As has been widely reported, various allegations have been raised with respect to KPMG South Africa’s work on behalf of the Gupta family and work performed in 2014-2015 on the ‘Report on Allegations of Irregularities and Misconduct’ which KPMG South Africa produced for the South African Revenue Service (SARS report).
As a result, KPMG International has conducted a comprehensive investigation. While the investigation did not identify any evidence of illegal behaviour or corruption by KPMG partners or staff, this investigation did find work that fell considerably short of KPMG’s standards.
Based on the results of this investigation, significant actions have been taken and are being announced today with respect to KPMG South Africa. These actions include a series of leadership changes, changes in the governance of KPMG South Africa, and enhanced quality control procedures in certain areas.
Nhlamu Dlomu has been appointed to succeed Trevor Hoole as CEO.
Nhlamu was previously KPMG South Africa’s Head for People and Change. She is a highly experienced partner with extensive client experience leading significant transformation in the Financial Services and other industry sectors in South Africa and overseas.
She has over 17 years’ experience in management consulting, and management roles gained mainly in organizational development and human resources across various industry sectors.
As a former HR Executive for one of the largest banks in South Africa, Nhlamu’s experience spans culture transformation, change management and other people management practices.
“I am very proud to have been named the new CEO of KPMG in South Africa,” Nhlamu said. “KPMG has a long and distinguished record of service in South Africa. Ethics and integrity are fundamental values of KPMG and these will be the guiding principles of my leadership.”
“To this end, my first order of business will be to build a management team committed to these principles.” Nhlamu added, “That team will be announced in the coming days. The skill, experience and energy of KPMG’s new management team will ensure stability and high quality service to our clients. Included on that team will be Andrew Cranston, a senior partner from the KPMG International network, as interim Chief Operating Officer. Andrew is a former CEO of KPMG in Russia and Commonwealth of Independent States, and a former KPMG International COO. I will also appoint another partner from the KPMG International network to serve as the interim Risk Management Partner, to bring international expertise and best practice to improve risk management and quality control for KPMG South Africa.”
The findings of the investigation have reinforced the criticality of a leadership and governance model that sets the right tone from the top, and ensures appropriate accountability and responsibility at every level of leadership within the firm.
The South African Board, working with KPMG International, has taken a series of actions to address both those responsible for specific failures and those who, by virtue of their knowledge and leadership role, should have acted to ensure that those failures ended and appropriate actions were taken.
Trevor Hoole has tendered his resignation to the Board of KPMG South Africa and stepped down as CEO, and Steven Louw has resigned as Chief Operating Officer and Country Risk Management Partner.
“Steven and I have taken the decision to step down, in the best interests of the firm as it rebuilds and moves forward. I absolutely understand that ultimate responsibility lies with me. KPMG South Africa is a firm of hugely talented people and I believe it is the right thing for me to stand down and allow a new CEO to restore public trust and build a firm that once again sets the standard for quality and ethics,” said Trevor Hoole.
In addition, Ahmed Jaffer has resigned from the firm and stepped down as Chairman of the Board. The following partners will be leaving the firm:
Mike Oddy, Head of Audit and Board member
Muhammad Saloojee, Head of Tax and Board member
Herman de Beer, Former Head of Forensic and Board member
John Geel, Head of Deal Advisory
Mickey Bove, Risk Management Partner for Deal Advisory.
KPMG South Africa has decided to take disciplinary action seeking dismissal in relation to Jacques Wessels, the Lead Partner on the audits of the non-listed Gupta entities.
In addition to the leadership changes set out above, KPMG South Africa will enhance its corporate governance processes. These 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.
At present, the role of Risk Management Partner is combined with that of Chief Operating Officer for KPMG South Africa. Going forward, the two roles will be separated to ensure that the Risk Management Partner has sufficient time to focus on this crucial role.
KPMG South Africa is committed to overhaul the firm’s public reporting, including a commitment to publish an annual Transparency Report detailing the firm’s quality processes and controls.
