About Chinese Walls, Revolving Doors And Famous Weddings
By Khaya S Sithole
Moses Kgosana and KPMG’s fall from grace is painful to watch. But if one wants to understand the tragedy of Moses Kgosana’s predicament – it is not the Guptas from Saxonwold we need to understand – but another Gupta altogether…
The Indian consultant and the auditor
Early on the morning of January 8, 2013, Jacob Zuma rose up to deliver his official annual address as the President of the ANC. The address started off promisingly enough by reflecting on the 100-year anniversary of the 1913 Land Act. But – as expected – the speech predictably meandered off into a series of promises that remain unfulfilled even to this day.
Hours after Jacob Zuma finished his speech, the most famous Gupta in corporate history rose up to face a different challenge.
Rajat Gupta was due to begin a 2-year sentence for white collar crimes on the 8th of January 2013. But he had appealed his sentence and did not have to check in to prison that morning. So he spent that day in the library of his house reflecting on his spectacular fall from grace and preparing notes for his appeal – which eventually failed. Rajat Gupta would eventually serve his sentence from June 2014 until March 2016.
Before his spectacular fall from grace, Rajat Gupta represented something of an enigma in Indian business circles. Because even after his stint in prison, the reality is that of all the business leaders that have emerged from India since the partition saga of 1947, very few have been as celebrated and successful as Rajat Gupta.
His was of course a double blessing. Rajat was born in Kolkata in 1957 and benefited from 2 historical strokes of luck. His first encounter with luck is that he was born after the independence struggles that resulted in the 1947 partition which separated India from Pakistan. Secondly, after he was born, the United States officially abolished its policy of allowing only 100 Indians to immigrate to the United States each year. Rajat Gupta distinguished himself firstly in Delhi and then more importantly at Harvard Business School. His time at Harvard coincided with the rise of management consulting as a viable career choice of Ivy League graduates.
Upon exiting Harvard, Gupta headed for an interview at McKinsey. He was rejected after his first round. But then Gupta had an alternative plan. His Harvard Professor – Walter Salmon – just happened to know Ron Daniel, a man who was important enough at McKinsey to override the decision and hire Rajat Gupta. And thus began his meteoric rise at the heart of the McKinsey Empire. Rajat Gupta would interact with a lot of finance gurus within the McKinsey stable. One of the more important ones, was a guy called Jeffrey Skilling who joined McKinsey in 1979.
Meanwhile in South Africa, long before a man called Raboijane Moses Kgosana flirted with disgrace by declaring a particular wedding as the event of the millennium; he was something of a reluctant legend in the accounting profession in South Africa. An ambitious and disciplined man throughout, Moses was part of the first wave of black professionals who made it to the top of the CA profession in South Africa. At that stage, the industry was of course remarkably white in nature and the addition of any new name to the list of black CAs was a massive event. Moses however, was no ordinary accountant. Deeply affected by a history of exclusion within the traditionally white auditing firms in South Africa; Moses cobbled together an alliance of friends – Tshidi Mokgabudi; Edson Magondo and Themba Tshikovhi and created a black auditing firm – KMMT. Within the South African environment, KMMT stood along SizweNtsaluba as the most prominent of the black firms.
In 1994, two things happened in different parts of the world. South Africa ushered in a democracy and discovered an urgent need to include black people into its economy. In the United States; Rajat Gupta finally fulfilled his destiny and became the first Indian to ever head up McKinsey.
From the moment Rajat Gupta took charge of McKinsey, his ambition became the driving force behind the success of this firm. During his time, McKinsey reached levels of success and profitability that no other firm could match. Such was Gupta’s success at the firm; he was eventually reappointed to serve the maximum 3 terms and left McKinsey in 2003. Meanwhile in South Africa, the desperation to transform became a business imperative for the auditing firms. PWC – the biggest of them all, attempted a takeover of Gobodo which was a spectacular stillborn failure. KPMG then made an approach for KMMT in 2001/2. At that stage, KMMT was a thriving black firm but agreed to be taken up by KPMG. In Kgosana’s view, merging with a bigger white firm was more sensible than a process of a creating bigger black firm by combining with the other black auditing firms. As a result, a black auditing firm got swallowed by a larger white corporation in order to facilitate some element of transformation. Within the combined structure, Moses Kgosana was put on track for the CEO post – which he duly took up in 2006; and Tshidi Mokgabudi became an Executive Director and chairperson of Advisory at KPMG.
