The hearing focused on the work handled by KPMG for the South African Revenue Service (SARS); the general operation of KPMG’s work; transparency within the firm; criteria for billing; debate on the refund of money received to carry out work for SARS; KPMG’s inability to ascertain which findings in the SARS report where incorrect although all were withdrawn; inability to comply with regulatory standards in terms of reportable irregularities; the failure to take criminal action against senior management officials for condoning illegality; as well as KPMG’s involvement in the audit of Gupta linked entities.
The Auditor General said his Office has decided to reduce its contract with KPMG from a two-year period to a one-year period, until the outcome of the investigation by IRBA and SAICA has been completed.
In conclusion, the Chairperson urged KPMG to cooperate with any investigation that may be carried out; publicise the timeframes for the independent inquiry; and to consider not bidding for any public contract during this period until the completion of all investigations. He noted that he was leaving the engagement with a negative view from what he initially had before the commencement of the hearing.
The Chairperson welcomed KPMG officials and the Auditor General. He went on to state that KPMG would be given an opportunity to present its responses to the set of questions sent to it by the Committee.
The Chairperson noted that KPMG carried out significant work for state institutions and gets paid for such work with public money. When concerns arose about KPMG arose which created doubts about the standards used by KPMG in carrying out its work, Parliament had to step in rather than be a passive spectator of the unfolding events. This necessitated the opportunity granted to KPMG to engage with Parliament and the public at large. The public hearing was therefore in the interest of KPMG to utilise a public platform such as the Committee hearing to engage with the public.
He noted that 2 October was the last day for annual reports to be submitted to Parliament and a number of the audit reports that the Committee would be engaging on would be products of KPMG. The critical issue then becomes the attitude towards that work; how the Committee relates to it if there are significant uncertainties around it; and whether it could be utilised without any hesitation. It was the Committee’s understanding that audit firms provide essentially two things, namely expertise and trust. The existence of a trust deficit meant that KPMG was already faced with a challenge, particularly because a trust deficit also translates to a questioning of KPMG’s expertise. The engagement was therefore, aimed at giving KPMG an opportunity to clarify matters. The Committee would only have a challenge with KPMG if evasive answers are given. The Chairperson handed over to KPMG to make a presentation on the responses to questions posed by the Committee beforehand.
KPMG response to written questions
Ms Nhlamu Dlomu, KPMG CEO, began by acknowledging the unusual nature of KPMG as a service provider, appearing before Parliament. The invitation sent by the Committee was accepted because the organisation agreed with the Committee that it was constructive for it to present some facts to the Committee. It was also a show of respect for Parliament, and an opportunity for KPMG to share its values of being a professional service firm that upholds objectivity, transparency, and trust in servicing the public sector. KPMG also acknowledged the need to serve its clients well and manage confidentiality. It has responded to the questions asked by the Committee and would do its best in responding to any further questions that may be asked in the course of the meeting. It was important for KPMG to acknowledge the mistakes made in the course of carrying out its work and this has been done in the report submitted to the Committee. However, it was important to note that the organisation comprised of over 3 400 people who embarked on different jobs across the public sector. These were dedicated people that have served with distinction. Although the CEO had only occupied her office for less than 20 days, she had found ways of rebuilding trust in the organisation.
Regardless of the numerous conversations that has taken place in the public space, KPMG requested another chance to rebuild the trust of the public. A number of jobs that the organisation had done for the public sector have been well received, as the organisation had worked in this space for a long time
KPMG also shared the concerns that were raised in the letter from the Committee and would respond appropriately to them.
On the question of why the Standing Committee on Public Accounts (SCOPA) should continue to have confidence in KPMG, Ms Dlomu replied that the organisation worked in a highly regulated environment, with independent regulators that conducted regular checks on it, and provide external validation to the work that KPMG does. KPMG has operated successfully in this environment for many years and it was unfortunate that what constituted a small proportion of the work done by the organisation had resulted in questioning trust in the organisation. KPMG also provided a training ground for people in the accounting profession and other professions and would continue to do so. Strong action has been taken on the concerns raised. The biggest lesson for the organisation was to listen to SCOPA, as a representative of its clients, and respond accordingly to the suggestions made by SCOPA.
On the question of KPMG’s quantum with states and constitutional institutions for the past three years, Mr Modise Maseng: Head of Public Sector, replied that a submission containing details of the work done for the state in the past three years has been made. In 2015, 2016 and 2017, KPMG billed the state R579 million, R485 million and R456 million respectively.
On the number of contracts in 2017, KPMG had active contracts with organs of state in the region of about 222. This figure was not stated in the response submitted to SCOPA because the billing process was determined on a transaction basis. In KPMG’s 2017 financial year, the organisation had an average of 1 300 mandates that it executed in delivery of work that was secured with the state.
On the question of appointing personnel to projects, outlined interaction, operation of report and handover to clients, Ms Dlomu replied that KPMG engaged in a variety of projects, ranging from tax related projects to advisory to audit projects. A typical project would be led by an engagement partner, who alongside all business units would be able to allocate personnel. The choices around personnel were mainly based on the skills required by the job. Usually, the engagement team would be tested for the necessary qualification and skills. A lot of time was also spent in ensuring that KPMG professionals were continually developed in order to service clients. Services were sometimes procured from specialists outside the employ of KPMG South Africa, depending on the work request of a client. The engagement partner was responsible for communicating feedback, discussion and details around the project directly with the client at all times. However, team members were also able to communicate with the client from time to time. KMPG was generally guided by contracts, and different terms of references. Its deliverables were based on the agreement contained in a contract.
Mr Gary Pickering, KPMG interim chair of the auditor’s policy board, added that the terms of KPMG’s engagement were governed by the engagement letter. The engagement partner was however, responsible for the quality of all deliverables, as well as ensuring that all deliverables were consistent with the terms of the engagement letter. The engagement partner was also responsible for reviewing and approving significant deliverables prior to their delivery to the client; and preparing deliverables within the boundaries of KPMG’s policies, procedures, professional standards, and legal and regulatory requirements. Where engagements were allocated or considered to be high risk, KPMG policy required the appointment of a second reviewing partner who would be required to review the final deliverable and to consult on significant or high risk issues. Engagement on deliverables was usually restricted to clients and any other party specifically identified in the engagement terms. This was however, subject to caveats and other relevant restrictions in the circumstances.
On the clearing and handing of final reports over to clients, Ms Dlomu replied that the issuing of reports, whether in draft or final form, was regulated by the client’s request on specific contracts. The value and significance of a report whether in draft or final form, differed from case to case, depending on the type of service being offered. In some cases, the value of the work was in the production of the final report, while in some others, the value of the work was in the services themselves, with a report merely standing as a summary or description of the work performed. Understanding this difference was important because the production of a report in any form or any particular piece of work was dependent on whatever has been agreed with the client, and would be subject to the provisions of the terms of engagement. KPMG SA places a duty on all engagement leaders to employ skill and diligent review in the work product before delivery to clients. It was the duty of engagement partners to ensure quality of work before delivery.
