KPMG and McKinsey feel the heat as graft scandal rocks SA

Cape Town - As global companies implicated in a graft scandal in South Africa scramble to contain the damage to their reputations, politicians and law enforcement agencies are prevaricating and stalling official investigations.

The scandal has revolved around members of the wealthy Gupta family, who are friends of President Jacob Zuma and have been accused of looting billions of rand in taxpayer funds and exerting undue influence over the state.

Accountants KPMG, public relations firm Bell Pottinger, consultancy McKinsey & Co and software company SAP are among the companies that have been implicated in facilitating, being party to or turning a blind eye to their deals. Zuma and the Guptas deny wrongdoing.

Eight top executives at KPMG’s South African office have quit, Bell Pottinger has collapsed and McKinsey and SAP have suspended or put staff on leave and initiated internal probes. Yet South African authorities haven’t arrested or prosecuted anyone despite the nation’s graft ombudsman and the local media highlighting numerous allegations of wrongdoing.

The scandal’s most telling damage has been to the reputation of the state, the presidency and the ruling African National Congress.

Zuma is challenging a directive issued 10 months ago by the ombudsman for the chief justice to establish a judicial commission to probe the allegations and hasn’t followed through on a pledge to set up his own inquiry. While parliament has told four parliamentary committees to conduct probes, only one has scheduled public hearings that are due to begin next week.

Leadership failure

“While there is an elaborate regulatory framework and constitution in place to keep the state in check, in practice we have seen that circumvented and not responded to,” Jay Kruuse, the director of the Public Service Accountability Monitor at Rhodes University in the southern town of Grahamstown, said by phone.

“The checks and balances in the state have been progressively weakened. Investigations drag on and on. It’s a consequence of a failure in leadership across the board.”

Power struggles and a lack of leadership within the investigative agencies may be contributing to the inaction. The police and its elite anti-corruption police unit known as the Hawks both have acting leaders, while the chief prosecutor has been accused by opposition parties and civil-rights groups of being politically aligned to Zuma and his allies.

Business concessions

The allegations leveled against the Guptas include offering cabinet posts to officials in exchange for business concessions with Zuma’s consent, using their political clout to get allies appointed to the boards of state companies and diverting state funds meant to be used for a dairy farm to fund a family wedding.

Much of the detail of the family’s dealings emerged from thousands of their emails, which were leaked to the amaBhungane Centre for Investigative Journalism and Scorpio, the Daily Maverick news website’s investigative unit.

While the family says the mails are fake, several cabinet ministers and other officials who were mentioned in some of the correspondence confirmed their authenticity.

Zuma is attending the United Nations general assembly in New York and his spokesman Bongani Ngqulunga didn’t answer a call to his mobile phone. Gary Naidoo, a spokesperson for the Gupta family, didn’t immediately return a message seeking comment.

Ongoing investigations

The National Prosecuting Authority says its investigations into the allegations against the Guptas and politicians and other senior officials are ongoing, and denies there have been undue delays in pressing charges.

“My silence does not mean that no work is being done,” chief prosecutor Shaun Abrahams told lawmakers in Cape Town on September 6.

The Democratic Alliance, the main opposition party, has led calls for companies that dealt with the Guptas to be investigated and penalised. It filed a complaint against public relations firm Bell Pottinger for fostering racial divisions in South Africa with the main industry group in the UK, which led to its expulsion and forced it into administration.

The DA has also requested that McKinsey’s domestic and US representatives be called before lawmakers to explain some of the work it did with a company linked to the Guptas for state-owned power utility Eskom.

The party said it intends bringing charges of fraud, racketeering and collusion against the consultancy in Cape Town on Tuesday.

Improper intervention

Like McKinsey and SAP, KPMG ordered an internal inquiry after it was implicated in the leaked mails.

The accounting firm’s probe found that the work it did for the Guptas fell “considerably short” of its auditing standards and criticised its role in advising a company controlled by the family on the acquisition of a coal mine from Glencore [JSE:GLN] in a transaction in which Mines Minister Mosebenzi Zwane has been accused of improperly intervening.

It also said four KPMG partners shouldn’t have attended the Gupta family wedding at the gambling resort of Sun City that was alleged to have been funded by taxpayers. KPMG employs 3 400 people in South Africa, according to Business Times newspaper. Barclays Africa [JSE:BGA] and Investec [JSE:INL] have said they are considering ending their relationship with the audit firm.

Public and corporate governance go hand-in-hand and slippage will negatively affect the South Africa’s ability to attract foreign investment, said Russell Lamberti, a chief strategist at ETM Investment Services in Cape Town.

“If we maintain a corrupt government, it’s not going to be very easy for corporate South Africa to stay clean,” he said. “I don’t see signs of a systemic problem yet, but unless we clean up government then you can see how this starts to suck more people down with it.”

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