KPMG ignored red flags

15 September 2017 - 15:40 By Graeme Hosken
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International auditing firm KPMG has admitted that senior executives ignored "red flags" relating to the accounts of the controversial Gupta family.

The admissions were made in Johannesburg on Friday morning. The company also announced the resignations of nine of the firm's top South African executives. They include KPMG SA's chief executive officer‚ Trevor Hoole‚ and chief operating officer Steven Louw.

The other executives who have resigned include:

• KPMG SA board chairman - Ahmed Jaffer;

• KPMG SA Audit and Board member - Mike Oddy

• KPMG SA Head of Tax and Board member - Muhammad Saloojee

• KPMG SA Former head of Forensic and Board member - Herman de Beer

• KPMG SA Head of Deal Advisory - Johan Geel

• KPMG SA Risk Management Partner for Deal Advisory - Mickey Bove

KPMG SA‚ according to the company's interim chief operating officer‚ Andrew Cranston‚ is also pursing disciplinary action and seeking the dismissal of Jacques Wessels‚ the company's lead partner on the audits of the non-listed Gupta entities.

Cranston said there had been "red flags" but they had not been acted on‚ "which was a mistake".

His admission follows him saying the company was recalling its findings‚ recommendations and conclusion of KPMG SA's report into bogus allegations of a rogue spy unit operating within South African Revenue Service (SARS).

The report was instrumental in the removal of finance minister Pravin Gordhan from his ministerial position on the basis that he would have known of the existence of the rogue unit‚ while he was the SARS commissioner.

Asked whether KPMG would pursue criminal complaints against those who had resigned‚ Cranston said the firm had not committed any criminal acts. "We have found no proof of this."

His assertion comes a year after the business rescue practitioners for the Optimum Coal Mine‚ which KPMG SA helped Guts Tejeda Resources acquire‚ laid a corruption complaint with the Hawks in July last year‚ after the business rescue practitioners became suspicious of the financial transactions used to buy the mine.

The sale went through less than three months before the practitioners laid their criminal complaint.

Cranston said KPMG SA would also enhance its corporate governance processes.

These‚ he said‚ may include adopting additional recommendations set out in the King IV Report on Corporate Governance for South Africa and the appointment of a senior‚ independent‚ non-executive director to complement the current board members.

"This will assist the KPMG South Africa board and leadership team to deliver the actions necessary to restore public trust in the firm."

Cranston said in terms of the auditing work it had done for the Gupta companies‚ "it is evident from the investigation that the audit work in certain instances‚ including Linkway Trading‚ fell well short of the quality expected‚ and that the audit teams failed to apply sufficient professional scepticism and to comply fully with auditing standards".

Linkway Trading was used by the Guptas to pay for the family's lavish Sun City wedding. The wedding‚ which cost R30-million‚ was paid for with money intended for indigent Free State farmers.

He said despite the deficiencies in the audit work‚ KPMG International found no evidence of dishonesty or unethical behaviour on the part of the audit partners and audit teams working on the audits for the Gupta group of companies.

"However‚ the investigation established that management of many Gupta entities responded misleadingly and inadequately to audit teams’ inquiries about the nature of related party relationships and the commercial substance of significant unusual transactions. "While the firm’s last audit opinions for the Gupta group of companies were for the year ended 28 February 2015‚ KPMG South Africa should have resigned as auditors earlier than March 2016. KPMG South Africa regrets that its association with the Guptas and their business entities went on for far too long."

He said KPMG International would work with its South African arm to improve audit quality and risk management processes.

Despite saying that KPMG was subjected to inspection on a regular basis by multiple regulators‚ Cranston could not say why the "red flags" were not detected and then acted on.

In terms of questionable tax advice KPMG may have provided to the Guptas‚ he said they had sought expert legal advice over whether KPMG had acted unlawfully but nothing had been found to suggest this.

"The KPMG International investigation identified‚ based on subsequent information‚ a series of misrepresentations from the client over the period that KPMG South Africa provided tax advice.

"The majority of the tax services provided by KPMG South Africa to the Guptas and their entities was routine tax compliance work. These tax compliance activities were reviewed to confirm they were of a professional quality and consistent with the tax advice given‚ where applicable."

Cranston added that tax advisory services provided to the Guptas since the start of the tax advisory engagement in 2014 were also reviewed‚ including the technical quality of the services‚ to see whether it was in line with the company's global tax principles.

He said nothing was found to suggest KPMG was involved in activities such as money laundering‚ tax evasion‚ corruption or any other illegal activity.

South Africa's Independent Regulatory Board for Auditors‚ along with the Hawks‚ are investigating the Guptas' businesses‚ with criminal complaints set to be laid with financial and law enforcement authorities in the United States and United Kingdom.

Cranston said when it came to advice KPMG SA provided to the Guptas in the Optimum coal mine acquisition‚ they gave "limited" transaction support services. He denied KPMG SA provided advice in connection with the raising of funds to pay for the transaction.

Cranston instead blamed the Guptas’ group representatives who deal with the financials. "The representatives increasingly undertook commercial discussions with the seller’s representatives in the absence of KPMG."

He added that KPMG SA was not always made aware of the details of these discussions.

Cranston acknowledged‚ however‚ that KPMG SA became aware of information that called into question the Guptas’ integrity.

"This information was not adequately dealt with by a number of senior leaders in the firm and was not taken into account when assessing whether to continue to perform work for the Gupta group‚” he said.

"The KPMG investigation did not‚ however‚ find any evidence of participation by KPMG SA‚ partners or staff in illegal activity or corruption as a result of work performed or as a result of the information which became available to them."

He admitted the relationship with the Guptas lacked the necessary rigor‚ which prevented the company from ending their work with the Guptas earlier than they did.

"The investigation found that there were certain red flags that came to KPMG SA attention regarding the integrity and ethics of the Guptas that were not appropriately considered and addressed. Had one or more of those red flags been heeded‚ KPMG SA would have stopped working for the Guptas earlier."

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