Work was selected from time to time as part of KPMG’s quality performance review. The final work product is reviewed alongside working papers. This was usually done by a separate partner that was not involved in the work. This form of review could also be done by KPMG international colleagues to ensure that standards have been met. Where information is received that the work done for client did not meet required standards, KPMG SA would consider the information and review the work. For the SARS report, the KPMG International (KPMGI) investigation office assessed the report to verify that the engagement team performed the work in accordance with KPMG methodology, standards, processes and procedures; and was in compliance with KPMG risk management protocols. This investigation did not involve doing the underlying work.
Whenever KPMG SA was notified of falling short of standards in doing any work, it sought to correct such immediately. It was important to communicate this view to the client and it may also be necessary to communicate this view to others, depending on the circumstances. In this case, given the failure to appropriately apply its risk management quality control, KPMG SA decided that part of the report which referred to conclusions, recommendations and legal opinions should no longer be relied upon. This was communicated in a public statement on 15 September 2017. On communications to SARS, KPMG SA informed SARS of its intention to make the statement on 15 September 2017, in advance of making the actual public statement. Given the urgency with which KPMG SA felt it needed to act following the international investigation, it became impossible to provide SARS with more time to consider the practical implications of this, if any. However, KPMG offered to engage with SARS, and remain available for any such engagement.
On the method used by KPMG SA in billing its clients in terms of the agreed engagement letter and contract with clients, Mr Pickering replied that the timing of the invoices was largely determined by the nature of the project or work to be done. When dealing with short term or less complex projects, invoices were presented on a mass scale basis where specific deliverables were handed over to the client. Invoices for longer term or more complex projects were subject to specific terms agreed on with clients, typically on a monthly basis.
On the matter of the KPMG work in the programme management office of the Integrated Financial Management System (IFMS) at National Treasury, Mr Maseng replied that the organisation has noted the suggestion stated in the SCOPA letter about irregular payment received by KPMG SA in the IFMS project. However, KPMG held the view that there was no basis for the suggestion that payment received for that project was irregular. None of the Treasury officials responsible for the project has suggested that the work delivered by KPMG fell short of the required standard or did not deserve the payment it received. Also, the invoices and the supporting documents given to Treasury were subjected to inspection and interrogation by the Treasury officials. KPMG remained confident that the invoices issued were supported accordingly; were in accordance with the signed contract, and were managed in the context of the project governing structures agreed to with the client.
On why confidence should be regained in KPMG, Ms Dlomu reiterated that KPMG worked in a highly regulated profession and compliance to regulation was key. KPMG has been in conversation with its regulator and has committed itself to maintaining compliance with any investigation. KPMG would continue to take strong actions to be accountable for the failings that have been identified. KPMG supports the establishment of an independent inquiry for the purpose of keeping it in check and holding it accountable. Regaining public trust was paramount for KPMG.
Mr C Ross (DA) said that SCOPA was interested in engaging with KPMG because it was the Committee had the responsibility of fighting corruption. It therefore considered all issues relating to corruption, as well as improving the quality of financial management in departments and state owned entities (SOEs). He appreciated the appearance of the organisation before the Committee and the openness displayed in the responses to the questions posed by the Committee, particularly because it was not regulated by SCOPA. In terms of the bigger picture, KPMG played a substantive role in the financial management and security of state institutions through auditing, forensic investigation, asset management and review. On this note, he asked Ms Dlomu to define the role of an auditing firm; she was not an auditor by profession.
Ms Dlomu replied that although she was not an auditor by profession, she had been tasked with leading a firm comprising of different skills and with the historical function and basis of auditing. The majority of the partner group and staff that she manages were qualified chartered accountants and registered auditors who were saddled with the responsibility of complying with required standards. She had spent over seven years working with colleagues from the auditing profession and was aware of the need to ensure the existence of a highly qualified leadership with an auditing background to maintain compliance with existing auditing standards. It was for this reason she was appearing before the Committee alongside the chairperson of the interim board, Mr Pickering who was an auditor and Mr Maseng who was a chartered accountant.
Mr Ross asked if she believed that KPMG’s consulting role was largely unregulated, particularly with regard to the fees and the functions of the organisation to its clients.
Ms Dlomu replied that the work done on consulting, was assessed on the basis of the amount of time required to execute the work and the effort put in. To the best of her knowledge, there was no fee regulation but KPMG usually calculated the effort required to complete a piece of work.
Mr Ross asked what percentage of work would be considered as consulting by KPMG in terms of billing state departments.
Mr Maseng replied that 40% of the work done by KPMG was advisory in nature. KPMG however, had its own processes to regulate the organisation as a brand in the market; the key process being risk management. In the risk management process, KPMG had engagements within non-audit services that get selected as part of its key processes.
The Chairperson noted that the CEO had already mentioned that the fee structure was not regulated.
Mr Ross noted that a huge amount of work done by KPMG was completely unregulated in terms of fees, and this was something that the profession should look into. From the recent event indicating misconduct by KPMG, the Committee was extremely concerned about the integrity and appropriateness of KPMG as a service provider to the state. It was a known fact that the organisation dealt with huge amounts of money in terms of contracts. He had received some information that morning on its forensic invoicing to the tune of R106 million which excluded audit and tax functions. Based on the fact that huge money and cost to the state was involved, and different allegations have been levelled against KPMG, was the SARS-KPMG debate not just the tip of the iceberg, especially if KPMG had a systemic problem, given the huge number of contracts it has with the state?
He noted that KPMG had replied that it handled 1 301 projects on behalf of the state and constitutional institutions in 2016 only. In the last three years, the organisation had handled an average of 4 000 projects for the state. The cost implication of this was immense for the state, and the Committee should be equally concerned about the cost to the state. He asked if KPMG battled with a systemic problem in terms of all projects or if it was an isolated incident that brought the attention of the public to the problem. Did KPMG and its projects pose a systemic risk to the state?
Ms Dlomu replied that the organisation was also concerned. However, KPMG has reverted to the existing evidence in terms of quality performance reviews that prove the performance of the bulk of its work on a macro level to the satisfaction of its international standards. The bulk of KPMG’s work was also checked by reviewers across the network of the organisation. Some other entities in the auditing space also carried out checks on KPMG. KPMG was satisfied that it generally performed within the right levels compared to its peers in the auditing environment.
On whether the organisation was affected by a systemic problem, she replied that there was no evidence to prove that KPMG was affected by a systemic problem, as the investigation of KPMGI did not prove such.
