Supposedly too big to fail. Certainly too slippery to police.
These are factors that South African authorities will have to take account of as they contemplate the next steps in dealing with beleaguered professional services firms KPMG and McKinsey. The two stand accused locally of facilitating corruption and attempted state capture, in complete antithesis to their professional obligations and proclaimed values.
The world's mega-business entities have considerable advantages when compared to their smaller counterparts. Their wealth, their cross-border operations, their ability to collude against market entrants, to influence politicians, to intimidate critics, and — when all else fails — to suborn law enforcement and judicial officials, make them pretty much immune to control.
Some have more real power than many national states. It makes in many cases for arrogance, an imperviousness to criticism, and an indifference to ethical conventions.
So, when once in a blue moon, one of these giants is brought to its knees, there is a certain schadenfreude. Everyone enjoys seeing the bully taking a well-deserved, long delayed, thumping.
That is why the plight of KPMG-SA, as clients desert and legal sanctions loom, has been watched with such widespread public enjoyment. It has fired most of its executives and has had the unhappy experience of its new leaders trying, not very convincingly, to explain its actions to Parliament’s public accounts oversight committee.
It has issued a craven apology for being the accounting pawn of the controversial Gupta family. It has conceded also that its “rogue unit” report for the SA Revenue Service was a hatchet job that enabled the forces of state capture to get rid of those who stood in their way.
But equally fascinating has been the sudden counter rally of support for KPMG-SA. Even before any definitive forensic findings have been made, there have been pleas for compassion and warnings of dire societal consequences if it is harshly punished.
The head of The Ethics Institute, Professor Deon Rossouw, has argued that while the current outrage over corporate ethical failures is understandable, one must accept that lapses are inevitable. “The response to such failures cannot be to drive the [businesses] into the ground. It must be to help them put themselves together again.”
Concern has also been expressed by former Finance Minister Trevor Manuel. On the one hand, he wants those involved in state capture to go to jail. On the other hand, Manuel warns it would be a “profound tragedy” for risk management if the big four auditing firms were reduced to three as a result of the KPMG debacle.
This is the “too big to fail” view, based on the premise if KPMG-SA’s clients left it and it folded, or if the legal penalties against it were so punitive that it simply closed its doors in SA, there would be a risk of systemic contagion.
An authoritative opinion on the system risk should be the SA Reserve Bank, except here there is ambivalence, too. Previously it was reported that SARB had pleaded with the top banks not to fire KPMG, fearing that doing so would undermine financial stability.
However, this week, SARB Deputy Governor Kuben Naidoo said the troubles at KPMG would pose no financial stability risk to the banking sector. Instead, the firm must be given space to “come clean” — with the implication being that if they do so, the authorities will act leniently.
But there is, as yet, no sign of full disclosure from KPMG-SA.
In Parliament it was evasive and supercilious in answering questions from MPs. Indeed, earlier the Independent Regulatory Board for Auditors told the standing committee that KPMG SA had, contrary to assurances, failed to fully co-operate with the IRBA investigation.
Similarly tone deaf was McKinsey’s response this week to demands from Eskom that it repay R1.6bn in consultancy fees for an contract that the state firm says was illegal. McKinsey would only repay the money, it announced, if the High Court ruled that the Eskom officials had acted unlawfully.
Note, McKinsey is not saying that it is so confident that the contract is legal that it will defend it in court. On the contrary, it is implicitly conceding that it might very well be illegal, it just isn’t sure.
What McKinsey cannot get its supposedly brilliant business mind to comprehend, is that the letter of the law doesn’t matter on this occasion. The contract is ethically indefensible: McKinsey was paid a fortune for doing nothing but act as a conduit to others who since have been accused of being corrupt.
Rossouw’s approach — the wise, loving parent who gently sets his errant child on the right course — might have merit were there compelling evidence that KPMG-SA and McKinsey are contrite, have confessed all transgressions, are eager to make amends, and are capable of reform.
There is no sign of that. To concentrate their collective minds, a judicial punch to the snout and us all cheering their pain, seem to me to be reasonable alternatives.
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