<\/p>\n
I jumped the turnstiles, evading reception and security at Business Day\u2019s gleaming new Rosebank offices in 1997 and slapped an unsolicited article on the editor\u2019s desk, turned tail and left with the curt instruction: \u201cUse it, or don\u2019t.\u201d<\/p>\n
Some days later, the piece was published with the title \u201cCorporate Governance Must Be Prescribed\u201d. I argued that the first King Committee report, published in 1994, adopted a non-prescriptive approach and was not merely short-sighted \u2013 it was wrong.<\/p>\n
Read:
SA faces long haul to roll back scourge of corruption
Only people missing at SA graft hearings are accused<\/p>\n
In the 29 years since, the core argument has not been meaningfully challenged, and subsequent developments suggest a different path may have been warranted.<\/p>\n
South Africa has seen a passing parade of corporate collapses, both immediately pre-King and post-King \u2013 such as Fundstrust (1991), Tollgate Holdings (1992), Macmed Healthcare (1999), LeisureNet (2000), Regal Treasury Bank (2001\/2002), Saambou Bank (2002), Fidentia (2007), Sharemax (2010), African Bank (2014), Steinhoff International (2017), VBS Mutual Bank (2018), EOH Holdings (2019) and Tongaat Hulett (2019-2022).<\/p>\n
The cumulative corporate value destroyed is estimated at R400 billion-plus.<\/p>\n
This excludes investment fraud and Ponzi schemes, to which you can add R50 billion to R70\u00a0billion-plus.<\/p>\n
It also excludes state-owned enterprises with R1.03 trillion in\u00a0Special Investigating Unit (SIU)\u00a0Directorate for Priority Crime Investigation (DPCI)\u00a0investigations.<\/p>\n
Read:
Claims against BHI Trust balloon \u2013 and keep going \u2013 as Ponzi scheme unravels
Behind the BHI Trust scandal<\/p>\n
And it excludes small and medium-sized enterprises (SMEs), which account for 98% to 99% of registered businesses and, together with unlisted and informal enterprises, contribute 50% to 60% of GDP.<\/p>\n
\u2018Essential\u2019 \u2026 yet lacking<\/p>\n
The non-prescriptive model championed by Judge Mervyn King \u2013 largely borrowed and adapted from the UK Cadbury Report and the US Treadway Commission \u2013 was presented as essential for a young democracy navigating post-apartheid southern Africa.<\/p>\n
Prescription, it was argued, would have a \u201cpossible braking effect\u201d on businesses\u2019 ability to compete and would \u201cpotentially serve to perpetuate and entrench past inequalities\u201d.<\/p>\n
I found the statement deeply concerning at the time. The data has since made it difficult to defend.<\/p>\n
The key limitation in King I was obvious: it was explicitly a participative model that delegated interpretation and implementation to the very people best placed to cause the most significant damage \u2013 those with the greatest financial control.<\/p>\n
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I countered with hard data from the 1996 Wells Report, then the largest-known private study of fraud in the world.<\/p>\n
It showed median losses of $60 000 caused by non-managerial employees, $250 000 by managers, and $1 million by owner\/executives. The loss differential was almost entirely attributable to the level of financial control exercised.<\/p>\n
I argued that \u201cthe buy-in suggested by the King report allows too much leeway in the practical interpretation and implementation of its recommendation \u2026 to have any meaningful effect as even a partial response to the prevailing climate of economic lawlessness\u201d.<\/p>\n
I also argued that \u201cnonprescriptive corporate governance may serve to ensure the perception that corporate governance itself is the perpetuation and entrenchment of past inequalities\u201d.<\/p>\n
Confict and chasm<\/p>\n
The reports were commissioned by the Institute of Directors; King himself had resigned from the bench in 1980 as an \u201cact of conscience\u201d and later held executive roles in major companies \u2013 an arrangement I viewed as inherently conflicted.<\/p>\n
Elements of the King philosophy found their way into the Companies Act 71 of 2008 \u2013 most notably the codification of directors\u2019 fiduciary duties (sections 76 and 77), audit committees for public interest entities (Section 94), enhanced financial reporting, and the \u201capply or explain\u201d governance framework.<\/p>\n
The act also introduced director disqualification provisions, personal liability under Section 77, reckless trading under Section 22, and civil remedies under Section 218(2).<\/p>\n
In theory, very strong. In practice, enforcement is limited, cases are rare, and deterrence modest.<\/p>\n
South Africa does not lack corporate governance law; it lacks mandatory consequences rather than optional ones.<\/p>\n
While the country possesses a world-class legislative and guiding framework, a \u2018chasm\u2019 exists because the most comprehensive standards are not always legally binding.<\/p>\n
The auditing profession\u2019s original sin and its\u00a0tragic consequences<\/p>\n
The Masterbond collapse and the Nel Commission of Inquiry into the Affairs of the Masterbond Group and Investor Protection in South Africa\u00a0of 1997-98 proved the point at tragic human cost.<\/p>\n
The Nel Report exposed \u201cserious deficiencies in the South African supervisory system and in those sections of the Companies Act which were designed to protect investors\u201d.<\/p>\n
It also exposed \u201ca significant degree of dishonesty, inefficiency, lack of professional integrity and lack of independence on the part of some of the auditors involved\u201d.<\/p>\n