The Chairperson asked if KPMGI reviewed all projects handled by KPMG SA or it only reviewed the SARS report.
Ms Dlomu clarified that the investigation in question was carried out on both the SARS report and some other work done for a private entity. However, quality reviews were carried out on all KPMG SA projects on an annual basis.
The Chairperson pointed out that the submission that KPMGI did not find a systemic issue in KPMG SA could only happen if KPMGI reviewed almost all KPMG SA projects. Such conclusion could not have been drawn from reviewing only the SARS report and the macro issues.
Considering the fact that KPMG had handled over 3 900 contracts over the last three years for the state and constitutional institutions, Mr Ross asked if an isolated approach would have been able to identify or rectify any systemic issue. He requested schedules and details of contracts entered into between KPMG and state entities; issues identified in those contracts; current contracts; contracts handled over the last three years; as well as contracts already tendered for. He repeated the information he had on R106 million, but noted that the information seemed limited. He acknowledged that such information may be confidential but sought guidance from KPMG on the request to assure SCOPA that no looting of public funds was taking place, particularly as it was the primary role of SCOPA to ensure value for money on the use of public funds per invoice, and to prevent irregular expenditure.
Ms Dlomu said the information requested would be submitted to the Committee in writing.
Mr Ross asked for proposals from KPMG on the suggested independent inquiry and progress in initiating such a process.
Ms Dlomu replied that KPMG’s proposal was for the establishment of an independent inquiry led by a lead figure in the legal fraternity. This was because KPMG desired to provide assurance to SCOPA, other clients, and South Africans in general that both KPMGI and KPMG SA would address any issues that may arise from the work done by the them
The Chairperson asked if the independent inquiry would be independent to KPMG management or to South African Institute of Chartered Accountants (SAICA) and other regulatory bodies.
Ms Dlomu clarified that the independent inquiry would be independent to KPMG SA and KPMGI.
Mr Ross referred to the Vrede community dairy project in the Free State in which KPMG was involved, and in which there was a reclassification of the expenditure of Linkway, a Gupta linked company. KPMG was asked to provide information on the reclassification of expenditure as business expenses which were for a wedding.
Mr Pickering clarified that KPMG was not the auditor of Estina nor was it involved in the Free State project. KPMG was the auditor to Linkway which was an Oakbay company. The interest of KPMG was in the audit of Linkway and other home based companies. On the expenditure in Linkway, KPMG had noted SCOPA’s question on the wedding expenses. This company operated as an events company and the wedding expenditure that was included in the company was reimbursed from another company known as Accurate Investments, of which KPMG was not the auditor.
Mr Ross said the approach of listing a number of companies suggested that KPMG was shifting the blame. However, SCOPA would look into the information given in response.
On the substandard report on the SARS rogue unit investigation, Mr Ross noted that the revised report on the SARS rogue unit had huge political, financial and economic implications for the country, despite the fact that the report was substandard and did not meet set requirements. He was aware of the fact that 35 people were working on the SARS report and a number of people were accused of illegal and unprofessional conduct. Why were none of the accused persons interviewed by the 35 people working on the report? Were there any interviews? KPMG was asked to clarify the different reports in terms of the timelines, and reasons for revising the reports.
Ms Dlomu clarified that the scope of work was a documentary review. It therefore considered actual information provided by the client. As for the different reports, she said that draft reports were often provided to management on the work carried out. Revisions of such reports took place from time to time, especially at the request of a change of scope like the case at hand.
Mr Ross asked if KPMG could submit its briefing note on the mandate of the SARS report or if such reports were confidential and private to the company.
Ms Dlomu replied that because KPMG had contracts with institutions of the state, it would have to communicate with SARS on the request made to ensure that KPMG did not overstep its boundaries on any of the mandates.
Mr Ross noted that the report was partly retracted. He wanted to know why the report was not retracted in full, and who gave the legal advice to partly retract it.
Ms Dlomu replied KPMGI’s review and investigation considered KPMG SA’s processes, risk procedures, and methodologies used. KPMGI)did not redo the actual body of the work. The recommendation and conclusions that the report could not be relied upon were based on the way that risk processes were managed during the conduct of the report. KPMG SA could therefore not comment on withdrawing the entire report.
Mr Ross asked if the review was initiated by KPMGI, and why did KPMGI intervene in KPMG SA’s investigations and reports, specifically on the report in question.
Ms Dlomu replied that KPMG, being an international firm, had a requirement for its international partners to provide support on the ground from time to time. KPMG SA therefore requested its international partners to assist in providing a level of objectivity and to test its work against global standards.
The Chairperson asked for the reason for KPMG SA’s request for assistance from its international partners on the specific report in question. Was there a body of reports that was requested to be reviewed or it was only the report in question?
Ms Dlomu replied that the reason behind the request for assistance from KPMGI was for the international partners to consider two areas of work that KPMG SA had done in the recent past. These works had been reviewed to some extent by the South African firm but KPMG SA wanted additional assurance on how the work was done, hence the request for a review by international partners. Requests were sent to KPMGI from time to time, to perform reviews. Requests were made for specifically two areas because they were areas where issues had arisen in the public and KPMG SA wanted to ensure that clarity, objectivity and openness were provided to the public on how the work was done.
The Chairperson said that the issues should have been categorised as high risk according to KPMG risk management process, which should have been addressed immediately and not as an afterthought.
Mr Ross asking if the SARS report was sent to the former Minister of Finance before the February budget, and if the former Minister of Finance was implicated in the report.
Ms Dlomu replied she had no information on this but would confirm if KPMG sent the report to the former Minister of Finance.
Mr Ross said that the Minister particularly referred to the findings of the SARS report in the budget.
The Chairperson said that the question should be passed over, as KPMG compiled and presented the report to SARS, and could not have been aware of other events that took place after that. Any other events that took place after the submission of the report to SARS must have been from SARS itself.
Mr Ross asked if KPMG had received a response to the letter it wrote to SARS on 15 September 2017 that the legal opinion should no longer be relied on.
Ms Dlomu replied that KPMG has requested an engagement with SARS to discuss this further. KPMG has received a response on the setting up of a meeting but a date for the meeting is yet to be confirmed.
Mr Ross asked if SARS questioned the submission of KPMG not to rely on the legal opinion.
Ms Dlomu replied she could only state that a public response has been received on the letter sent to SARS. However, KPMG has not had the opportunity to engage directly with SARS.
Mr Ross said the impact of a predetermined report in the public domain raised a huge concern; was very unethical; and it depicted a lack of responsibility on the part of KPMG. He hoped that KPMG would assist SCOPA and the Standing Committee on Finance by submitting responses in writing to clarify these issues.