The narratives behind the leadership journeys of Rajat Gupta at McKinsey and Moses Kgosana at KPMG are interesting to observe. Gupta did of course prove himself to be a worthy leader of McKinsey – and no one disputed that until he finished his stint in 2003. Moses on the other hand, had a relatively successful stint in charge of KPMG from 2006 to 2015. What is of particular interest however, is the very essence of what these men actually did for a living.
Auditors, consultants and firewalls
If one ever has to ask what exactly a consulting firm is the answer is just one word – McKinsey. Because not only is the firm the market leader in consulting, it is also the one all ambitious graduates dream about. Apparently its interview process takes months and can involve more than 10 interviews. Once you get in, you find yourself living in the age of slavery where the only 2 guaranteed facts is that you are paid more than all your peers; and everyone thinks you are an arrogant prick. And they are probably right in both instances.
The McKinsey business model is one of questionable moral character. Management consultants make their living ‘advising’ clients on various matters. The reason people pay management consultants is the long-held view that they have seen it all and know how to advise all sorts of companies. And therein lies the problem. For a company like McKinsey to advise a particular client on how to improve business processes there is the expectation that whatever problem you might have – McKinsey has seen it before and will tell you exactly what to do.
But bizarrely, the only place they could have seen something similar within your industry is of course – if they have consulted for your competitors before. As the Financial Times once put it – “management consultants in general, and McKinsey consultants in particular; have made their entire business out of exploiting the moral grey zone surrounding confidential information”. In other words, McKinsey is the type of entity that you invite to your business; grant them access to your most valuable information – only for them to use that information a week later when consulting for your competitor. The very essence of hiring McKinsey is that you are simply trying to steal highly-sensitive and confidential information about your competitors from someone who masquerades as a consultant. John Gapper says ‘one of the main reasons companies hire consultants is to make sure they do not fall behind what their competitors are doing – and in return for parting with their own secrets; they gain access to their rivals secrets and this is suitably disguised as ‘best practices’. It is essentially glorified corporate theft.
But the situation gets worse, much worse. The McKinsey business model not only thrives on this trading of confidential information but also depends on creating a need for clients to keep calling them back. This need is quite easy to create actually. Whenever you hire McKinsey to assist you they have an ability to ‘limit’ their assistance rather than provide permanent solutions. After all, if your problems are resolved forever then the consultants might one day run out of business. Take the recent Eskom and Trillian saga for example. According to the Budlender report sanctioned by Tokyo Sexwale (the first human being to actually acknowledge that board chairpersons occasionally have no clue what goes on in the businesses they are associated with); McKinsey has a contract with Eskom. The contract was signed on the basis that Eskom needed advice on how to manage its costs – and McKinsey indicated that it would be able to assist Eskom in this regard. We are not particularly sure how much these costs that Eskom needs to save are but we do know that McKinsey has worked out that it will cost R1 billion to teach Eskom which costs to cut. For 5 years. In other words, McKinsey will charge Eskom R5 billion in order to help Eskom reduce its costs.
However, in a strange twist of fate, McKinsey then decided that they would give up 30% of the fee to a company called Trillian which – according to McKinsey – needs to do nothing more than just look pretty. In other words, McKinsey has been hired to help Eskom reduce its costs. It charges Eskom a billion a year and then acknowledges that up to R300 million of that amount is actually unnecessary but must still be paid by Eskom. But that’s how McKinsey works. In 2007, the year before McKinsey captured Eskom, the electricity supplier paid R839 million in consultant fees. As soon as McKinsey joined the party, the fee for consulting fees hit R1,2 billion in 2008. And kept rising. By the time we got to 2012, the bill was at R2,9 billion.
