BUSISIWE MAVUSO: Consultants and auditors: where the private sector interacted with the captured state

The composition of boards of directors is a hot topic of late and that’s healthy for our democracy. They play critical functions in both the public and private sectors and transparency is important for the public and shareholders to be able to assess their performance.

All citizens, of course, are effectively the shareholders of state-owned enterprises, with the government they elected having the responsibility of ensuring that SOEs represent their interests. The government appoints boards to ensure they carry out their mandates.

We’ve seen how easily these processes can be subverted by corrupt elements and we’re still trying to recover from the massive damage inflicted on the economy and  SOEs themselves during the state capture era, particularly Transnet, Eskom, Denel and SAA.

That highlights how important it is for all boards of directors, public and private, to have people with integrity along with the requisite skills and expertise to ensure that they can fulfil their mandates. In last week’s column I wrote about findings from a research report that BLSA has commissioned which covered the role that boards of SOEs and private companies played during the state capture era, and measures required to prevent that in future. It focused on the integrity of board members and how the process of selecting them needs to be more rigorous and transparent, while processes to remove those who are not meeting expectations also need to be implemented more regularly.

Once shareholders and citizens are confident that the integrity of all board members is beyond reproach and that the right skills are in place, the boards themselves will be able to function efficiently. It is then their responsibility to ensure that all parts of the entities they oversee are not tainted by corruption. The researchers focus on the roles of consultants and auditors, while emphasising the need in both the public and private spheres for improved education and training for board members, who must be fully aware of what their responsibilities are.

External consultants, they say, were used during state capture to provide plausible deniability for “facilitation payments” made in their name and were often employed without due process. While consultants can be employed to provide strategic input, supplement management capacity and enhance quality of service delivery, “the Zondo findings show that without proper procurement, vetting, supervision and governance, they have the opposite effect”.

Boards of directors need to be far more demanding in requiring a comprehensive needs-based analysis for hiring consultants as well as justification for why the function cannot be filled in-house. More transparency is also required over their fees: “If expenses cannot be disclosed in the public domain, there is reason to be suspicious.” The report recommends that “a new transparency regime would also be warranted at companies where consulting contracts are in place with values exceeding, for example, more than 1% of annual turnover”, with details of such contracts published in financial statements.

Another area of massive failure during state capture was in the auditing profession  which has the responsibility of assuring that financial statements are free of material misstatement due to fraud. Outside of state capture, auditors also failed to detect or disclose fraud at Steinhoff, Tongaat Hulett and VBS Bank. But in many instances, in both the public and private sectors, auditors were complicit in trying to cover up illicit transactions.

The report also notes that there were numerous instances where auditors of SOEs did raise red flags and reported irregularities, but the regulators or law enforcement authorities failed to act, reflecting how widely the tentacles of corruption had spread.

Among numerous detailed recommendations to strengthen the integrity of the auditing profession, the researchers highlight a need to appoint procurement specialists to internal audit teams who should be heavily involved in procurement activities rather than just providing assurance. “It is critical they have a deep understanding of the value of the work being done so as to detect instances of overcharging.”

The consulting and auditing professions are two segments where the private sector interacted directly with corrupt elements within SOEs and the common factor was a failure of ethical leadership. Ethical leadership includes honesty, ubuntu, and integrity and the post-state capture period, where corruption has continued to run rampant, shows that this is still sadly lacking in South Africa.

Strengthening the processes to ensure ethical leadership on the boards of SOEs and private companies is just one of many measures needed that will prevent corrupt elements from attaining positions of influence. Guided by Judge Raymond Zondo’s recommendations, BLSA is working on presenting a holistic set of reforms proposals aimed at eliminating corruption in other areas and we look forward to assessing government’s response to the state capture reports, with President Ramaphosa scheduled to present that to parliament next month.

• Mavuso (@BusiMavuso2) is CEO of Business Leadership SA. She resigned from the Eskom board last week, shortly before public enterprises minister Pravin Gordhan appointed the new board.