Mr T Brauteseth (DA) said one of the reasons for requesting KPMG to appear before SCOPA was because it was a supplier to the State. This gave SCOPA the right to engage with the organisation, especially since the Constitutional Court judgement relating to Cash Paymaster Services (CPS) earlier in the year stated that CPS was an effective functionary of the state because it carried out work on behalf of the state. KPMG was therefore regarded as a partner. He wanted to know how KPMG weighed the conflict between employer and referee. How does KPMG provide audit services for the AG, since it also provided forensic and consulting services to the state institutions?
Mr Pickering replied that KPMG was very conscious of the audit services it provides and it ensures that such audit services did not conflict with other services it provides.
Mr Brauteseth asked why KPMG SA did not request a completely independent body rather than KPMGI to review the work done on Linkway and SARS, since the organisation preferred to avoid conflict.
Ms Dlomu replied that KPMG SA being a global member firm, had the advantage of accessing people that were not working directly with the South African branch to review its work and ensure that it complied with global standards and methodologies. It was for this reason that KPMGI was approached.
Mr Brauteseth asked if KPMG SA realised that KPMGI could in no way be regarded as an independent body as they were the mother body. How could KPMG SA regard its international partners as independent in conducting a review on its work?
Ms Dlomu replied that the request to KPMGI was to conduct a review based on KPMG SA standards. The proposal for an independent inquiry was separate and different from this.
Mr Brauteseth asked why KPMG SA did not approach an independent inquiry as a first point of contact.
Ms Dlomu replied that the decision to approach KPMGI was taken in the last three months and she was unable to provide the detailed reasons for the decision taken.
Mr Pickering added that the Independent Regulatory Board for Auditors (IRBA) announced its investigation into Linkway specifically. KPMG SA was therefore mindful of the investigation.
Mr Brauteseth referred to KPMG’s submission on the fact that there were enquiries about the nature of related party relationships and the commercial substance of significant unusual transactions. He asked what this submission meant to the Committee, particularly for party relationships and unusual transactions.
Mr Pickering replied that the commentary made by KPMG in its media statement reflected the fact that its work in those areas was insufficient. Reference to parties referred to other parties that could be connected to the Oakbay Group.
Mr Brauteseth asked for details of the significant unusual transactions.
Mr Pickering replied that significant unusual transactions within the Oakbay Group occurred from year 2014 onwards, including large amounts and capital flows, and which necessitated KPMG to do more work on the audits. The unusual transactions constituted red flags, one of which was referred to in the media statement.
Mr Brauteseth asked who carried out the initial work and did not identify the red flags.
Mr Pickering replied that the conduct of audits was usually supervised by engagement partners, engagement managers and the team. The primary responsibility of identifying red flags was placed on the team that would have conducted the audits annually.
Mr Brauteseth asked if KPMG was familiar with the wording of the provision of Section 34 of the Prevention and Combating of Corrupt Activities Act (PCCA).
Mr Pickering replied that he was not familiar with the provision but was aware of the Act.
Mr Brauteseth said it was problematic that KPMG was not familiar with the provision. He asked if KPMG was aware of its duty to report criminal activities.
Mr Pickering replied that KPMG was aware of this duty.
Mr Brauteseth said that Section 34(1) provides for this duty while Section 34(2) states that non-reporting of criminal activities was an offence. Section 34(4)(g), (h) and (i) sets out those liable for failure to report criminal activities. He noted that the initial KPMG team fell into the category of those liable for failure to report the unusual practices. He asked if any reporting was done to the police in this regard.
Mr Pickering replied that KPMG had fulfilled all its reporting obligations. However, the team did not report the unusual transactions to the police as these unusual transactions had not been identified at the time.
Mr Brauteseth asked for the rationale behind KPMG’s assumption that it was not necessary to report the unusual transactions to the police at the time.
Mr Pickering replied that KPMGI pointed the attention of the local branch to those red flags.
Mr Brauteseth asked if KPMG SA did not deem it fit to report the red flags identified by its international partners to the police.
Mr Pickering replied that it was not all the red flags that related to corrupt practices.
Mr Brauteseth said it was common knowledge that no action was taken by KPMG in terms of the PCCA. He however asked if KPMG SA had laid charges against the team that conducted the audits and therefore committed an offence in accordance to Section 34(2) of the Act.
Mr Pickering replied that no charges have been laid yet but KPMG would certainly take action in this regard.
Mr Brauteseth noted that the National Treasury had given SCOPA a full list of named persons involved in the KPMG scandal. He asked what action had been taken against these persons, particularly because KPMG’s generosity towards refunding SARS for the work done had been noticed. He asked for the implication of the said refund. Did it mean that all the work done for SARS on the SARS rogue unit report was useless?
Ms Dlomu reiterated that KPMGI did not redo the work for SARS. The quality and redoing of the actual work was yet to happen. It was only the checking of KPMG SA’s processes against its methodologies that has taken place. The decision to refund the R23 million to SARS implied that KPMG acknowledged the incorrectness of the recommendations and conclusions.
Mr Brauteseth said the total refund of R23 million for the entire work done on behalf of SARS made no economic sense. He asked the reasons behind the total refund.
Ms Dlomu replied that 80% of the work was yet to be reviewed in terms of redoing the work in compliance with quality standards.
Mr Brauteseth repeated his question on whether the entire work done by KPMG for SARS was a complete waste of time, and whether this was the basis for refunding the money. Did it imply that the entire work should be set aside?
Ms Dlomu replied that the implication of KPMG’s position was that the bulk of the work was completed in accordance with the organisation’s processes. KPMG had no information from its international partners on the need to set aside the entire work, since KPMGI did not review the entire work.
The Chairperson asked if KPMGI reviewed only the recommendations, conclusions and legal opinions of the report or reviewed everything and only found issues with these three elements.
Mr Maseng clarified that KPMGI reviewed the level of KPMG SA’s compliance against the methodologies used for the audit process.
The Chairperson restated his question on whether the international partners only reviewed these three elements of the report or whether the entire report was reviewed and issues were only highlighted on those three parts.
Mr Maseng replied that KPMGI reviewed the level of KPMG SA’s compliance to methodologies in respect of the three parts. Areas found wanting were in respect of the legal opinion, recommendations and conclusions.
Mr Brauteseth asked why KPMG did not refund one-third of the funds instead. He noted that apart from the full refund of R23 million, KPMG committed to giving R40 million to any charity organisation that fights corruption. He therefore sought explanation on the reason for such generosity on KPMG’s part, particularly this chunk of money. He restated his question on whether the entire report on the SARS investigation was worthless. He noted that he used to work as a forensic investigator and he was aware of corners of truths on particular jobs; there would be a body of evidence collated by people in the field that reflects the truth to a particular issue. It was difficult for the entire team carrying out investigation to conclude that the entire investigation was useless. He therefore asked the percentage of the SARS report that was problematic.
