JSE-listed asset manager Sygnia has fired KPMG over its alleged role in state capture – the first private sector pressure that has been brought to bear on global firms accused of having questionable business relations with the Gupta family.
A series of leaked emails, called the Gupta Leaks, have exposed KPMG for its role as the auditors of the Guptas’ Linkway Trading – from which cash from the state that was earmarked for the Gupta-linked Estina dairy project in the Free State was diverted to cover the expense of a lavish family wedding.
KPMG also allowed Linkway to account for the wedding as a business expense, so no tax was paid on the Free State government funding.
On Thursday morning, Sygnia, with a market value of R1.4-billion, notified KPMG that it would terminate its services as external auditors. This followed a meeting between the parties on Tuesday, in which Sygnia asked hard questions of KPMG about its business with the Gupta family to ascertain how it could have missed “a big money-laundering exercise”.
“The meeting didn’t dispel, in my mind, the perception that adequate oversight was not exercised,” Sygnia chief executive and South Africa’s richest woman Magda Wierzycka told the Mail & Guardian. She stressed, however, that the move was in no way a reflection on the KPMG audit team that had served Sygnia.
KPMG South Africa chief executive Trevor Hoole expressed his disappointment at Sygnia’s decision to end their relationship.
Following the meeting, Wierzycka said Sygnia believed there remained many unanswered questions on KPMG’s relationship with the Gupta-related businesses.
One of these is why, in its audit of Linkway, KPMG did not take a closer look at a R30-million payment used to fund the wedding. The leaked emails indicate that the true source of the money – after being filtered through a number of local and offshore entities – was Free State government funds.
Sygnia also remained troubled about the manner in which a KPMG audit for the South African Revenue Service (Sars) was conducted. Sars paid KPMG to investigate allegations about the so-called “rogue unit”. The audit was criticised for its limited terms of reference and for making damning findings against former finance minister Pravin Gordhan and others, without including their version of events.
Wierzycka said she also remained deeply concerned about the manner in which the Gupta-owned Oakbay Resources and Energy listing was handled, which she said has resulted in significant losses to South African taxpayers.
“When listing, there is robust engagement with all parties – sponsors and auditors – and you argue rigorously over the listing of a company and what a fair value might be,” said Wierzycka.
Reports have since emerged suggesting the share price was fixed. This would have prejudiced the Industrial Development Corporation (IDC), which converted part of a loan into equity in the company. Oakbay Resources recently delisted, unable to find a sponsor, and the IDC says it will likely have to write down the debt.
Although a process against KPMG has been launched by the Independent Regulatory Board for Auditors (Irba), Wierzycka said she did not believe Sygnia could delay a decision until investigations were concluded as the timelines were too open-ended.
Wierzycka said clients exerting pressure on firms entangled in the Gupta Leaks was one of the few options left in light of a seemingly broken criminal justice system – at least for to bringing those involved in state capture to book. “If the right things were happening in South Africa right now, it wouldn’t be up to me to exert pressure,” she said.
The M&G pressed KPMG International about how it intended to deal with the recent revelations in South Africa, and minimise the reputational harm that could be caused by the allegations, but it referred us back to KPMG South Africa for comment.
The Irba investigation in itself was quite extraordinary, said David Loxton, a partner at law firm Dentons, noting it showed how seriously the body took its oversight role.
If Irba found against KPMG, he said, the ultimate sanction could be the suspension of the firm’s executive auditors, and in effect its own licence could be suspended. “Irba has a strong investigations team in house. If prima facie evidence is uncovered, it will run like a full-on trial and the likes of KPMG would come with its own high-powered senior counsel,” said Loxton.
“The risk they run [is that] it’s not one aberrant auditor. It’s common cause the chief executive attended the Gupta wedding,” said Loxton, referring to former KPMG chief executive Moses Kgosana’s presence at the Sun City wedding hosted by the Gupta family.
“Then he almost makes it worse, writing to the Guptas for advice on how to deal with the media,” said Loxton, referring to further emails between Kgosana and Atul Gupta.
KPMG said the wedding attendance was approved by its risk management and executive committee at that time. Accommodation and travel costs were borne by the firm and it was satisfied that its independence had not been impaired.
If, indeed, KPMG is subjected to an Irba trial, the implications could conceivably lead to a flight of clients in South Africa and abroad – especially those with South African links – Loxton said.
Irba announced it had launched an investigation into KPMG on June 30. An Irba spokesperson was unable to provide further comment this week, saying the investigation was still in its early stages.
The South African Institute of Chartered Accountants (Saica) has joint jurisdiction with the Irba, given that auditors are necessarily chartered accountants. Depending on the transgression, its disciplinary committees may order penalties that range from a R500 000 fine to permanently disqualifying an individual from applying for membership.
Saica said once the outcome of the Irba investigation is known then its own disciplinary process will activate to sanction any chartered accountant found to have acted unprofessionally.
Unlike other corporates entangled in the state capture web – such as McKinsey, SAP and Software AG – KPMG is unlikely to face repercussions from any global authority.
The matter seems outside the jurisdiction of United States authorities, and “there are simply no other countries with the appetite for this kind of thing”, said Loxton.
In response to the M&G’s questions, KPMG strongly refuted allegations that it was involved in state capture. It noted that at no stage was it appointed as the auditor for any offshore entities named in the email leaks, nor did it audit or have know-ledge of other Gupta-linked entities such as the dairy farm project.
KPMG also strongly refuted that it was involved in, or condoned, any alleged money-laundering activities. It said its audits are conducted in accordance with international auditing standards.
KPMG said it resigned as auditors to the Oakbay Group entities in South Africa in April 2016, because of what it perceived at the time as associated risk. Hoole said the firm was fully co-operating with the Irba inquiry.
KPMG may soon feel pressure from other clients. In South Africa it also audits for the likes of Standard Bank, Nedbank and Investec – whose chief executives are part of the CEO Initiative which has been vocal on the issue of state capture.
Standard Bank said it exited relationships where commitment to doing business ethically is lacking, but unless it is required by law, the bank doesn’t comment on individual cases.
Nedbank said it continues to monitor its service providers allegedly implicated in the Gupta leaks and was following internal assessment processes. “Should it become necessary to terminate any relationships with service providers or others, we will do so after following our robust internal process.”
Investec noted KPMG are one of its joint auditors for the South African business. “We have engaged with them on this matter and note their statement issued in response to a number of questions in this regard. At this stage we are comfortable with their response. We will, however, assess the outcome of the review by the Independent Regulatory Board for Auditors, and at the time decide if any particular action is warranted.”