Twitter users have called it #KPMGBloodbath as client after client dissociated from the global audit firm’s South Africa office. KPMG International finally admitted it was partly responsible for some lapses, while papering over a major part of its role in the Gupta family fiasco. Heads have rolled in the South Africa offices, but, as per KPMG’s own admission, much later than desired.
The government had tasked the firm with a document-based investigative review of the functioning of the South African Revenue Service (SARS). The partner who led the probe had wrongly concluded that then finance minister and revenue commissioner Pravin Gordhan had known about an illegal, “rogue” espionage outfit operating within SARS. In its September 15 statement, KPMG distanced itself from the review and said it had fired the partner. The current leadership of SARS is not happy and has threatened to blacklist the audit firm.
Gordhan has sued the Guptas, highlighting 72 suspicious transactions by their companies, and claimed that the Guptas had allegedly tried to influence him to probe another company. In a media statement, the Guptas have said that “the (then) minister could simply have declined to do anything in the exercise of his legal discretion.”
KPMG admitted that the firm had bypassed its quality control standards by skipping “second partner reviews” of the review in question. Gordhan has been booted from his office following the original review. KPMG International has brought in a top global boss to repair the damages.
KPMG South Africa’s relations with the Gupta family has been on the scanner since allegations of ‘state capture’ last year, which had also forced the Guptas to resign from executive posts in their own companies.
In June, this year, the amaBhungane Centre for Investigative Journalism (ACIJ)—a member organisation of the Global Investigative Journalism Network—and the Daily Maverick upped the game against the alleged nexus between the Guptas, the South African government and KPMG by publishing leaked e-mails.
KPMG was acting as both auditor and consultant to the Guptas and had overlooked several ‘dodgy’ transactions. In India, this is considered a conflict of interest. Several international firms get away with this by separating the ownership and management structures of the audit and consultancy services. Foreign audit firms are not allowed to practice in India and backdoor arrangements with local firms/individual chartered accountants have been challenged at the Supreme Court. (Outlook carried an in-depth report on this practice in its August 14, 2017, cover story titled How They Make The Ledger Lie).
Some have described the scandal as KPMG’s ‘Satyam’ incident, drawing a reference to the 2009 scam involving another Big Four audit firm, PricewaterhouseCooper. Even while it was a statutory auditor of the company, some KPMG partners had attended the wedding of one of the Gupta’s children. Indian guests had been flown directly to a South African military facility foregoing immigration checks. There was nothing wrong with attending the fantastical wedding except that it was allegedly paid for by money that the Guptas have been accused of diverting out of windfall gains from state funds for a dairy project.
The ACIJ report claimed that, during its audit, KPMG ‘overlooked’ the fact that the $3.3 million wedding expense was booked as a ‘business expense’ by the Guptas, allowing it to be a tax-free exercise. The money was routed through the Guptas’ companies in Dubai. A junior accountant in KPMG had pointed out the wrong treatment of the wedding expense, but another senior KPMG partner who had attended the wedding had overruled the objection.
Standard Chartered in South Africa had closed their business with the Guptas in 2014, shortly after the funds were routed through the bank and a State Bank of India overseas branch between the Guptas’ companies in South Africa and Dubai. Ironically, the Dubai-based shell company through which the money was round-tripped is called Gateway Limited.