OPEN SECRETS UNACCOUNTABLE #18

KPMG – How a Big Four auditing firm went rogue in its greed for profit

By Open Secrets 16 September 2020

The Big Four auditing firms - Deloitte, EY, KPMG and PwC - played a systemic role in economic crimes and State Capture. The evidence suggests that these firms have prioritised profit over professional duties and the law. Accountability and reform of the industry is thus essential.

In July, Open Secrets released the latest Corporations and Economic Crime Report (CECR). Volume 2 – The Auditors – draws on information from Open Secrets’ investigations and publicly available information to illustrate the crisis faced by the auditing industry and how this affects the public.

The previous instalments have focused on Deloitte and EY. This piece turns to KPMG, the auditing firm at the centre of many State Capture scandals.

The costs of contemporary State Capture in South Africa have been disastrous. Taking into account the money lost directly to corruption, low or non-existent economic growth, lost jobs, and an explosion of public debt and borrowing costs, estimates range from the conservative R500-billion to R1.5-trillion. The austerity measures enforced to appease credit ratings agencies have hit vulnerable South Africans the hardest. This was the case even before the devastation wrought by the Covid-19 pandemic, which has also disproportionately harmed the poor.

But when it comes to State Capture, not even the upper-bound estimates can fully cover the consequences of the destruction of institutional independence and capacity throughout the state, including crucial institutions like the South African Revenue Service (SARS).

As we have submitted to the Zondo Commission, banks, law firms, consultancies and the Big Four auditing firms were key enablers of the State Capture project, and are also responsible for the associated harms of State Capture. This is nowhere more clear than in the case of KPMG.

After apologising for its role in enabling some of the most egregious State Capture corruption, KPMG committed to appearing before the Zondo Commission in early 2019. This has still not happened, and KPMG’s leadership has still not had to answer the difficult questions of clarifying its role in State Capture.

A rogue investigation

KPMG’s role in State Capture first garnered public attention in relation to the infamous KPMG “rogue unit” report it completed in 2015 at the behest of then SARS Commissioner Tom Moyane.

In 2007, a special investigative and enforcement unit was created within SARS by a joint agreement between SARS and the National Intelligence Agency (now the State Security Agency). SARS obtained three legal opinions at the time on the legality of the unit – all gave the green light to proceed. Two months after his appointment as SARS commissioner by Jacob Zuma in September 2014, Moyane enlisted KPMG to conduct a forensic investigation into allegations of a covert unit at SARS that was allegedly spying on Zuma and Julius Malema, the leader of the EFF.

Given the importance of the issue in the public interest and in safeguarding the integrity of SARS, South Africans expected that a leading forensic firm would undertake a thorough and careful investigation. This was not the case.

The KPMG report found that the unit was breaking the law and was thus “rogue in nature”. However, the report had striking similarities to earlier investigations by advocate Muzi Sikhakhane and the law firm Mashiane Moodley & Monama (MMM), which had been commissioned by former acting head of SARS Ivan Pillay. A later examination revealed that KPMG had plagiarised sections of the MMM report, including grammatical and spelling errors – it was literally a copy-and-paste exercise.

Roy Waligora, head of KPMG forensics, led an internal investigation into the report. Waligora found that the lead auditor on the KPMG report had been “unprofessional and lazy”, leading to an inaccurate report. Advocate Dumisa Ntsebeza, who chaired the South African Institute of Chartered Accountants (Saica) inquiry into the saga, went further and concluded that the KPMG auditor’s conduct had been “an act of absolute dishonesty”. KPMG later admitted that there had been no internal partner review of the investigation, calling this “substandard” quality control. Ntsebeza’s report found there was a prima facie case that KPMG staff had violated Saica’s professional code of ethics.

KPMG’s report, alongside those of Sikhakhane and MMM, was used to justify the dismissal of about 50 senior officials at SARS, and investigations into Pillay, Pravin Gordhan and Johan van Loggerenberg. This, coupled with a coordinated restructuring of SARS by Moyane and management consultant Bain & Co, had an undoubtedly negative effect on SARS’s capacity to generate revenue. In the first quarter of 2017 alone, the agency failed to meet its revenue target by R13-billion, and rebuilding the institution continues today. KPMG would eventually retract the report and apologise to those affected. In 2020, all criminal charges were withdrawn by the National Prosecuting Authority.

This was not the last time KPMG would be linked to State Capture. It also played a critical role in one of the most audacious and iniquitous State Capture stories to date.

