KPMG comes clean but the dirt sticks

The firm’s mea culpa underestimated the anger that the effects of its negligence would unleash

The bombshell statement by KPMG International on its internal investigation of KPMG South Africa opened a can of worms rather than exonerating the firm. As companies continued to drop KPMG throughout the week, it’s hard to see how the firm will ever clear its name.

The key findings of KPMG’s own investigation show, at the very least, the local branch did a poor job and in many cases fell far short of good auditing standards. This applies to the work it did for the Gupta family and the South African Revenue Service (Sars).

The Sars report commanded airtime this week because it was used to shore up the allegations that were used to hound senior executives out of the tax authority and was instrumental in the lobbying to remove Pravin Gordhan as finance minister.

KPMG admits it went wrong: it allowed Sars to change the parameters of the work required at a very late stage and agreed to this without consulting its risk management division, as it should have. KPMG then arrived at legal conclusions and findings that it did not have the expertise for.

The language it used in making findings on Gordhan and the socalled Sars rogue unit was unclear and open to interpretation. The evidence in the documentation provided to KPMG also did not support the firm’s findings, which the firm has now withdrawn. In addition, the work should have been reviewed by a second partner.

The report cost the taxpayer R23million, which KPMG has offered to pay back. But the cost to the country was far higher — estimated at billions of rands. The removal of Gordhan triggered a ratings downgrade, which increased the cost of government debt and affected the economy as a whole.

There is a clear case to be made: KPMG is partly responsible for some of the economic troubles South Africa has suffered and will suffer.

Gordhan is also reviewing his legal options.

In KPMG’s work with the Guptas, there are many cases of the firm simply not doing its job properly and not complying with auditing standards.

KPMG International found the management of many Gupta entities gave misleading and inadequate responses to auditing team inquiries.

A number of red flags about the ethics and integrity of the Guptas also came to the firm’s attention, KPMG admits, but none were heeded.

During the time KPMG did work for the Guptas, it said “it became aware of information which called into question the integrity of the Guptas”. This information was not adequately dealt with by senior leaders in the firm. KPMG said it usually reassesses its clients annually, and even more frequently if it is deemed necessary. But this never resulted in the firm dropping the Guptas’ business because the information was not taken into account, the firm admits.

KPMG claims it can find no evidence of illegal or corrupt activity on the part of its auditing teams dealing with the Guptas. But leaked emails show KPMG staff were aware that something was amiss.

In the case of Linkway Trading, a Gupta entity that used R30million from the Free State government, laundered through offshore accounts, to pay for a lavish Sun City wedding for a niece of the Gupta brothers, KPMG correctly identified the source of the funds and allowed Linkway to write it off as a business expense.

A junior auditor, in an email to Jacques Wessels, the KPMG audit partner responsible for auditing the unlisted Gupta companies, warned that the wedding costs were unlikely to be related to business activities, but the warning had no effect.

Asked about this, KPMG South Africa’s interim chief operating officer, Andrew Cranston, told a media briefing that he would have to be shown the emails so he could respond to the details.

KPMG International said the South African operation was never involved in putting a value on the Gupta’s Oakbay Mineral Resources and Energy’s stock exchange listing. But it did issue an audit opinion in respect of the historical information of the company, and relied on a report from a competent authority, the Mineral Corporation Consultancy.

But Oakbay has previously invoked the power of the KPMG name, referring to the firm’s audit opinion when asked about the fair value of its company shares on listing.

The Industrial Development Corporation, a state-run development financier, invested in Oakbay and converted part of a loan into equity on listing, with its faith placed in a wider technical valuation.

Cranston said the Guptas were a small client and “there are a lot of circumstances around that”, but the many findings of substandard work did not reflect on KPMG’s standards as a whole, he said.

Now KPMG is laying the blame for its woes on one individual. Asked why the standards were so poor in these cases, Cranston said KPMG’s engagement partner on the audits of unlisted Gupta entities, Wessels, “did not adequately understand and reflect the risks”.

KPMG is taking disciplinary action against him.