When the KPMG International statement was first released on 15 September 2017, the overall first impression was that here was a company coming clean and putting its hand up and being accountable. However, as the dust has settled, it seems that there is a distinct possibility that its intentions are anything but a whole-hearted mea culpa. Let’s review the content fairly.

The KPMG International media statement is revealing not only for what it concedes and addresses, but also for the important issues which appear to have been conveniently overlooked. An analysis of its contents appears to confirm significant spin and obfuscation, suggesting the worst kind of corporate arrogance; especially coming from a major audit firm. The statement, which would no doubt have been carefully crafted under the watchful eyes of legal experts, appears to have worsened the situation as opposed to providing the balm for what has become a major corporate crisis.

In establishing whether the KPMG International media release has been economical with the truth or not, one must consider its contents within the framework of the requirements of the statutory Audit Professions Act (APA) which authorises the Independent Regulatory Board for Auditors (IRBA) to regulate the audit profession in South Africa.

The APA requires that registered auditors comply with all rules prescribed by the IRBA and that the IRBA is empowered to deal with any complaint of improper conduct against a registered auditor and impose prescribed sanctions as set out in Section 51(3). It follows then that a registered auditor will have breached statute if he or she has been found guilty of improper conduct by the IRBA and it is worth noting that under certain circumstances, the APA’s penalties provide for fines and/or jail time.

IRBA guidelines for improper conduct by a registered auditor include but are not limited to:

• Failing to comply with any provision of the Act;
• Failing to comply with the provision of any other Act;
• Failing to perform professional services or duties with the necessary degree of professional competence, due care and skill;
• Knowingly or recklessly making or assisting any person to make any false statement, as well as signing such false statement; and,
• Behaving in a fashion which brings the auditing profession into disrepute.

If the IRBA is clear on what can constitute improper conduct, then it is worthwhile to summarise how little KPMG International appears to have conceded in its media statement when, on available media evidence, the indications are of numerous gross breaches of substantive improper conduct.

The statement highlights that the international investigation found that KPMG SA:

• Fell well short on quality of work performed;
• It was imperative that the local leadership be accountable and responsible;
• There was a failure in risk management,
• There was a failure in quality controls including absence of second partner review;
• Legal recommendations included in the SARS report should have been caveated and not formulated in the manner in which they were included;
• With respect to the SARS report, there was no intention to mislead and that,
• The report’s conclusions, recommendations and legal opinions should no longer be relied upon.

KPMG International appears to contradict itself when it advises that there was no breach of independence when its partners attended the Gupta wedding but still concludes that they should not have attended. On the matter of tax, the international firm’s findings are that KPMG SA has not been complicit in any advice on offshore structures which could be illegal or improper. Yet, it fails to acknowledge that the KPMG experts were centrally involved in the structuring of a number of business entities in Dubai, including the one trading in precious metals. Finally, the statement confirms that KPMG International has found no evidence of dishonest or unethical behaviour on the part of the audit partners or teams working on the Gupta group of companies. Curiously, the statement makes no finding in this regard on the forensic work of partners and teams involved with the SARS report.

Notwithstanding the convoluted and begrudging admissions made in its media statement, it is quite clear that KPMG International, on its own version, admits to such poor work that the IRBA will be hard-pressed not to make a finding of improper conduct on a number of grounds. It also seems that the local firm has easily satisfied many of the other requirements for further charges of improper conduct as set out by the IRBA.

KPMG International is silent on ethical conduct by partners and audit teams involved with the SARS report and flatly denies unethical behaviour on the Gupta group audits. However, unethical conduct, as it relates to business, is defined as (i) lacking in moral principles; (ii) unwilling to adhere to proper rules of conduct and; (iii) not conducting business in accordance with the standards of a profession.

