The Unholy Alliance · Is Public Accounting Turning a Blind Eye to Corruption and Fraud in Africa?

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Rumors of massive fraud and state capture have plagued the Angolan ruling class for many years. Despite these rumors, Isabel dos Santos – the daughter of Angola’s former president – began to publicly entertain the possibility of running for president. The Western media and global elite in some circles, such as the World Economic Forum often portrayed dos Santos as a visionary and prolific businesswoman. Many branded her as Africa’s entrepreneurial ambassador and a model for woman empowerment.

But, on January 19, 2020, the conversation changed. On this date, the International Consortium of Investigative Journalists (ICIJ) published a report on Africa’s “self-made billionaire” Isabel dos Santos. In what became known as Luanda Leaks, the ICIJ released more than 715,000 documents revealing how dos Santos plundered her country, Angola, often with help of Western accounting and consulting firms.1 Dos Santos’ wealth and reputation finally came under significant scrutiny, though the breaking news was hardly a surprise for many Angolans, including myself. It was only a matter of time that the unholy alliance between poor governance, lack of transparency, and an unaccountable government would be exposed.

Response to the unholy alliance

The unholy alliance is not germane to Angola and our contemporary debates over public finance and transparency. Developed countries, such as the United States, have experienced the fallout of uncouth accounting and even occult financial practices. The Great Depression in the 1920s-1930s, the fall of Enron and Worldcom (among others) in the early 2000s, and more recently the 2008-9 global financial crisis are case and point. In each case, the financial sector was implicated, including accounting firms that were supposed to ensure that financial statements were above board and regulations were followed. 

In response, efforts for more transparency led to modest new regulations, the creation of institutions to monitor accounting practice and transparency, and mechanisms to hold individuals and organizations accountable for their behavior. For example, in the United States, the Securities and Exchange Commission (SEC) was established in 1934 during the Great Depression to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”2 The Public Company Accounting Oversight Board was formed as a result of the Sarbanes-Oxley Act of 2002 to oversee public accounting firms and to enforce the new regulations.3 Pursuant to Sarbanes-Oxley, auditors who fail to uphold their responsibility of protecting the public may be fined, imprisoned, or lose their license to practice. 

Some analysts suggest that these regulations do not go far enough – and in many cases, they do not – although it was arguably an important first step. In many African countries, however, the response to economic theft has been even less. Instead, in the main, public financial officials and accountants have faced even minor consequences to their actions and regulations improving transparency and accounting practices have not been forthcoming. Rather, accountants have become key allies in schemes to perpetuate and conceal fraud, misinformation, and loot the country with the facade of accountability.

State capture and the Angolan experience

I grew up in a country that historically has held the reputation of being one of the least transparent countries in the world. Transparency International (TI) consistently ranks Angola as one of the most corrupt countries. And, only recently the country experienced a modest elevation according to TI’s yearly index. Angola ranks 146 of 180 countries up from 163 of 180 countries in 2018.4 Of course, the statistics about transparency tell us very little about the impact of the lack of transparency, or the frustrations of many Angolans with underfunded public services, such as hospitals without adequate medicine and staff, ill-equipped schools, as well as endemic corruption that breeds a quid pro quos to cover wages and salaries. Meanwhile, a wealthy Angolan elite with international ties to countries, such as Portugal, amasses fortunes hidden from public scrutiny and fair tax contributions — even in a country with very minimal tax burdens for wealthy.5 This occurs even as the governing elite attempt to raise the tax burden on the middle class and poor Angolans.

