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KPMG to donate R40m it earned in fees from Gupta-related entities to NGOs

NEWS ANALYSIS

KPMG on Friday said it will pay back a R23-million fee for a Sars report, and would donate the R40-million it earned in fees from Gupta-related entities to education and anti-corruption NGOs.

This follows the conclusion of the audit firm’s internal investigation, led by its international network, into work it had done for the controversial Gupta family.

A raft of leadership changes at the firm was also announced on Friday. Nine people have left KPMG, including the chief executive and the chief operating officer.

The firm said it found no evidence of illegal or corrupt activity through its investigation. However, the investigation had found work that fell “considerably short” of KPMG standards, the firm said.

The investigation looked into both the Sars report as well as KPMG’s association with the Guptas including the audits, tax advice and the general relationship with the family.

The firm launched an internal investigation after leaked emails showed a Gupta-owned company, Linkway trading had used laundered money from the state to pay for a family wedding. KPMG audited the financials of Linkway and KPMG executives attended the wedding.

Cranston said the investigation into the audits of Gupta entities found the firm had fallen short and “failed to apply sufficient professional scepticism and to comply fully with auditing standards”.

However, KPMG found no evidence of dishonesty or unethical behaviour on the part of the auditors involved. The investigation however established that management of many Gupta entities responded misleadingly and inadequately to enquiries about the nature of relationships and the commercial substance of significant unusual transactions.

KPMG South Africa said it regretted that its association with the Guptas and their business entities “went on for far too long”.

The firm said it fully understood the criticism of the attendance of four partners at the Gupta wedding – “while the investigation concluded that their attendance was not a breach of auditor independence rules, we accept that the partners should not have attended this wedding,” Cranston said.

Regarding tax advice KPMG had given to Gupta entities. The firm’s investigation found nothing to stand up allegations that it had acted in an illegal or improper manner.

KPMG International said it had identified a series of misrepresentations from the Guptas over the period that KPMG provided tax advice.

The firm also said it responsibilities relating to the listing of Gupta-owned Oakbay Resources and Energy, and the acquisition of the Optimum coal mine were limited and above board.

However, KPMG said it processes which reassess its clients annually lacked the necessary rigour when it came to the Gupta’s. Certain “red flags” were not appropriately considered and addressed Cranston said.

The Sars report – entitled the “Report on Allegations of Irregularities and Misconduct” – was produced by the firm on behalf of Sars.

As articulated by Andrew Cranston, a senior partner for the KPMG international network, and now interim chief operating officer, the mandate around the report originally involved an extensive document investigative review and collation of the documentation. But at a later stage the mandate was extended to include conclusions, recommendations and legal opinions.

KPMG International concluded that KPMG South Africa did not properly grasp the new risks associated with this change and quality controls were not performed as expected – in particular the work was not subjected to second partner review, which KPMG standards require, Cranston said.

The Sars report refers to legal opinions and legal conclusions as if they are opinions of KPMG South Africa, however, providing legal advice and expressing legal opinions was outside of the mandate and expertise of those working on the report. This, KPMG acknowledged on Friday, should have been formulated otherwise.

As a result, certain sections of the report can be read to suggest that former Sars Commissioner, and finance minister, Pravin Gordhan, knew, or ought to have known, of the establishment of the so-called “rogue unit” within Sars. It was not intended to be interpreted this way, KPMG said.

“We recognised and regret the impact this has had. KPMG South Africa had no political motivation or intent to mislead,” said Cranston.

KPMG said it will make its findings available to the investigation launched into its conduct by the Independent Regulatory Board for Auditors.

The firm’s new chief executive officer, Nhlamu Dlomu, said it had been a painful period for KPMG which had fallen short of the standards it sets itself and what the public expects of it.

“I want to apologise to the public, out people and clients for the failings that have been identified by the investigation,” said Dlomu, adding that these events did not represent the firm and its values. “My pledge and promise to the country is that we can and will regain the public’s confidence.”

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