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It investigated not only Masterbond but a string of similar collapses \u2013 Owen Wiggins Group, Cape Investment Bank, Supreme Group, Alpha Bank, Prima Bank and others \u2013 all built on opaque participation bond schemes and phantom investments.<\/p>\n
Twenty-two thousand investors lost R650 million.<\/p>\n
Sixteen pensioners committed suicide after discovering their life savings had vanished.<\/p>\n
Clearly, at some point the question I posed in the closing paragraph of my Business Day article of November 1997 must be asked: \u201c[W]hether we can afford not to legislate corporate governance and whether such legislation would have the effect of hampering the economy any more than nonprescriptive corporate governance clearly does.\u201d<\/p>\n
Oversight: The audit profession as a cultural signal<\/p>\n
This is a key point often overlooked. Auditors don\u2019t just detect fraud \u2013 they signal what is acceptable.<\/p>\n
In the Masterbond saga, Ernst & Young, Judge Hennie Nel found (and with few exceptions, auditors in the other cases demonstrated) that they appeared to believe their function was \u201cto assist and protect the management of such company as far as possible\u201d and that \u201cthe end justifies the means\u201d.<\/p>\n
I drew a direct parallel with the R400 million fraud I helped uncover at the Johannesburg Fresh Produce Market in the 1990s \u2013 again with Ernst & Young as the historical auditors, and again with evidence disappearing and reports compromised.<\/p>\n
In the market scandal, the Auditor-General\u2019s investigation was compromised from the outset: the client set the terms of reference, the historical auditor was recommended, key evidence (over 200 items) disappeared, and the final report contained impossible references to transactions dated after the investigation period.<\/p>\n
On 16 January 1998, I wrote in Business Day that current trends in auditing practice were contributing to \u201ca serious erosion of business ethics and standards\u201d.<\/p>\n
The profession\u2019s subscription to the Statement on Auditing Standards Article 5.3.2 \u2013 allowing one firm to provide the annual attest function, internal audit and forensic audit to the same client because it was \u201ceconomical in terms of skill and effort\u201d \u2013 was a serious lapse in responsibility.<\/p>\n
We didn\u2019t ban the conflict; we asked auditors to manage it. Predictably, some went on to monetise it.<\/p>\n
Despite Independent Regulatory Board for Auditors (Irba) independence rules, international standards, JSE listing requirements, King IV and the Companies Act 2008, we still relied on disclosure, judgement, and \u201cindependence in appearance\u201d rather than hard prohibitions and behavioural change.<\/p>\n
We regulated the structure but never reset the mindset.<\/p>\n
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CONTINUE READING BELOW<\/p>\n
Fraud lives here, not in spreadsheets, audit files, or compliance frameworks, but in rationalisation, pressure, and perceived acceptability.<\/p>\n
If leadership sees auditors managing conflicts rather than eliminating them, why would anyone else behave differently?<\/p>\n
The system-wide consequence?<\/p>\n
Auditors tolerate grey areas, executives push boundaries, employees rationalise behaviour, fraud becomes culturally permissible; when fraud is no longer a control failure, it\u2019s a permission structure.<\/p>\n
We keep trying to solve fraud with better rules, better audits, and better oversight, but fraud was never a technical problem to begin with.<\/p>\n
You can rotate auditors, tighten regulations, and increase disclosures.<\/p>\n
But if the system quietly signals that conflicts are manageable instead of unacceptable, fraud doesn\u2019t decrease \u2013 it evolves.<\/p>\n
What the system really says is that conflicts are acceptable, ethics are negotiable, and compliance is enough. It is a system where the outcome \u2013 fraud \u2013 is a permission structure.<\/p>\n
It is one where culture eats control for breakfast.<\/p>\n
This is the first article in a three-part series.<\/p>\n
* Bart Henderson is a veteran fraud risk specialist and forensic investigator with nearly three decades of experience at the highest levels of financial crime detection, investigation, and litigation support across South Africa and beyond.<\/p>\n
An original official research partner for the New Partnership for Africa\u2019s Development (Nepad)\u00a0African Peer Review Mechanism, Henderson spent over two decades advancing fraud risk methodologies across South Africa and the broader African continent. During this time, he developed and refined what became a pioneering 72 Red Flag\/400 Rule forensic audit and investigation model \u2013 a system that broke decisively from traditional silo-based methodologies and anticipated what is now widely recognised as Enterprise-Wide Fraud Risk Management.<\/p>\n
As a lecturer,\u00a0Henderson\u00a0has presented on the subject at multiple\u00a0white-collar crime symposia and summits\u00a0as a main speaker alongside Judge Willem Heath, Advocate Willie Hofmeyr, Peter Goss, Martin Welz, and others of his generation. He also serves on contract to the Institute of Internal Auditors (SA), the Institute of Chartered Accountants (ZW), AusAID, the Central Bank of Kenya, the Central Bank of Nigeria, and a host of state-owned enterprises throughout Africa.<\/p>\n
In both prosecution and defence environments, he has been advisor, and represented high-net-worth individuals, senior executives, government officials, cabinet ministers, and a former head of state.<\/p>\n
#governance #optional #failure #inevitable #Part<\/p>\n","protected":false},"excerpt":{"rendered":"
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