PracticeAuditKPMG rocked by South African corruption scandal

KPMG rocked by South African corruption scandal

KPMG’s South African branch has come under fire after becoming caught up in a growing corruption scandal surrounding one of the country’s most influential families, the Guptas

KPMG rocked by South African corruption scandal

KPMG’s South African branch has come under fire and suffered a severe reputational hit after becoming caught up in a growing corruption scandal surrounding one of the country’s most powerful families, the Guptas.

KPMG is accused of facilitating the family in tax evasion and corruption. The firm denies any wrongdoing but admits to missing several “red flags” in relation to the family’s accounts. At least eight senior KPMG South Africa officials have resigned in the wake of the scandal, including CEO Trevor Hoole.

The Gupta family, once called South Africa’s “shadow government” by former General Secretary of the Congress of South African Trade Unions Zwelinzima Vavi, is a very wealthy and politically influential family, with close ties to South African president Jacob Zuma. It is alleged that the family exerts undue influence over government policies as well as dictating high level governmental appointments in exchange for commercial opportunities. The family’s empire ranges across multiple sectors, including technology and mining. Links to a Gupta family company brought down PR company Bell Pottinger earlier this year following accusations of a racially divisive campaign.

KPMG audited Gupta companies for 15 years, finally terminating the relationship in 2016 amid growing concerns about the family’s links to Zuma. In a statement KPMG said: “KPMG South Africa regrets that its association with the Guptas and their business entities went on for far too long.”

One corruption allegation against the family relates to the 2013 wedding of Vega Gupta, which was allegedly funded with R30-million of taxpayers’ money. This was purportedly done though funnelling funds intended for poor Free State farmers through Dubai and then repatriating to South Africa through the Gupta’s company Linkway Trading Pty Ltd. The Guptas allegedly claimed these as business expenses and did not pay any income tax. As auditors of Linkway, KPMG failed to recognise any wrongdoing. Furthermore, four KPMG partners attended the Gupta wedding.

KPMG conceded that audits of Gupta companies: “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”, particularly in relation to the company Linkway Trading Pty Ltd.

Firm policy dictates annual re-assessment of clients, and it is unclear why the Gupta family’s dealings were not better scrutinised. KPMG said: “In relation to the Guptas, over a number of years this process lacked the necessary rigour.”

It is also alleged that KPMG facilitated the Guptas’ tax evasion and corruption. One allegation relates to KPMG’s involvement in the valuation of Oakbay Resources and Energy Limited (ORE) in 2014 at the time of its listing, where it has been alleged that the share price was fixed. KPMG claims it’s involvement did not include providing a valuation.

Another allegation is based on the firm’s involvement in the Gupta’s interest in acquiring the Optimum Coal Mine (OCM) from Glencore. KPMG claims that it provided “limited transaction support services” but admits that “during the course of the engagement KPMG South Africa became aware of information which called into question the integrity of the Guptas” which 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.”

Another charge levelled against KPMG relates to a problematic report produced by the firm for South African Revenue Service (SARS). The report claimed that a rogue spy unit was operating within SARS, which led to the removal of finance minister Pravin Gordhan, on the grounds that he should have known about (or was involved with) the rogue unit. Since the findings were deemed incorrect, SARS is pushing for KPMG to be blacklisted from all government business. KPMG responded: “We recognise and regret the impact [the SARS report] has had. KPMG South Africa had no political motivation or intent to mislead.”

Nhlamu Dlomu, the new CEO of KPMG South Africa, commented: “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.”

As a result of the scandal KPMG have lost several audit contracts in South Africa, with even more companies considering severing ties. The firm is under investigation by South African regulatory body IRBA and risks being removed from the country’s auditors’ register, which would have a disastrous effect on its African business.

The FRC recently closed an investigation into KPMG’s audit of HBOS.

Related Articles

EY to audit Standard Chartered bank

Audit EY to audit Standard Chartered bank

1w Alia Shoaib, Reporter
KPMG replaces PwC as Croda auditor

Accounting Firms KPMG replaces PwC as Croda auditor

1m Emma Smith, Managing Editor
BDO replaces Deloitte as Mitie auditor

Audit BDO replaces Deloitte as Mitie auditor

2m Emma Smith, Managing Editor
Deloitte rises in auditor rankings with most FTSE 250 clients

Accounting Firms Deloitte rises in auditor rankings with most FTSE 250 clients

3m Alia Shoaib, Reporter
Latest Big Four auditor changes

Audit Latest Big Four auditor changes

3m Alia Shoaib, Reporter
FRC closes KPMG HBOS audit investigation, Treasury Committee expects ‘full explanation’

Accounting Firms FRC closes KPMG HBOS audit investigation, Treasury Committee expects ‘full explanation’

2m Emma Smith, Managing Editor
PwC to audit BBC pay policies following gender pay gap outrage

Accounting Firms PwC to audit BBC pay policies following gender pay gap outrage

2m Alia Shoaib, Reporter
PwC to take over from Deloitte as Diploma auditor

Accounting Firms PwC to take over from Deloitte as Diploma auditor

2m Alia Shoaib, Reporter