Luanda Leaks provides details about this elite and the source of their wealth. The documents show how Isabel dos Santos built a $2.2 billion fortune6 through coordinated efforts to plunder hundreds of millions of dollars from Angola.7 What is most interesting is how she did it. The International Consortium of Investigative Journalists’ report explains that dos Santos was able to “clean dirty money” by setting up a web of complex shell companies and other business structures. She did this to conceal the origins of the money and avoid taxes and fees. But, she did not act alone nor was she the sole mastermind. Dos Santos worked with consulting companies and public accounting firms, including PricewaterhouseCoopers, KPMG, and Boston Consulting to develop her schemes without any red flags being raised.8

Accounting without conscious

In South Africa, KPMG, a ‘big four’ accounting firm, was immersed in a profound crisis that shook public confidence in the South African accounting profession. The company had misled the South African Revenue Service and was argued guilty for its involvement with the former President, Jacob Zuma, and his Gupta allies. In this case, the accusation was that the Gupta family plundered South Africa’s treasury more than $7 billion.9 Several partners of KPMG were found guilty of dishonesty, negligence, and breach of auditor independence.10  Later in 2018, KPMG apologized for its role in misleading investors and asked for a second chance to rebuild trust with the South African business community.

Back in Angola, the dos Santos case is not an isolated occurrence. Rather than an exception, it has become the rule for public accounting firms to seek increased revenue in this corruption permissive environment. Often, accounting firms have taken risky audits or clients whose financial management lacks integrity. Many major accounting firms accept clients when it was widely known – even by Angolan people — that clients engaged in corruption, illegal activity, and money laundering.

These cases are not only happening in Angola or South Africa. It is almost everywhere on the African continent, as well as in many developing countries the world over. Due to the weaker regulatory environment and institutions, international public accounting firms get away with their mistakes and aiding and abetting crimes. In Kenya, two companies, Sino-Forest and Steinhoff International Holdings, audited by Ernst and Young and Deloitte respectively showed audit failure leading to the former company losing 95% of its share value and the latter declaring bankruptcy. Ernst and Young failed to detect the inexistent timber that Sino-Forest claimed in its balance sheet, and Deloitte failed to detect a $5.5 billion hole in Steinhoff’s account. In Ghana, Deloitte was fined almost half-million dollars for the failure to comply with auditing standards that resulted in seven insolvent banks. These are only a few of the instances when auditors deliberately disregarded their responsibility to protect certain key relationships.

In some cases, it is argued that the public accounting firms are only applying the laws and regulations on the books in the countries they work – and sometimes this is true given weak regulations in place. But, this short-sided argument has the potential to tarnish the image the accounting firms themselves and abnegates the power that accounting firms have in selecting their clients and forcing their clients to change their behavior. This goes beyond a sense of morality and ethics that must accompany their behavior. Instead, the experience has generally been accounting without consciousness.

Breaking the unholy alliance 

The responsibility for financial malpractice and a lack of transparency involves firms based in Western countries, and Western countries have largely been complacent. It is suggested that international accounting firms submit to regulation for their overseas exploits. For example, firms with a foreign presence would have to prove that their practices comply with a generalized and recognized standard of accounting practice regardless of the foreign countries’ regulatory environment. Of course, this may mean that international auditing firms lose business because they refuse to play by sub-par accounting standards in permissive environments. However, the move could induce more convergence across countries in terms of the regulatory environment. Or, due to a lack of international auditor presence, it may become a reason for levying more restrictive economic relations on the targeted country that refuses to invest in improved regulatory frameworks.

Moreover, countries with adequate experience with regulation should work closely with regulators in permissive environments to ensure that accounting and auditing principles are accepted and minded. Also, reputable international organizations should avoid lending their credibility to actors openly known to be unethical or involved in corruption in African countries. Dos Santos is one of the many examples. The World Economic Forum often invited dos Santos to speak despite many concerns about how she built her empire. In short, vigilance should be the norm for African countries and the countries and firms that operate and have relationships on the continent.

Second, international accounting firms operating in developed countries should invest in building capacity in their overseas offices. Moreover, emphasis should be given to ethical and professional conduct to ensure compliance with generalized standards, laws, and regulations. The investment in capacity building should also be in giving accountancy firms the ability to advocate for an improved regulatory environment in the countries they conduct business. The lack of institutions and regulatory frameworks is not an alibi to behave poorly and unethically.