The Gupta cash cow

Billed by then KPMG CEO Moses Kgosana as “an event of the millennium”, the 2013 wedding of Vega Gupta and Aakash Jahajgarhia cost South African taxpayers R30-million. The lavish wedding and the arrival of some guests through the Waterkloof Air Force Base catalysed a number of investigations by Treasury and the Public Protector, which first revealed a vast State Capture network of Gupta enterprises.

It emerged later that the wedding was connected to another scandal, the Vrede Dairy Project: A project where public money that was intended to benefit local dairy farmers in the Free State had instead been laundered into the pockets of Gupta companies and to meet the costs of the Sun City wedding.

The Vrede Dairy Project, a project between the Free State government and BBBEE company Estina, was meant to establish a productive dairy farm near the town of Vrede, creating local jobs and opportunities.

But the #GuptaLeaks revealed that the project, from its conception, was set up to loot the Free State agriculture department. KPMG was centrally involved in assisting the Gupta enterprise to launder stolen Estina funds on to the books of Linkway Trading, a Gupta company. KPMG provided both auditing and tax advisory services to Linkway Trading, the South African firm that invoiced Dubai-based Accurate Investments R30-million for organising the extravagant wedding. Accurate Investments was one of four offshore companies in the Guptas’ UAE-based “laundromat”.

Linkway Trading was 53% owned by Islandsite Investments, which was also owned by the Gupta family. Linkway drew up an invoice addressed to Accurate Investments on 31 July 2013 that provided a detailed breakdown of costs related to the wedding.

Jacques Wessels, then an auditor partner at KPMG, managed Linkway’s accounts. His management failed several standards for the auditing profession. Firstly, the Gupta wedding raised obvious red flags: for example, Linkway was registered as a construction company, yet had taken an odd foray into wedding planning. Secondly, the R30-million invoice accounted for 55% of Linkway’s 2013 revenue. Thirdly, both firms had the same beneficial ownership and so should have been classified as related parties.

The “oversights” for these transactions in financial statements indicate that the company was using them for the purpose of tax evasion, which KPMG allowed. To add insult to injury, Linkway’s 2014 annual financial report stated a R7-million loss on the wedding as a “cost of sales”, a misstatement aimed to evade taxes.

A competent auditor should have been able to pick these up, and one did. A junior auditor at KPMG voiced concerns to Wessels that the wedding expenses had nothing to do with Linkway’s real business. However, these concerns were brushed aside. One possible reason the junior auditor was shut down was the close relationship between senior KPMG partners and the Gupta family. Despite what would appear as an overt conflict of interest, which the Independent Regulatory Board for Auditors (IRBA) later criticised, senior KPMG partners attended the wedding – including Wessels, who led the Linkway account, and CEO Moses Kgosana, who attended with his wife and subsequently wrote a gushing thank you email to Atul Gupta.

IRBA investigated the case, and in March 2019 struck Wessels off the auditor’s register, ordering him to pay part of IRBA’s legal costs, and instructing that Wessels’ name, KPMG’s name and the findings be made fully publicly available.

The venal VBS heist: Where were the auditors?

VBS was set up as a building society in 1982 in what was the Venda Bantustan. It became a mutual bank in 1992. By the time of its implosion, it served tens of thousands of depositors in Limpopo, including many poor and working-class people. It was placed under curatorship as a result of a liquidity crisis in March 2018. The bank could not be saved because it had been looted into insolvency.

An independent report, commissioned by the South African Reserve Bank and authored by senior advocate Terry Motau, found that 53  people and other entities had benefited from VBS money to the tune of just under R2-billion. In November 2019, the bank’s liquidator announced that R800-million more than initially thought was stolen – making the total as much as R2.7-billion. The deposits of ordinary South Africans had been looted by bank executives to pay for luxury cars, multiple properties and various personal vanity projects.

This was an unsophisticated heist. Not only was money looted straight out of the bank’s cash reserves, but payments were made to obviously related parties without the necessary reporting. This required VBS to publish fraudulent misrepresentations in its 2017 annual statements and its monthly regulatory reports to the Registrar of Banks. Yet, the annual financial statements were signed off as an accurate representation by KPMG.

In March 2018, the Minister of Finance placed VBS under curatorship. The appointed curator immediately found that the bank could not confirm the existence of nearly R1-billion in cash deposits. He also flagged deficiencies in the management of the financial systems, as well as fraudulent transactions between VBS and related parties. He could not understand how a senior KPMG auditor had signed off the financial statements without reporting a single transaction to IRBA or raising any other red flags. The annual financial statements had to be withdrawn as they were completely inaccurate.