Mr Pickering replied that the part KPMGI indicated could not be relied upon was the recommendations, conclusions and legal opinion. The other part related to factual findings that involved the compilation of key findings from a documentary review of more than 850 000 emails and over 1 000 000 documents covering six months and 30 people. KPMGI did not redo this work; it only concentrated on the specific processes and procedures on how the report was compiled. Based on it, KPMGI was satisfied that there was no reason to withdraw the entire report, but noted that the recommendations, conclusions and legal opinions could not be relied upon. When KPMG SA considered the sanction, given the impact of the media statement and the comments made in this regard, it was the view of the board and the leadership that the full fee should be refunded.
Mr Brauteseth said his line of questioning was due to the conduct of the KPMG staff that worked on Linkway, and those that worked on the SARS report. Although KPMGI has found no illegality in respect of the SARS report, he asked if any of the staff that worked on the SARS investigation took any action in terms of PCCA, especially since the persons that carried out the initial investigation must have suspected some illegality going on around the existence of a rogue unit. Why was no action taken?
Mr Pickering replied he could not confirm the position.
Ms Dlomu added that KPMG SA could not confirm that action was taken in terms of PCCA. However, the report was given to its client. KPMG could only maintain its role as a service provider, but could request assistance on details required by SCOPA from the client.
Mr Brauteseth noted that because KPMG SA was not aware of the wording of the Act, it would not be aware of the provision of Section 34(4)(g) that lists all persons that would be held responsible for not reporting a criminal activity. He asked what action had been taken against persons removed from KPMG. Have packages been paid to these persons and if so, what did the packages entail?
Ms Dlomu replied she would need to seek legal advice before responding to the question due to the employer-employee relationship between the organisation and the persons concerned.
The Chairperson said that the question required a yes or no answer.
Mr Brauteseth said that KPMG announced the exit of these persons from the organisation after the issue of the SARS report arose and it would have been impossible for disciplinary actions to have been taken against those persons within a short period. He therefore asked if those persons decided to resign on the promise of a generous package.
Mr Pickering replied that severance packages were paid to some of the nine partners that exited the organisation in the interest of speed to enable the organisation to forge ahead in terms of allowing the new leadership team to assume duty.
Mr Brauteseth said that the removal of the four persons involved reflected the adoption of damage control by the organisation. This was probably the reason behind the generosity of KPMG in terms of the R40 million donation.
Ms Dlomu disagreed with Mr Brauteseth’s view. She noted that this was the reason for KPMG’s proposal for an independent inquiry to establish any other facts or evidence. The R40 million donation would be managed in a way that would benefit the community. KPMG deemed its efforts as a start towards a reparation process. It would however be guided by the findings of the inquiry.
Mr Brauteseth said it seemed the stance of KPMG was misleading the public by stating that the persons had exited the organisation without stating that these persons resigned from KPMG based on payment of a severance package. Instead, KPMG created the impression that these persons were dismissed and there had been some sort of consequence for their actions. As mentioned earlier, KPMG did not take any action against these persons for not taking action in reporting illegality. Instead, it has paid off people who should have been held liable for condoning illegal activities. He asked if KPMG was aware of what impact its actions had on the South African public.
Mr Pickering replied that KPMG took its reporting responsibilities very seriously and the new leadership team was committed to addressing these issues.
The Chairperson noted that KPMG was embarking on damage control instead of addressing the issue at hand.
Ms Dlomu replied it was important for SCOPA to note that KPMG was committed to taking appropriate actions where required. Different actions were taken for the different individuals that resigned. However, there were still areas that the organisation would continue to work on in order to take full responsibilities. Since the release of the KPMGI report in the last two weeks, the new leadership was doing its best to stay accountable. KPMG SA was therefore requesting a chance to take necessary action on the recent issues.
Mr Brauteseth said that although the CEO committed to providing information that will give SCOPA comfort, what gives him comfort was seeing justice done, especially because this was rare in South Africa. Instead, people are paid handsomely to walk away from their problems. Nevertheless, KPMG was aware that the persons responsible for not pointing out the red flags in the Linkway and SARS investigation had committed an offence in accordance with the law. KPMG was supposed to fish out persons within the organisation that were aware of this illegality and did not report it. Doing this would assure the South African community of KPMG’s desire to address corruption. He asked when the service level agreement between SARS and KPMG would be submitted to SCOPA. He asked for details of the engagement between SARS and KPMG. He noted that the document could be given to SCOPA since KPMG was paid and the contract involved a state entity.
Ms Dlomu replied the document could be received from SARS. However, KPMG was willing to provide response to the question after the meeting.
Mr Brauteseth asked if the document was currently with KPMG at the meeting, and Ms Dlomu replied that it was not. He went on to note that IRBA denied KPMG cooperation unlike what the organisation had said. IRBA appeared before SCOPA on 3 October 2017 and referred to phrases such as ‘non-cooperative and giving information in bits and pieces’.
Mr Pickering replied that the discussions with IRBA in the initial stages focused on the weaknesses within IRBA’s jurisdiction, which have now been resolved.
Ms Dlomu corrected the response by noting that some of these issues were raised at a meeting held with the IRBA CEO a week ago. Since then, KPMG has been working to ensure all outstanding documentation was submitted.
The Chairperson clarified that submission made by IRBA two days ago in Parliament was that KPMG was not cooperative.
Ms Dlomu replied that, in her understanding, the Linkway review started earlier and a number of conversations had taken place. Some documents were outstanding. However, KPMG has been working towards clearing the backlogs since its last interaction with IRBA.
The Chairperson asked for a straightforward answer on whether KPMG cooperated with IRBA or not.
Mr Pickering replied that the discussions around IRBA focused on jurisdiction and on certain documents on which complaints were made. In other words, KPMG found some of the documents that IRBA needed problematic. KPMG has however decided to be pragmatic and would provide all documents that IRBA needed. The reason for not giving out the requested documents initially was because KPMG was concerned about setting precedent on handing out documents that were outside the scope of IRBA.
Mr Brauteseth referred to the last line on page 4 of the KPMG response to SCOPA questions that states that KPMG believed that it needed to take the initiative to support and reform its profession as a whole. He asked what was wrong with the profession.
Mr Pickering referred SCOPA to page 3 of the KPMG response where it was suggested that an integrated report would be used to enhance transparency in the profession, as well as enable clients to have greater insight into the quality and risk management work of the organisation, and various aspects of transformation that affect the organisation and the profession in general. KPMG has made suggestions on enhancing governance within the organisation through the appointment of independent directors on its board.
