Business / Business News

Warren Thompson
6 minute read
3 Jul 2017
8:00 am

KPMG responds to allegations of involvement in state capture

Warren Thompson

Accounting firm says relationship with Guptas was above board.

Global accounting, audit and consulting firm KPMG got sucked into the #guptaleaks vortex last week when it became apparent that it audited a company owned by the Gupta family, which was used to launder money to pay for a wedding at Sun City.

As revealed by amaBhungane, money allocated to the Vrede Dairy Farm by the Free State government flowed via Dubai to a company controlled by the Guptas called Linkway Trading.

Linkway was audited by KPMG before the firm chose to terminate its relationship with the family and related entities in April 2016. (The last audits were performed for the 2015 financial year.) What appears to be controversial is that KPMG audit managers signed off on the deduction of the wedding expenses (amounting to R30 million) as a business expense, meaning the Guptas did not pay tax on the income. Other questions relating to why this was not investigated by KPMG, when it appeared that the company reimbursing Linkway was under the control of the Guptas – and was thereby a related entity – has also caused a stir.

Add to this the cosy relationship KPMG audit partner Jacques Wessels and KPMG CEO, Moses Kgosana had with Atul Gupta, places the concept of objectivity at centre stage. They certainly knew their client.

Linkway, KPMG told Moneyweb over the weekend in response to written questions, “was a project management company in the Oakbay Group that, inter alia, project-managed the wedding of the niece of the Oakbay Gupta directors. Costs incurred by Linkway Trading, in respect of the wedding, were reimbursed by Accurate Investments. In project management entities such as Linkway Trading, it is standard procedure to receive and disburse funds against a specific event. The profit or loss incurred on such a project would form part of a company’s taxable income. We conducted our audit of Linkway Trading in accordance with International Standards on Auditing. At no stage, based on the facts at our disposal, did we consider that any transaction required to be reported under South African or foreign legislation. We stand by our audit opinion issued.”

The movement of money out of the country and then back into it to reimburse Linkway for the wedding expenses was suspicious enough for Standard Chartered Bank to terminate its relationship with the Guptas.

Linkway was one small company in the wider web of Gupta-controlled corporate vehicles. Fundamental to understanding how KPMG would be influenced and possibly conflicted by the Guptas, would be seen in the relationship of executives with the family and the size of the overall business the Guptas represented to the firm. KPMG declined to provide us with a breakdown of how much money the Guptas and related entities had paid the firm for audit, accounting and consulting work over the 15-year term of their relationship.

But a look at the documents circulated by the listed Oakbay Energy and Resources shows KPMG as the “Independent Reporting Accountants and Registered Auditors”. Neither is any other audit firm on record as having terminated the relationship with the Guptas.

These will be the issues the Independent Regulatory Board for Auditors (IRBA) will wade through in its investigation of KPMG and the Linkway matter, which it notified the public of on Friday. “The audit watchdog has the power to initiate such investigations without having to receive a formal complaint,” it stated.

Both KPMG audit partner responsible for the Oakbay account, Jacques Wessels, and previous KPMG CEO, Moses Kgosana, attended the wedding at Sun City. Both are listed as qualified chartered accountants. The South African Institute of Chartered Accountants has not indicated if it will be conducting its own investigation into the matter.

KPMG: Full statement by CEO Trevor Hoole 

KPMG in South Africa resigned as auditors and advisors in April 2016 to the Oakbay Group entities. Our last sign-off as auditors was in respect of the February 2015 year-end.

At no stage were we the auditors of any of the offshore entities mentioned in the media, including Accurate Investments or entities related to the Free State Dairy project, including Estina. We therefore cannot comment on the Free State Dairy project, these entities, or the flow of related funds.

We strongly refute allegations that KPMG was involved in, or condoned, any alleged money laundering activities.

Below are some of the other main issues covered in the media:

Wedding attendance

The wedding took place in 2013 and attendance by some of our partners was approved at that time by our Risk Management team and Executive Committee. The accommodation and travel costs were borne by KPMG. We are satisfied that our independence was not impaired at any stage.

Linkway Trading

Linkway Trading was a project management company in the Oakbay Group that, inter alia, project-managed the wedding of the niece of the Oakbay Gupta directors. Costs incurred by Linkway Trading, in respect of the wedding, were reimbursed by Accurate Investments. In project management entities such as Linkway Trading, it is standard procedure to receive and disburse funds against a specific event. The profit or loss incurred on such a project would form part of a company’s taxable income. We conducted our audit of Linkway Trading in accordance with International Standards on Auditing. At no stage, based on the facts at our disposal, did we consider that any transaction required to be reported under South African or foreign legislation. We stand by our audit opinion issued.

Related party

At the time of the audit, based on facts known to us and representations made by management, Accurate Investments was an entity related to the father of the bride, an offshore resident, who was not related to the Oakbay Group of companies. Accurate Investments was not identified as a related party to Linkway Trading in terms of International Financial Reporting Standards.

IRBA investigation

We were notified on Friday evening, June 30 2017, that the IRBA will investigate us under section 48 (1) (a) of the Auditing Profession Act. It is unusual for us to comment on such matters in the media – but since the IRBA chose to publish this fact – we deem it appropriate to publicise our initial views.

At this stage it is unclear to us what the basis of the investigation is as the notification referred in general terms to the media releases. The investigation appears to have been launched by the IRBA based only on the reports in the media. This is pertinent since we have no knowledge of the matters which allegedly, per these media reports, appear to have their roots in the Free State Dairy project.

We will cooperate fully with the IRBA in their investigation and give a detailed account of our actions, which we restate, were in accordance with professional and ethical standards.

Consistent with our values, we have acted with integrity in our dealings with the Oakbay Group.

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