Third, and perhaps most obvious, regulators, accounting and auditing standard-setters in the African countries should invest in capacity building and build trust-worthy systems that hold individuals and organizations accountable for their actions. This is more than passing robust regulations. It is about allocating resources to train accountants and auditors, funding institutions to oversee public accounting practice, developing mechanisms for review of auditors’ work, and setting minimum requirements for education, experience, licensing, and continuing education in the accounting profession. 

African countries face the challenge of promoting and enforcing ethical financial standards and transparency. Often there is an overreliance on accounting firms and professionals that operate in a weak regulatory environment to “self-regulate” and protect the public interest and exercise due care and professional judgment. However, in many cases, including Angola, this has not been the norm. In response, there must be a serious conversation about the regulatory environment. 

It is necessary that actors – public and private – whether in Africa or overseas to join forces and work together to protect not only the accounting profession but especially the people of Africa. When accountants and auditors do their job in a well-regulated environment, broad-based economic and social improvement is possible. Hopefully, Luanda Leaks serves as a lesson to African regulators, public accounting, and international observers of the need for stronger accounting controls and a culture of accountability and transparency, and ethical leadership. 

About the Author

  • I am a Pan-Africanist excited about the prospects of Africa reinventing the meaning of development. At the core of my passion, I seek to share with the world how corporate governance can maintain social responsibility in Africa.

  1. International Consortium of Investigative Journalists (2020). Read The Luanda Leaks Documents. Accessed from <https://www.icij.org/investigations/luanda-leaks/read-the-luanda-leaks-documents/> Feb 2020.
  2. U.S. Securities and Exchange Commission (2019). What We Do. Accessed from <https://www.sec.gov/Article/whatwedo.html > Jan 2020
  3. U.S. Securities and Exchange Commission (2019). Public Company Accounting Oversight Board. Accessed from <https://www.sec.gov/fast-answers/answerspcaobhtm.html> Jan 2020.
  4. Transparency International (2019). Angola. Accessed from <https://www.transparency.org/country/AGO> Jan 2020.
  5. International Consortium of Investigative Journalists (2020). Western Advisers Helped An Autocrat’s Daughter Amass And Shield A Fortune. Accessed from <https://www.icij.org/investigations/luanda-leaks/western-advisers-helped-an-autocrats-daughter-amass-and-shield-a-fortune/ > Feb 2020.
  6. Forbes (2020). Angolan Billionaire’s Assets Frozen By Country’s Court Worth Hundreds Of Millions Of Dollars. Accessed from <https://www.forbes.com/sites/kerryadolan/2020/01/03/angolan-billionaires-assets-frozen-by-countrys-court-worth-hundreds-of-millions-of-dollars/#79ddf41d7acb> Jan 2020.
  7. International Consortium of Investigative Journalists (2020). How Africa’s Richest Woman Exploited Family Ties, Shell Companies And Inside Deals To Build An Empire. Accessed from <https://www.icij.org/investigations/luanda-leaks/how-africas-richest-woman-exploited-family-ties-shell-companies-and-inside-deals-to-build-an-empire/> Jan 2020.
  8. International Consortium of Investigative Journalists (2020). Western Advisers Helped An Autocrat’s Daughter Amass And Shield A Fortune. Accessed from <https://www.icij.org/investigations/luanda-leaks/western-advisers-helped-an-autocrats-daughter-amass-and-shield-a-fortune/ > Feb 2020.
  9. Vanityfair (2019). “STATE CAPTURE”: HOW THE GUPTA BROTHERS HIJACKED SOUTH AFRICA USING BRIBES INSTEAD OF BULLETS. Accessed from <https://www.vanityfair.com/news/2019/03/how-the-gupta-brothers-hijacked-south-africa-corruption-bribes> Feb 2020
  10. Financial Times (2019). Former KPMG partner struck off South Africa register over Gupta audits. Accessed from <https://www.ft.com/content/2591c996-5157-11e9-9c76-bf4a0ce37d49> Jan 2020.
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