It turned out that this was not a case of an auditor being hoodwinked by its client. KPMG’s lead auditor on the VBS account, Sipho Malaba, is alleged to have covered up the crimes. Motau’s report concludes that Malaba “gave an unqualified audit opinion in circumstances where he knew the financial statements were misstated. He also gave a regulatory audit opinion, whichhe knew to be false”. In plain words, Malaba lied.

It is estimated that Malaba reaped up to R34-million in exchange for assisting in the cover-up at VBS. This was done predominantly through loan facilities that were extended to Malaba’s companies and to himself in his personal capacity. This included loans for three luxury vehicles through VBS’s special financial scheme for employees and shareholders, for which Malaba did not qualify. The “loans” turned into gifts as Malaba would invariably reverse the debit orders, and VBS would not follow up to pursue repayment.

As was the case for KPMG’s failures at Linkway Trading, one junior auditor did in fact spot trouble at VBS. Zondi Nduli soon learnt that silence was the order of the day, even if the irregularities could not be explained. A third-year auditing clerk at KPMG, Nduli found a R700-million overstatement in the financial statements. When Nduli asked VBS to provide documents to explain this, the bank’s officials were, of course, unable to. Malaba, the senior auditor, was called in to clean up the situation.

Testifying under the promise of immunity, Nduli told Motau that, when he saw the audit signed off by Malaba, he realised that no further work had been done to clarify the glaring problem he had seen in the cash accounts. Confused and worried that he would be implicated in wrongdoing, he admits to going back and deliberately altering his original audit note to say that “specific procedures were performed by the partner and CEO, respectively”. Nduli also testified that he spoke about his concerns with both his counselling partner and counselling manager at KPMG, but received little assistance from them.

As is apparent from this account, a team of KPMG auditors worked on the VBS financial statements in 2017. There may have been a rogue auditor, but there was also a collective failure to exercise the professional scepticism and accountability that is required of auditors.

It is encouraging that the National Prosecuting Authority has decided to pursue a criminal prosecution of Malaba. Yet this is still not enough; KPMG’s failure to exercise independence and professional scrutiny is indicative of an industry riven by structural problems and deficiencies in governance that will continue to produce major conflicts of interest. Without effective sanction for the firms themselves, they will reoffend.

The rot runs deep

Since the full extent of KPMG’s role in these crimes has emerged, the firm has spent a lot of time apologising to South Africans and the institutions they harmed. They also agreed to pay back R23-million in fees from SARS and pledged to donate the R40-million earned in fees from Gupta-linked entities. It is unclear how these meagre offers are supposed to provide restitution for the dairy farmers, or for the billions lost in tax revenue and the near-collapse of several state institutions.

This is why it remains essential that KPMG’s executives, former and current, are summoned to the Zondo Commission to fully account for the firm’s conduct. Such information can now be shared with law enforcement and the National Prosecuting Authority, which should pursue cases against all those at KPMG who broke the law. While KPMG assures the public that it has self-corrected, only hard accountability will change the calculus for how it conducts itself in the future. DM

Open Secrets is a non-profit organisation that exposes and builds accountability for private sector economic crimes through investigative research, advocacy and the law. Tip-offs for Open Secrets may be submitted here.

Previous articles in the Unaccountable series are:

Unaccountable 00001: Dame Margaret Hodge MP – a very British apartheid profiteer; Unaccountable 00002: Liberty – Profit over Pensioners

Unaccountable 00003: Dube Tshidi & The FSCA: Captured Regulator?

Unaccountable 00004: Rheinmetall Denel Munition: Murder and mayhem in Yemen

Unaccountable 00005:National Conventional Arms Control Committee: handmaiden to human rights abuse?

Unaccountable 00006: Nedbank and the Bank of Baroda: Banking on State Capture.

Unaccountable 00007: HSBC – The World’s Oldest Cartel

Unaccountable 00008: FNB and Standard Bank- Estina’s Banks

Unaccountable 00009: McKinsey – Profit over Principle

Unaccountable 00010: Jacob Zuma – Comrade in Arms

Unaccountable 00011: Thales – How to buy a country

Unaccountable 00012: John Bredenkamp – Agent of BAE Systems

Unaccountable 00013: Fana Hlongwane – Agent of BAE Systems

Unaccountable 00014: BAE Systems: (Profit) Before Anything Else

Unaccountable 00015: The BAE Corruption Bombshell

Unaccountable 00016: Deloot- How Deloitte gets away with it.

Unaccountable 00017: EY- Incompetent, Negligent or Criminal?

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  • Enabling the state looting of tax-payers is prime evil. That none of these corporates has been taken down yet is miserable. Certainly reason enough for SA to stop paying taxes to feed the best fed.

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