It defies logic that the international findings can conclude that there is no evidence of “unethical” conduct when it is clear that improper conduct amounts to the same thing. Curiously, the senior partners at KPMG SA have publicly acknowledged that their conduct was unwise and improper, and that their audit work was poor, if not outright shoddy. Not only have the top 10 of KPMG SA resigned, but the audit of the “wedding planner firm” was simply in breach of the established norms of the profession. How KPMG International can make no findings at all as to the ethics of the employees involved with the SARS report is indeed passing strange.

The KPMG International statement devotes many column inches to the local firm’s lack of complicity in the facilitation of tax evasion through illegal offshore structures – but it studiously avoids commenting on the reported R30-million Gupta wedding which, notwithstanding red-flagging by a junior employee, was allowed to be treated as a tax deductible business expense by senior KPMG staff.

The curious findings and conclusions of the KMPG International investigation raise many questions, including, but not limited to, the following:

• How is it possible to conclude that local partners and audit teams have acted ethically with respect to the Gupta group of companies when even the convoluted “limited” admissions confirm improper conduct which is by definition unethical behaviour?
• If it is confirmed that the audit partners and teams acted ethically in the Gupta group audits, then why has there been no confirmation that the partners and audit teams involved with the SARS report also acted ethically, and if they didn’t, then why has this not been confirmed?
• If it has been found that attending the Gupta wedding is not a breach of independence, then what are the reasons for recommending that the partners should not have attended the wedding?
• Why did the media statement not deal with the accounting and tax treatment of the R30-million expenditure for the Gupta wedding?
• If the SARS report is only flawed because KMPG SA “didn’t take into account the risk owing to scope change and because there was no second partner review and that legal opinions were included in an inappropriate manner and that there was no intention to mislead”, then why is the partner responsible for the SARS report no longer with the local firm?
• Surely, if KPMG International had done a “warts and all investigation” on the local firm it would have concluded that the local firm failed comprehensively in performing professional services with the necessary degree of professional competence, due care and skill which resulted (in) knowingly or recklessly making findings and signing off of a report (SARS report) which is potentially false?
• Why was there no admission confirming that the local firm had brought the auditing profession into disrepute?
• Conclusions and recommendations are the purpose and heart of any report. KPMG International confirms that conclusions and recommendations in the SARS report cannot be relied upon but won’t go as far as to confirm that the whole report isn’t worth the paper it’s written on. Why only this selective qualification as to what can be relied upon or not?
• Who made the call for KPMG International to investigate the local firm?When did the investigation start? When was it completed? And, most important of all: who determined the scope and what exactly was the scope?

It is common sense that the nature of questions asked will determine the quality and content of answers supplied. In the absence of suitable explanations, and of which there have been none to date, it would appear that KPMG International has not asked very tough and relevant questions. Perhaps this was by design, or was it just plain incompetence? Or are there other plausible reasons which have been overlooked?

On the face of the available evidence, KPMG’s initial response to the crisis has been anything but honest and professional. The fact is that KPMG International has now commissioned a second investigation, suggesting that there is potentially more to discover than initially assumed.

What the firm and its senior partners have not yet publicly acknowledged is the reality that KPMG’s conduct over the past decade has brought the entire audit profession into unprecedented disrepute. Serious as this reality may be, the full KPMG damage is not limited to the audit profession either. It is no exaggeration to argue that KPMG has caused considerable consternation and risk within the business sector in general. The firm’s unethical and improper conduct has in effect made itself, knowingly or otherwise, an accessory to the complex web of fiscal extraction and misappropriation, institutional decay, and material damage to brand SA. None of these is yet acknowledged by the firm.

Hopefully in its second investigation, an independent and credible team will assess the damage and will recommend clear remedial actions for the firm and a fair and material compensation for South Africa. Short of that, its second investigation, much like the first one, will lead to further suspicion and damage.

The sooner obfuscation and legal manoeuvring stop, the more likely KPMG will have a fighting chance to “reboot” its operations. To this end, KPMG may want to study carefully the fresh case of Bell Pottinger. DM

[Watch: The 9min SARS Rogue Unit explainer video]