But none of this should surprise us.
As I said before, the entire McKinsey model is based on milking clients without ever providing a service that fixes the problem. If McKinsey had any idea how to fix Eskom’s problems, it would not take them over 10 years to remain engaged with Eskom at a billion rand a year. But that’s not where it ends. The problem with the McKinsey model has always been that they can’t possibly be loyal to anyone. And in their quest for disloyalty, they are bound to betray their own clients as soon as a competitor asks them for advice. In this classic conflict of interest dilemma, one has to ask how McKinsey could possibly balance its need to maintain neutrality across different clients. And the simple answer is that they can’t.
What McKinsey does instead is that it subjects itself to a manufactured Chinese wall – which simply means they try to pretend they don’t know what your competitor has told them. If they get that right then they would not be betraying their own clients. The only other industry that seems to suffer from similar conflicts of interest is the auditing profession. And nowhere was the intersection between auditors, consultants and conflicts of interest more dramatic than in the Enron case.
The Skilling age and the corporate moral compass
Jeffrey Skilling – one of McKinsey’s finest sons – is currently in prison serving a 24-year sentence. What got him there is the most famous story in professional services. Skilling worked with Gupta at McKinsey from 1979. During his time, McKinsey was a consultant to Enron. Then Skilling went to join Enron and became the CEO. And then he contracted McKinsey as consultants of Enron. McKinsey were fully responsible for the Enron strategy. At that time the world’s greatest auditing firm – Arthur Andersen – were the official auditors of Enron. Between Enron, McKinsey and Arthur Andersen – developed the worst conflict of interest fiasco in history. Essentially, the auditors had zero independence from Enron. McKinsey on the other hand, couldn’t figure out whether it was a consultant to Enron or part of the furniture. Predictably, McKinsey provided Enron with absolutely useless advice. As a consequence, the financial fortunes of Enron started collapsing. But Enron didn’t worry too much – because the auditors were on board to sign off whatever Enron told them to sign – especially if it was all a bunch of lies. And then it all fell apart when one day the sum of all fabrications got too much for Enron and its allies.
By the time the scandal unraveled, the auditors were so compromised they had to shut down the entire firm. McKinsey escaped with a battered reputation as a corrupt advisor to Enron. Throughout this scandal, Rajat Gupta was the leader of McKinsey.
Once Arthur Andersen had committed professional suicide, its assets were free for the other members of the auditing cartel to acquire. KPMG took the bulk of the Arthur Andersen assets – essentially the dodgy auditors that had destroyed their own firm.
The collapse of Enron and the demise of Arthur Andersen coincided with the merger between KMMT and KPMG in South Africa. So in 2002, KPMG ended up with the most promising black audit firm in its stable and the crumbs of the most disgraced international auditing firm in its pocket. Moses Kgosana was by now primed to take over the leadership of KPMG in South Africa, which eventually happened in 2006.
During Kgosana’s years at KPMG, the industry itself underwent a dangerous form of transformation. The essence of it is that auditing firms evolved from being auditing firms to consulting firms. In other words, the firms started offering a wide range of services which affected their independence. In one moment the auditing firm would be providing tax advice and the next day they would be auditing the impact of their own advice. The next day they would be corporate finance advisors to the same client – a toxic revolving door. Predictably, the industry lost its moral compass.
But more frighteningly, the audit partners came under increasing pressure to keep clients and maintain revenues. To do this, they had to keep the clients happy – at whatever cost. This would one day lead Moses Kgosana to attend a wedding in Sun City – because the client said he could.
The problem with relationships between auditors, consulting firms and their clients is the ever-evolving understanding of what independence is. In extreme cases, the inability to understand this distinction is a recipe for the migration towards corrupt relationships. Rajat Gupta’s great frustration when he was in charge of McKinsey is that he wanted to benefit from the advice he gave to his own clients. Because surely if he believed in the quality of his advice he would invest in those companies? But he avoided the temptation – for a while.