Mr Brauteseth asked if KPMG upheld the view that the auditing industry was not transparent enough. Getting an answer to this was very important to SCOPA, especially because state institutions partnered with KPMG and other big auditing firms.
Mr Pickering replied that the regulators and the firms in the industry were more transparent in terms of the provision of transparency reports and disclosure of findings on quality reviews. This form of transparency was practiced in the United Kingdom.
Mr Brauteseth asked what the transparency practiced in UK entailed.
Mr Pickering replied that it entailed making public findings on all quality reviews conducted by regulators. All firms were subjected to publicise documents that emanated from such findings. Firms produced transparency reports on risk management and quality assurance.
Mr Brauteseth asked if this was not already practiced by KPMG through the submission of annual reports and production of findings on state entities in the reports submitted to the AG.
Mr Pickering replied that the response was given in relation to all the sectors in which KPMG operated.
Mr Brauteseth referred to point 2.1.1 on page 3 of the KPMG response to SCOPA which stated that the affected area of the piece of work represented a small proportion of the services that KPMG SA has delivered for public and private entities. He asked if KPMG SA had initiated a review of the work done in the last two years to ensure that the two issues under debate were the only ones to be addressed.
Ms Dlomu replied that KPMG SA has requested KPMGI to conduct a comprehensive review on its work, and it was open to correcting any mistakes that may be found. Also, KPMG SA was looking into all risk and quality issues including client acceptances and continuous procedures, which was where most of the highlights reflected.
Mr Brauteseth clarified that his question concerned the review of previous work done by KPMG SA over the last three years to identify other issues that were not addressed.
Ms Dlomu confirmed that KPMG SA had embarked on such reviews. KPMG SA has requested its global colleagues to assist with reviewing areas of its work that were identified as high risk engagements.
Mr Brauteseth asked if those were historical high risk engagements or if it referred to high risk engagements in future.
Ms Dlomu replied that reviews were ongoing on both historical and future high risk engagements.
The Chairperson noted that the importance of the question posed by Mr Brauteseth was related to the fact that the officials that exited the organisation were not middle management officers. They were senior management officers. This raised a concern about the quality of work that was done under their watch.
Mr Brauteseth concluded by noting that there were certain things that could not be left out in addressing the issues involving KPMG SA. The rogue unit report remained an ongoing concern but SCOPA had to allow the Standing Committee on Finance to address this. However, it was important to have on record that a group of people within KPMG confirmed the existence of a rogue unit, the existence of which has been denied by KPMG in recent times. The true circumstances would lie in between the two positions. However he would like KPMG to be transparent with SARS and table a request to conduct interviews on all the people that worked on the report to find out why they believed there was a rogue unit. This should be aimed at establishing the existence of the said rogue unit or that claims of such rogue unit were a complete fabrication; and then establish the link between the claims and the engagements. In other words, it was necessary to confirm if the previous Minister of Finance had any involvement in the issue. He urged KPMG SA to mete out some sort of criminal sanction against those that failed to comply with the PCCA.
Mr D Maynier (DA) said he was not convinced by KPMG SA’s damage control methods, particularly because it was premised on a few bad apples. There was a systemic problem in KPMG SA which has brought about the questioning of work that have been done over the past three years, work currently being conducted and future work. This was because, based on KPMGI’s findings, the Committee could not be certain until KPMGI’s independent investigation was completed and confirmed the fact that the organisation’s work was not tainted by corruption or illegal activities. He asked for the name of the partner or senior executive that authorised the extension of the mandate.
Mr Pickering replied that the name of the partner was Johan van der Walt.
Mr Maynier asked if KPMGI’s investigation reviewed whether SARS was able to influence KPMG’s conclusions, legal opinions, and recommendations.
Mr Pickering replied that this was not established.
Mr Maynier said that KPMG SA had withdrawn certain sections and conclusions of the report, which has led to uncertainty. Which conclusions and recommendations have been withdrawn? He read out six statements and asked if those conclusions could be relied upon. The first was: “A covert and rogue intelligence unit in contravention of the rule of law, was established in SARS.” Can this statement be relied upon or not?
Mr Pickering replied that the statement could not be relied upon, as KPMG did not have the legal expertise to come up with that view.
Mr Maynier asked if the second statement which was that KPMG found no evidence that the Minister of Finance knew about the existence of the unit in SARS, could be relied upon or not.
Mr Pickering replied that the second statement could be relied upon.
Mr Maynier asked if the third statement that there was no evidence to connote that Gordhan was aware of the existence of the unit, could be relied upon or not.
Mr Pickering replied that the third statement could be relied upon.
Mr Maynier asked if the fourth statement that the unit engaged in unlawful interception of communication, could be relied upon or not.
Mr Pickering replied he could not confirm the fourth statement but he would seek counsel on this.
Mr Maynier asked if the fifth statement on SARS engaging unlawfully in the procurement of intelligence gathering equipment with the necessary interception capabilities, could be relied upon or not.
Mr Pickering could not confirm the fifth statement.
Mr Maynier asked if the sixth statement on the evidence that the installation of equipment and purchasing thereof was in contravention of the provisions of the Regulation of Interception of Communications Act, could be relied upon or not.
Mr Pickering could not confirm the statement.
Mr Maynier noted that the six statements were drawn from the conclusions and body of the report. It was evident that KPMG could not categorically refer to statements that could be relied upon and was unsure about whether other statements could be relied upon. This was despite the fact that KPMG SA had withdrawn all conclusions, recommendations and legal opinions. On one hand, KPMG concluded that the unit engaged in unlawful interception of communication while on the other hand it had withdrawn all conclusions, which in effect meant that the statement could not be relied upon. However, the conclusion in the body of the report which could be relied upon, was to the effect that SARS unlawfully engaged in procurement of intelligence gathering equipment with the necessary interception capabilities. He asked how one was to balance these conflicting positions.
Mr Pickering replied that the last statement could not be confirmed.
Mr Maynier sought clarification on whether KPMG was unable to confirm that the conclusions it had withdrawn were in fact correct or incorrect.
Mr Pickering repeated the KPMG response which was to the effect that the organisation did not have the legal expertise to form many of the conclusions and recommendations; neither did it have the evidence to support them, hence the withdrawal of recommendations section of the report.
Mr Maynier said the problem with this response was that the statements referred to were drawn from broad conclusions made by KPMG. It appeared that KPMG SA did not understand what it was saying or what conclusions it has or has not withdrawn.
Ms Dlomu replied that the initial scope of work that KPMG was asked to carry out was in relation to the body of the work. However, KPMGI has not redone the work and this made it difficult to give satisfactory answers to some of the questions asked by SCOPA.