In December 2014, KPMG South Africa was engaged by the South African Revenue Service to perform an extensive document investigative review which resulted in the ‘Report on Allegations of Irregularities and Misconduct’. A version of the report dated 3 September 2015 was leaked and made public on 4 October 2015. The report was accepted as final on 26 January 2016.
This mandate involved an extensive document investigative review and a collation of the documentation. At a later stage, this mandate was extended to the provision of a report which included conclusions, recommendations and legal opinions. As a result, during the course of the engagement, the scope of the work changed. KPMG International has concluded that KPMG South Africa did not properly grasp the new risks associated with this change and consequently the appropriate consultation with risk management did not take place. Importantly, quality controls associated with the version of the report dated 3 September 2015 were not performed to the standard we expect. Specifically, in this instance, our standards require a second partner to review the work done; however, the final deliverable of this work was not subjected to second partner review.
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 the mandate of KPMG South Africa and outside the professional expertise of those working on the engagement. KPMG South Africa acknowledges that such opinions should have been caveated as recommendations of legal advisors and not formulated in the manner contained in the report.
Furthermore, the language used in sections of the report is unclear and results in certain findings being open to more than one interpretation.
As a result, it is possible to read sections 12.1.1, 12.1.2 and 12.1.3 of the “Executive findings and conclusions” contained in the report in a way which suggests that Pravin Gordhan knew, or ought to have known, of the establishment by SARS of an intelligence unit in contravention of the rule of law that was “rogue” in nature. This was not the intended interpretation of the report. To be clear, the evidence in the documentation provided to KPMG South Africa does not support the interpretation that Mr Gordhan knew, or ought to have known, of the “rogue” nature of this unit.
We recognise and regret the impact this has had. KPMG South Africa had no political motivation or intent to mislead. The partner responsible for the report is no longer with the firm. Given the failure to appropriately apply our own risk management and quality controls, that part of the report which refers to conclusions, recommendations and legal opinions should no longer be relied upon. KPMG South Africa has contacted SARS and offered to repay the R23 million fee received for the extensive work performed, or to make a donation for the same amount to charity.
The Forensic practice has since made changes to certain of its controls and methodologies. For example, before accepting contentious engagements, discussion with, and approval by, the firm’s Executive Committee is required. In addition, prior to finalising an investigation report, engagement teams are required to provide anyone who is the subject of the report an opportunity to respond to relevant findings.
With respect to the audits of the Gupta entities, it is evident from the investigation that the audit work in certain instances, including Linkway Trading Pty Ltd, 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.
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’ enquiries 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.
KPMG International will be working actively with KPMG South Africa to improve audit quality and risk management processes. There are a number of processes in place which give us assurance as to the general level of audit quality in the South African firm. The firm has an annual Quality Performance Review program that assesses audit quality. The firm is also subject to inspection on a regular basis by both local and other national regulators. As a result of the KPMG International investigation, KPMG South Africa will supplement these processes with additional audit controls to ensure that KPMG’s standards are met consistently.
KPMG South Africa will fully co-operate with IRBA (Independent Regulatory Board for Auditors) to assist in its investigation.
KPMG fully understands the criticism of the attendance of four KPMG partners at the Gupta family wedding in 2013. 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.
One of the main allegations levelled at KPMG is that it was involved, or complicit, in facilitating tax evasion and corruption by the Guptas and their entities. In particular, it has been alleged that tax advice given to Gupta entities involving offshore structures was illegal or improper.
KPMG South Africa sought independent advice from Peter Solomon SC, a respected tax silk, as to whether it had acted unlawfully or improperly in giving the advice on offshore structures. Peter Solomon says; “In my opinion it is clear KPMG did not act unlawfully or improperly in giving the advice…. I have not seen anything….which constituted KPMG advising its clients to partake in any form of tax evasion, or which even hinted at this possibility.”
The KPMG International investigation identified, based on subsequent information that is now in the public domain, 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.
The 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, the facts upon which the advice was based, and whether the tax advice was consistent with KPMG’s Global Principles for a Responsible Tax Practice.
