillian to pay some R600 million back to Eskom is a significant step forward.[xxxiv]
Compared to the other professions in this brief, management consulting is relatively young.[xxxv] In its fairly short existence, it has yet to subject itself to any kind of general regulation – which some would argue means it cannot rightfully be classed as a “profession” in the first place.[xxxvi] In any event, the lack of a supervisory body enforcing a code of ethics has enabled gross abuses of power. Even while their role is advisory, the influence they exert over the development of policy is very real. As such, it is deeply concerning that their work is not subject to the same safeguards as other professions.
The accounting profession is also not immune against charges of involvement in grand-scale corruption. Last year, Angelo Agrizzi named two professional accountants as having been involved in the payment of bribes to top government officials in an affidavit to the Zondo Commission.[xxxvii]They are now subject to investigation by the South African Institute of Professional Accountants.
WHAT IS NEXT FOR THE PROFESSIONS?
These are only a selection of the most prominent scandals implicating professions. They show that any expectation that professionals will consistently hold themselves to a higher standard of conduct is clearly misplaced. This brief has detailed some of the more egregious abuses perpetrated by actors within the professional services industries. Much work needs to be done to make sure that these abuses are not repeated in the future. The fourth brief in this series will look at what needs to be done, and by whom.
By Cherese Thakur, Legal Researcher, HSF, 27 June 2019
[i] The other actors identified by Mr Githongo include politicians, “private sector brokers who commodify relationships”, the security sector (including intelligence services and police), and bureaucrats (usually of a mid-level status in the public service).
[ii] See, for instance, the 2014 speech by Steven B Harris at the Practicing Law Institute 12th Annual Directors’ Institute on Corporate Governance, accessed at https://www.ethicsboard.org/system/files/meetings/files/Agenda_Item_F-1_-_Steven_Harriss_Speech_-_The_Rise_of_Advisory_Services_in_Audit_Firms_0.pdf.
[iii] See “Ex-KPMG auditor was naïve in dealing with Gupta wedding” Business Report accessed at https://www.iol.co.za/business-report/companies/ex-kpmg-auditor-was-naive-in-dealing-with-gupta-wedding-16425241. See also R Mahlaka “Ex-KPMG audit partner won’t budge on IRBA’s dishonesty charge” Moneyweb accessed at https://www.moneyweb.co.za/news/south-africa/ex-kpmg-audit-partner-wont-budge-on-irbas-dishonesty-charge/.
[iv] amaBhungane and Scorpio “#GuptaLeaks: Confidence game – or how professionals missed massive fraud at Oakbay listing” News24 accessed at https://www.fin24.com/Companies/Industrial/guptaleaks-confidence-game-or-how-professionals-missed-massive-fraud-at-oakbay-listing-20171215.
[v] G Hosken “KPMG cans SARS rogue unit report, apologises to Gordhan” TimesLive accessed at https://www.timeslive.co.za/politics/2017-09-15-kpmg-cans-sars-rogue-unit-report-apologises-to-gordhan/. See also C Presence “KPMG 'rogue unit' report was grossly unfair to Gordhan – Ramaphosa” IOL accessed at https://www.iol.co.za/business-report/companies/kpmg-rogue-unit-report-was-grossly-unfair-to-gordhan-ramaphosa-11630692.
[vi] K Khumalo “KPMG auditor paid R34m to cover up #VBSBankHeist” IOL accessed at https://www.iol.co.za/business-report/companies/kpmg-auditor-paid-r34m-to-cover-up-vbsbankheist-17439815.
[vii] See update on IRBA investigations into KPMG, accessed at https://www.irba.co.za/news-headlines/press-releases/update-on-irba-investigations-into-kpmg on 26 February 2019. See also H Ziady “Gears turn slowly in audit probes” BusinessLive accessed at https://www.businesslive.co.za/bd/business-and-economy/2018-03-22-gears-turn-slowly-in-audit-probes/.
[viii] J Cameron “KPMG begs SA for forgiveness. Has it REALLY changed its spots?” BizNews accessed at https://www.biznews.com/sa-investing/2018/12/10/kpmg-begs-forgiveness-changed-spots.
[ix] S Khumalo “KPMG to donate millions in Gupta fees to civil society” News24 accessed at https://www.businesslive.co.za/bd/business-and-economy/2018-03-22-gears-turn-slowly-in-audit-probes/.
[x] L Buthelezi “African Bank corporate accountability saga drags on” BusinessLive accessed at https://www.businesslive.co.za/fm/features/2019-01-17-african-bank-corporate-accountability-saga-drags-on/.
[xi] L Buthelezi “Deloitte should not have missed African Bank red flags, say auditing board” BusinessLive accessed at https://www.businesslive.co.za/bd/companies/financial-services/2018-12-03-deloitte-should-not-have-missed-african-bank-red-flags-says-auditing-board/.
[xii] A Crotty “Dutch investors gun for Deloitte over Steinhoff” BusinessLive accessed at https://www.businesslive.co.za/bd/companies/retail-and-consumer/2018-04-09-dutch-investors-gun-for-deloitte-over-steinhoff/, T Niselow “We did the right thing with Steinhoff – Deloitte” News24 accessed at https://www.fin24.com/Companies/Financial-Services/exclusive-we-did-the-right-thing-with-steinhoff-deloitte-20180119.
[xiii] S Mchunu “Steinhoff Scandal cost Government Employees Fund R20bn” IoL accessed at https://www.iol.co.za/business-report/companies/steinhoff-scandal-cost-government-employees-fund-r20bn-13041991.