The Chairperson clarified that the point Mr Maynier was making was that there were certain conclusions that KPMG could confirm, and there were certain other conclusions that KPMG could not confirm. Yet, all these conclusions were drawn from a body of information that KPMG went through. He equally thought all conclusions had been withdrawn. He was therefore surprised that there was a distinction between conclusions that could be relied upon and those that could not be relied upon.
Mr Maynier confirmed that the Chairperson had clarified his question. Despite KPMG’s claims on the withdrawal of recommendations, conclusions and legal opinions, the organisation was unable to confirm that the statements referred to could not be relied upon.
Mr Pickering noted that KPMG had indicated a withdrawal of the recommendations, conclusions and legal opinions in their entirety.
Mr Maynier then repeated his question on whether the statement on the unit’s engagement in unlawful interception of communication could be relied upon or not.
Mr Pickering repeated his previous answer on the withdrawal of all sections in which the statement was referred to, as well as the lack of legal expertise to have expressed the opinion in the statement referred to.
Mr Maynier asked for the reasons behind the withdrawal of this statement.
Mr Pickering repeated his answer about the lack of legal expertise to have expressed the opinion in the first place.
Ms Dlomu replied that KPMG could not own all the legal opinions expressed in the report since they were legal opinions beyond the expertise of the organisation to begin with.
Mr Maynier restated his previous point made on KPMG’s uncertainty about what statements could be or could not be relied upon, despite the withdrawal of the conclusions and recommendations in their entirety. He noted that the section of the report dealing with the conclusion in the statement referred to had been withdrawn, despite it being alluded to in the body of the report as one of the findings made. He insisted on getting clarity on how these two conflicting positions could be balanced.
Ms Dlomu repeated her previous answer on the reasons behind KPMG’s request for an independent inquiry, which was because the work had not been redone by KPMGI. KPMG SA could therefore not give detailed answers to questions relating to the report.
Mr Maynier asked for the rationale behind the KPMG SA submission that no evidence was found on the Minister of Finance’s awareness of the existence of the unit in SARS or that Gordhan was informed about the existence of the unit in SARS. How would KPMG determine that these statements could not be relied upon?
Ms Dlomu replied that the report in question was the one that emanated from the international investigation. KPMG SA did not carry out the investigation itself but it was open to providing formal responses to SCOPA in writing.
Mr Maynier sought confirmation that KPMG was unsure of what could or could not be relied upon in the report.
Ms Dlomu repeated the same answer about the work done by KPMGI on the report. She however noted that it would be difficult to state that the report could be relied upon since due processes were not followed. She repeated her request for KPMG to be given an opportunity to provide detailed responses to the Committee in writing.
Mr Maynier repeated the question on the first statement, and Mr Pickering repeated his answer to the effect that KPMG did not have the legal expertise to form the opinion expressed in that statement.
Mr Maynier noted that he raised a question in the Standing Committee on Finance meeting about KPMG SA’s cooperation with IRBA. At the end of the day, KPMGI made a commitment that KPMG SA would fully cooperate with IRBA. However, IRBA’s position was that KPMG SA had failed to fully cooperate. He therefore asked if the statement made by the IRBA CEO was correct or not, that KPMG SA had refused to hand over specific documents to IRBA. What were the reasons for the refusal to hand over those documents?
Mr Pickering replied that the requested documents related to certain tax compliance work done by KPMG. Discussions had taken place with IRBA on whether this request was within the jurisdiction of IRBA. The advice KPMG received from its attorneys was that the request fell outside the jurisdiction of IRBA. However, KPMG has now agreed to supply this information.
Mr Maynier asked if this meant that the CEO of IRBA lied to Parliament.
Ms Dlomu replied that a conversation was held with Mr Bernard Agulhas, CEO of IRBA prior to his appearance before the Standing Committee on Finance and he raised the same concerns to KPMG. KMPG has however committed to cooperate.
Mr Maynier asked if KPMG therefore agreed with Mr Agulhas that KPMG had failed to cooperate with IRBA.
Ms Dlomu replied that the documents requested by IRBA have been handed over and she has personally committed to fully cooperating with IRBA henceforth.
Mr Pickering repeated his answers to this line of questioning.
Mr Maynier said that SCOPA’s concern was based on the existence of a systemic problem within KPMG SA and until the independent investigation is completed, the quality of KMPG’s work in compliance to standards and whether its work may be tainted by corruption or illegal behavior, would continue to remain questioned. He therefore asked if KPMG had considered the appropriateness of acting in the public interest by voluntarily withdrawing all processes on existing works in the public sector, as well as the placing a moratorium and voluntarily commit itself to not bidding for any work in the public sector until the independent inquiry has been completed, and it was able to assure South Africans that all systemic issues have been dealt with and it was in a position to work based on appropriate standards.
Ms Dlomu replied that there was no evidence to the effect that KPMG SA constituted a systemic risk. However, KPMG SA was open to considering SCOPA’s suggestions and would go back to reflect on same.
Mr Pickering added that KPMG like all accounting firms, was subject to annual quality performance reviews which was led by KPMGI reviewers, and which reviewed work across audit, tax and advisory services provided by KPMG SA. Annual inspections were conducted by its regulator, IRBA, and by the Public Company Accounting Oversight Board (PCAOB) to the extent that some of its clients are governed by the PCOB. He pointed that KPMG SA was the auditor to four of the five main banks in South Africa, and the joint audits for these banks were subject to cross-review processes that take place to ensure the quality of its work on an annual basis. The findings made by KPMG SA were aligned with other findings from other firms. There was therefore no reason to believe that KPMG SA was faced with systemic problems.
Mr Maynier emphasised the point that these checks and balances have not worked, and this explained the current situation. He urged KPMG SA to consider his proposal, and if not, that SCOPA should formally recommend the consideration of this proposal to KPMG SA.
Mr Pickering replied that KPMG currently had about 2 500 audit clients, and the only matter at hand was in relation to a single but former client out of the whole lot. This client represented only 2% of KPMG’s revenue.
The Chairperson asked which response should be received between that of Ms Dlomu, the CEO, and Mr Pickering.
Ms Dlomu responded that the context of the scale of issues that have been identified in relation to the two specific clients under review.
The Chairperson interrupted to clarify his question on whether the definitive response to the proposal of Mr Maynier was the response given by Mr Pickering or Ms Dlomu herself.
To this, Ms Dlomu responded that KPMG would consider the suggestions that have been made to it.
Mr Maynier noted that his proposal was made based on the fact that every bid process that KPMG SA was currently involved in or would be become involved in pending the outcome of the independent investigation was potentially compromised. The initiators of such bid processes could not be assured of the fact that KPMG SA had the capacity to deliver work of the required standard. KPMG SA’s assurance was not compelling. It was only an independent investigation that would be compelling.