As soon as Rajat Gupta left McKinsey, his moral compass took a turn. As can be expected from the leader of McKinsey, invitations to serve on various boards rolled in as soon as he was free from McKinsey. His 2 most prominent appointments were on the boards of Goldman Sachs and Procter & Gamble – both McKinsey clients. Gupta then got himself a new friend – Raj Rajaratnam who ran the Galleon hedge fund. Raj was a billionaire who saw nothing with taking shortcuts towards making a billion or 2. In simple terms – he was the definition of corruption. Rajat Gupta then started offering classified information to the Raj. In one famous instance, the board of Goldman Sachs held a conversation with Warren Buffett at the height of the financial crisis. Buffett agreed to invest 5 billion dollars in Goldman Sachs to keep it alive. Only the board of Goldman Sachs was informed. 28 seconds after the end of the conference call that confirmed the transaction, Gupta called the Raj and informed him. The Raj made a massive profit the next day.
Disgrace and corruption behind revolving doors
When all of this was discovered, Gupta had long left the firm, but the scandal was a humiliation for McKinsey. The firm disowned him. He eventually went to jail and joined Skilling in the list of disgraced McKinsey partners.
These days, we have seen Moses Kgosana experience a similarly spectacular fall from grace. At the heart of the KPMG scandal is the question of how they audited the Gupta Empire. Moses Kgosana insists that he did nothing wrong. But his migration from a man of principle to a wedding cheerleader was a process, not an event. A process initiated by the blurring lines between client and friend; between independence and indifference; between carelessness and callousness. The place which served as the breeding ground for Moses’ decline into obscurity – KPMG – has predictably disowned him. Just like McKinsey disowned Rajat Gupta. That is the way these sins play out.
In relation to the wedding expenses/money laundering case, KPMG insists that it did nothing wrong. Essentially KPMG is invoking its Chinese wall defence – they say just because they audited one side of the transaction doesn’t mean they should have known what happened on the other side. But this is difficult to accept.
No one within the KPMG conversation doubts that the only thing KPMG and Moses Kgosana have to sell is their perception and their reputation. Whether Moses ought to have attended a wedding or written an e-mail is a secondary issue. What is becoming clear is the fact that we need to talk about the broken Chinese wall within the auditing and consulting industry.
The issue that looms large is the question of whether it is ever possible for auditors to remain independent when they provide more than an auditing service to a client? The auditing cartel would argue that it is possible. The consulting industry needs to address whether it can ever offer services to competing clients without compromising on quality. McKinsey would argue that it is possible. Evidence would indicate that the auditing industry and the consulting industry are completely wrong.
The fact that McKinsey is inherently corrupt is not a new story – this has been known for a long time. In the Eskom context, the McKinsey corruption is of no surprise. What is particularly interesting is how McKinsey manages to convince Eskom that it knows how to assist Eskom when billions later – it still hasn’t managed to fix Eskom. Regarding the R266 million that McKinsey instructed Eskom to pay to Trillian, McKinsey needs to answer. But because this is South Africa – McKinsey will get away with its corruption, and they will keep their R1 billion tender for the next 4 years.
At the end of it, Eskom will realise it still doesn’t know how to run its business properly – and another consulting tender will be issued for McKinsey to win.
In the meantime, KPMG will recover. Moses Kgosana’s reputation will be shattered. More board dismissals will follow. When Rajat Gupta left prison, the Indian business community embraced him as the prodigal son. Moses Kgosana is unlikely to be embraced as passionately by the South African business environment. So yet again – the friends of the man who delivered that uninspiring address on 8 January 2013 have claimed another black business leader. It is remarkably ironic that Moses now shares a history of disgrace with a guy called Gupta who once ran a consulting firm that is also part of the story that is slowly destroying the reputation of Moses Kgosana. But this is not the last we have heard of Moses.
On 15 June 2000, Tito Mboweni appointed the Davis Panel to check whether the ABSA apartheid loan was illegal or not. The Davis panel found that the loan was illegal. This ABSA loan will now be subject to the court process after the Public Protector stated that ABSA must pay back the loan.
One of the members of the Davis panel that found that the ABSA loan was illegal was of course – Moses Kgosana…