[xiv] J Cronje “Tongaat delays 2019 financials while it conducts forensic probe” News24 accessed at https://www.fin24.com/Companies/Agribusiness/tongaat-delays-2019-financials-while-it-conducts-forensic-probe-20190603.
[xv] A Crotty “Exclusive: another major auditing firm drawn into SAA scandal” BusinessLive accessed at https://www.businesslive.co.za/fm/fm-fox/2017-10-25-exclusive-another-major-auditing-firm-drawn-into-saa-scandal/.
[xvi] IRBA Annual Report 2018 accessed at https://www.irba.co.za/upload/IRBA%20Annual%20Report%202018.pdf.
[xvii] The broader term “lawyer” is used here, rather than a specific reference to the attorneys and advocates professions. A “lawyer” is defined as “a person who practises or studies law”. The broader term would include in-house legal advisers, who may not necessarily be formally admitted as attorneys or advocates.
[xviii] Jokes about this are probably as old as the profession itself. See R Gaudet Jr “Lawyer-bashing in the Western tradition – 350 BC to 1992 AD” Columbia University Journal of Politics and Society Spring 1992 at pages 21 to 26.
[xix] For instance, many will recall that a number of liberation heroes were practising lawyers before entering into politics.
[xx] R Davis “Law firm Hogan Lovells hits back over SARS ‘whitewash’ claims” Daily Maverick accessed at https://www.dailymaverick.co.za/article/2018-05-23-law-firm-hogan-lovells-hits-back-over-sars-whitewash-claims/.
[xxi] M Malema “Exclusive: Boycott Hogan Lovells – Peter Hain” Business Report accessed at https://www.iol.co.za/business-report/companies/exclusive-boycott-hogan-lovells-peter-hain-13365468.
[xxii] “Makwakwa quits SARS” eNCA accessed at https://www.enca.com/south-africa/makwakwa-quits-sars.
[xxiii] R Davis “Law firm Hogan Lovells hits back over SARS ‘whitewash’ claims” Daily Maverick accessed at https://www.dailymaverick.co.za/article/2018-05-23-law-firm-hogan-lovells-hits-back-over-sars-whitewash-claims/.
[xxiv] “Law firm 'appalled' that former partner implicated in state capture testimony” News24 accessed at https://www.news24.com/SouthAfrica/News/law-firm-appalled-that-former-partner-implicated-in-state-capture-testimony-20190118.
[xxv] J Bezuidenhout “Gupta Inc: The Lawyers, Part 1” Daily Maverick accessed at https://www.dailymaverick.co.za/article/2018-04-17-gupta-inc-the-lawyers-part-one/.
[xxvi] Rules Regulating the Conduct of the Proceedings of the Several Provincial and Local Divisions of the High Court of South Africa made in terms of the Uniform Rules of Court, rule 3A(5) in the case of advocates. The oath for attorneys is similar if not identical.
[xxvii] See Moyo v Minister of Justice and Constitutional Development and Others; Sonti v Minister of Justice and Correctional Services and Others ZASCA 100; 2018 (8) BCLR 972 (SCA);  3 All SA 342 (SCA); 2018 (2) SACR 313 (SCA) at para 169. For an historical perspective on this style of defence, see D Dinnie “The Stalingrad defense revisited” Insurance Gateway accessed at https://www.insurancegateway.co.za/ShorttermConsumers/PressRoom/ViewPress/Irn=17425&URL=The+Stalingrad+Defense+revisited+1#.XIob9CgzbIW.
[xxviii] This has been acknowledged as far back as 2007. See “Kemp J Kemp says why he stands by JZ” Sowetan Live accessed at https://www.sowetanlive.co.za/news/2007-05-30-kemp-j-kemp-says-why-he-stands-by-jz/.
[xxix]Democratic Alliance v President of the Republic of South Africa and Others and Economic Freedom Fighters v State Attorney and Others  ZAGPPHC 836;  1 All SA 681 (GP) at para 1.
[xxx] Final Report in respect of the Commission of Inquiry into Tax Administration and Governance by SARS at page 27. Accessed at file:///C:/Users/Cherese/Downloads/SARS%20Commission%20Final%20Report%20(1).pdf.
[xxxi] T Niselow “SA Revenue Service shortfall to blame for VAT hike” News24 accessed at https://www.fin24.com/Economy/South-Africa/sa-revenue-service-shortfall-to-blame-for-vat-hike-treasury-20180829.
[xxxii] N Marrian “Bain pays back the money over botched SARS work, but may face fraud charges” Business Live accessed at https://www.businesslive.co.za/bd/national/2018-12-15-bain-pays-back-the-money-over-botched-sars-work-but-may-face-fraud-charges/.
[xxxiii] E Ferreira “Shame corporates who colluded with state capture – Gordhan” Independent Online accessed at https://www.iol.co.za/business-report/economy/shame-corporates-who-colluded-with-state-capture-gordhan-16582062.
[xxxiv] “Eskom court ruling on Trillian, looks forward to getting back R600m payment” IOL accessed at https://www.iol.co.za/business-report/energy/eskom-court-ruling-on-trillian-looks-forward-to-getting-back-r600m-payment-27033475.
[xxxv] On one account, it is 133 years old. See C McKenna “A brief history of strategy consulting” Paris Innovation Review accessed at http://parisinnovationreview.com/articles-en/a-brief-history-of-strategy-consulting.
[xxxvi] This was considered in more detail in Part I of this brief series.
[xxxvii] “Accounting body to investigate two members implicated by Agrizzi” Fin24 accessed at https://www.fin24.com/Companies/Financial-Services/accounting-body-to-investigate-two-members-implicated-by-agrizzi-20190125.