NEWS

KPMG Shocker: Audit Firm Disavows Sars 'Rogue Unit' Report, Eight Senior Staff Resign

The under-fire audit firm has also apologised for the work it did for the Gupta family.

15/09/2017 14:09 SAST | Updated 15/09/2017 14:09 SAST
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KPMG have replaced its CEO and six other senior executives.

ANALYSIS

One of South Africa's so-called "big four" auditors, KPMG, has released a bombshell statement in which it withdraws its investigation into the so-called "rogue unit" of the SA Revenue Service (Sars).

This report was seemingly partly used by Sars commissioner Tom Moyane as the basis for his alleged witch-hunt into the unit in 2014 and 2015. It led to the dismantling of the unit and the departure of numerous senior staff members and experienced forensic investigators.

KPMG, in a statement, also announced the departure of its CEO, Trevor Hoole, as well as seven other senior executives, including chief operating officer Steven Louw and chairperson Ahmed Jaffer. A new chief executive, Nhlamu Dlomu, has already been appointed and parent company, KPMG International, has seconded a new chief operating officer from its global operation to stabilise the South African operation.

In addition, the embattled auditor has admitted that it should have ceased work for the Gupta family earlier and said the family's companies were often "misleading" and "misrepresenting" facts.

But the biggest impact surely has been on Sars, where Moyane dismantled the effective and successful High-Risk Investigations Unit (HRIU) based on a smear campaign in The Sunday Times and subsequent investigations by a panel led by Advocate Muzi Sikhakhane and KPMG. It was used to purge the unit of its leadership and resources and led to the resignation of various senior officials, including deputy commissioner Ivan Pillay, HRIU head Johann van Loggerenberg, Sars spokesperson Adrian Lackay and Pillay's special adviser, Yolisa Pikie.

The embattled auditor has also admitted that it should have ceased work for the Gupta family earlier and said the family's companies were often "misleading" and "misrepresenting" facts.

Since Moyane's arrival at Sars, there has been an exodus of experienced staff, with 55 senior executives having departed by the beginning of the year. Sars last year had a tax revenue shortfall of R28 billion. The Sunday Times has since retracted and apologised for its role in the purge.

The KPMG report -- which has never been made public -- was allegedly also the basis for Moyane supposedly laying criminal charges against former minister of finance Pravin Gordhan, Pillay, Van Loggerenberg and former Sars commissioner, Oupa Magashula.

Van Loggerenberg told HuffPost SA: "I have no comment at this stage. I am consulting with my lawyers on the matter and will consider my options in due course."

Since Moyane's arrival at Sars, there has been an exodus of experienced staff.

It is an extraordinary turn of events and will heap the pressure on a company with which Barclays Africa is already reviewing its relationship. "If one large corporation, like Absa or Old Mutual, fires KPMG, others won't have a choice but to act," Magda Wierzycka, CEO of Sygnia, a Cape Town-based money manager, told Moneyweb.

KMPG says in its report

In general:

1. 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.

On the Sars report:

2. In December 2014, KPMG South Africa was engaged by the SA Revenue Service to perform an extensive document investigative review which resulted in the "Report on Allegations of Irregularities and Misconduct".

3. At a later stage, this mandate was extended to the provision of a report which included conclusions, recommendations and legal opinions.

4. 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.

5. 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.

6. Furthermore, the language used in sections of the report is unclear and results in certain findings being open to more than one interpretation.

7. 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.

8. We recognise and regret the impact this has had. KPMG South Africa had no political motivation or intent to mislead.

9. 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.

10. 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.

On audit work for the Guptas:

11. 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.

12. 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.

13. 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.

14. KPMG South Africa should have resigned as auditors earlier than March 2016.

On a KPMG partners' attendance of the Gupta wedding:

15. 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.

On the Optimum deal

16. 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.