The investigation concluded there was nothing to indicate that in the delivery of these tax services, KPMG South Africa, its partners or staff, were involved in any activities of the Gupta family involving potential money laundering, tax evasion, corruption or any other illegal activity.
The Oakbay listing
A further allegation made against KPMG is that the firm was involved in the valuation of Oakbay Resources and Energy Limited (ORE) at the time of listing in November 2014, where it has been alleged that the share price was fixed.
The investigation confirmed that KPMG’s responsibility at the time of listing was limited to issuing audit opinions in respect of the historical financial information of ORE for the three years ended 28 February 2014 contained in the Pre Listing Statement (PLS), and for issuing a reporting accountant’s report on the pro forma financial information of the group. KPMG was not engaged to provide a valuation. This role was undertaken by the corporate advisor and the Competent Person.
KPMG South Africa’s report on the pro forma financial information entailed confirming that the pro forma financial information was properly compiled in accordance with the JSE Listings Requirements. As part of KPMG’s responsibilities, the firm also provided advice to ORE on the application of these requirements.
In a mineral company listing, the corporate advisor and the Competent Person are responsible for valuing the assets of the company and setting the listing price. The Competent Person’s Report, prepared by Mineral Corporation Consultancy (Proprietary) Limited and included in the PLS, includes the value of the mineral assets of R6.1 billion and was prepared in accordance with Section 12: Mineral Companies of the JSE Listings Requirements.
Advice on the Optimum deal
KPMG South Africa provided limited transaction support services to the Guptas in connection with their interest in acquiring the Optimum Coal Mine (OCM) from Glencore. These services included approaching Glencore to express interest in acquiring OCM, and subsequently assisting with early negotiations with the Business Rescue Practitioners appointed by Glencore. The firm also built a financial model reflecting assumptions to assist in the development of a purchase price offer.
Limited financial and tax due diligence services were performed, as well as assistance in reviewing the share purchase agreement drafted by Glencore’s legal advisers. KPMG South Africa did not provide any advice in connection with the raising of funds to pay for the transaction.
As the transaction progressed, representatives of the Gupta group were increasingly undertaking commercial discussions with the seller’s representatives in the absence of KPMG. KPMG South Africa was not always made aware of the details of these discussions.
During the course of the engagement KPMG South Africa became aware of information which called into question the integrity of the Guptas. 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.
The KPMG Investigation did not, however, find any evidence of participation by KPMG South Africa, partners or staff in illegal activity or corruption as a result of work performed on the engagement, or as a result of the information which became available to them.
The firm has a requirement to re-assess its clients annually, and more frequently than that if significant events or matters come to the firm’s attention. In relation to the Guptas, over a number of years this process lacked the necessary rigour which prevented KPMG South Africa from ceasing work for the Guptas at an earlier date.
The investigation found that there were certain red flags that came to KPMG South Africa’s attention regarding the integrity and ethics of the Guptas that were not appropriately considered and addressed at that time. Had one or more of those red flags been heeded, KPMG South Africa would have stopped working for the Guptas earlier.
KPMG South Africa’s client acceptance and continuance process will be centralised into a specialised team led by an experienced KPMG South Africa partner with the appropriate skills to evaluate the information provided on new and existing clients. Whenever integrity issues are identified, either the firm risk management partner or an ad hoc panel of senior partners will be consulted and decide upon the acceptance decision.
KPMG South Africa has, and will, comply with all its reporting obligations as required by applicable law, regulation and professional standards.
In addition to the R23 million fee for the SARS report referred to above, KPMG South Africa will also make a donation of R40 million into education and anti-corruption not for profit organisations. The R40 million figure is based on the total fees earned from Gupta related entities to which KPMG South Africa provided services from 2002.
Nhlamu Dlomu said: “This has been a painful period and the firm has fallen short of the standards we set for ourselves, and that the public rightly expects from us. I want to apologise to the public, our people and clients for the failings that have been identified by the investigation. It is important to emphasise that these events do not represent KPMG, our people or the values we have adhered to over decades of committed client service. My pledge and promise to the country is that we can and will regain the public’s confidence.”