Mr Pickering reiterated that KPMGI had confirmed that the quality of the work done in respect of the two clients under review did not meet the high standards of the firm. KPMG SA has committed itself to an independent inquiry despite its belief that there was no systemic problem in the organisation.
The Chairperson asked why KPMG believed that it was not battling a systemic problem.
Mr Pickering restated his responses on the conduct of independent reviews on the work carried out by the organisation on an annual basis.
The Chairperson asked if the two clients in question were independently reviewed alongside works done for other clients.
Mr Pickering replied that the two clients in question were reviewed by KPMGI.
Ms Dlomu noted that KPMG SA was saddled with the responsibility of carrying out work for other clients, and had subjected itself to an independent inquiry. It sought an opportunity to revert back to SCOPA after the completion of the independent inquiry.
Mr Pickering added that there was no auditing firm in the world with perfect audits or tax advisory work.
Mr Maynier said that the issue at hand was not about the survival of KPMG. Instead, it was about the survival of South Africa and it would be possible for the country to survive with the continued existence of audit firms that produced the kind of work produced by KPMG SA. KPMG SA had to take responsibility for this.
Ms Dlomu replied that KPMG SA was committed to rebuilding trust in the people of South Africa.
Ms N Mente (EFF) asked if SARS had accepted the offer of the R23 million refund by KPMG.
Ms Dlomu replied that no opportunity had arisen to discuss this with SARS yet.
Ms Mente asked about KPMG’s use of the R23 million refund as a mitigating factor between itself and SARS, and what the consequences of SARS refusal to accept the refund would be.
Ms Dlomu replied that KPMG did not consider the refund as the only mitigating factor. The organisation would like to engage with SARS. In the event that the refund was rejected, KPMG would donate same towards another cause.
Ms Mente noted the donation of R40 million to yet another cause. The issues at hand have led to the questioning of KPMG’s integrity, which was a serious concern for SCOPA, particularly because it implied that SCOPA could not vouch for KPMG to undertake any other audit on behalf of the government. She asked if Treasury believed the explanation that the senior management resigned as a consequence of the chaos. It was surprising that no criminal charges were taken against the officials and none of the statements highlighted by MPs could be confirmed. How would KPMG’s uncertainty assist in regaining its integrity? She noted that KPMG had three areas of billing, with the biggest area being advisory, which was not regulated. She therefore asked if such a huge amount of money was paid to private audit firms by the Auditor General.
The Auditor General, Mr Kimi Makwetu, said that the pricing of audit firms was characterised by service lines, which was about giving assurance, while advisory and tax services were predominantly centered on providing service to management of an entity. This explained the three service lines of billing by audit firms. However, the Office of the Auditor General as a state institution was only allowed to perform work of an assurance nature. In other words, the Office only got billed based on the statutory audit services when work was given to private audit firms. The Office of the Auditor General was not allowed to provide consulting services to the same entities that it audited. This was based on an independence point of view, and aimed at managing conflict of interest.
Ms Mente asked if what the Auditor General offered to state was far less in value than what the state paid to private firms.
The Auditor General replied that in most instances the rate of the Office of the Auditor General was largely driven by a consideration of recovery of the cost incurred, from staff to facilities to space utilised and some other costs that may have been incurred. The rate per hour tends to be predominantly far less than what obtains in a private audit firm. The structure of the Office of the Auditor General cost base, and the fact that people believed that they will get paid based on what audit firms believed they were worth explained the affordable amount charged by the Office of the Auditor General. This could be different from the considerations that other audit firms may take into account in determining the cost to be paid. However, the Office of the Auditor General only contracted private audit firms to carry out work on its behalf based on its own rates and not the rate designated by the private audit firm.
Ms Mente asked for a rounded off figure of the cost of auditing a metro.
The Auditor General replied that he could not state the amount off the top of his head but the driver of what the cost of auditing a metro would be was the rate for the different levels of people working on the audit multiplied by the number of hours it would take to vouch for the things reflected in the financial statements. This could entail 12 or more different departments in a metro, depending on the size of the metro, that were responsible for distributing the lump sum of expenditure in the budget on an annual basis. Private audit firms used this same logic for billing the client for audit work. This principle would apply even to the smallest municipality in any of the provinces. It would still be largely based on the amount of time needed to mitigate the risks from a financial statement audit point of view.
Ms Mente referred to the spreadsheet given to SCOPA containing details of the contracts executed by KPMG for the state, particularly in terms of municipalities. She highlighted the contract of eThekwini which started in July 2016 and the current value of the contract was R144 million. She asked if the AG would charge as much for this same contract with eThekwini.
The Auditor General replied that the responsibilities of the audit office extended only to the provision of audit assurance services. This meant that the Office of the Auditor General was the principal player as far as eThekwini was concerned in signing off on its financial statements. The figure highlighted in the spreadsheet for the contract billed at R144 979 200 was a contract for non-assurance services. Depending on the quantum of such services contracted by eThekwini, this amount was not an indication of anything other than the average rate that was proposed by the service provider for the service sought. The question could be directed to KPMG to assist with details of the services for which this amount was billed. This was particularly important because it was difficult to predetermine cost of professional service without a specified regulated period, as the contract may go on for two years or less, depending on the case, unlike a statutory audit that was confined within a regulated period.
Ms Mente noted that her line of questioning was aimed at illustrating the need for KPMG in the public sector. From the facts gathered, there seemed to be no need for the organisation in the first place, especially since there was an Auditor General that could perform the same work for a lesser amount. KPMG like other private firms, carried out business with profit-making in mind. The result of this profit meant that whatever KPMG charged the state was charged with profit in mind, which could be amounts above the line of expenses of the government. The SARS contract was characterised by this same position; to gain profit. KPMG did not consider that the integrity of those in charge at the time of conducting the SARS contract, those involved in the transactions, and KPMG itself, were being questioned. The organisation was only concerned about profit-making, hence the situation it had found itself in.
She expected direct answers from KPMG on questions posed by MPs, and was disappointed by the vague responses so far, which in her opinion was due to the fact that the contract was profit driven. She referred to the points made in 1.4 and 2.5 in the KPMG response to SCOPA on questions raised about services to SARS and Gupta family related companies and steps taken by KPMG SA in this regard. When did KPMG begin auditing Gupta family firms and for which entities were the audits carried out?
Mr Pickering replied that KPMG began working for the Gupta family in 2002. When it resigned from working for the Gupta family in March 2016, it had audited an average of 35 entities.
Ms Mente asked if KPMG identified any red flags while working for the Gupta family.
Mr Pickering replied that a number of red flags were identified both in the public domain and internally. As mentioned in the KPMG media statement, the team lacked rigour or professional skepticism in addressing the red flags and this resulted in KPMG’s delayed resignation for the purpose of conducting more work.
Ms Mente asked if KPMG resigned as auditors from all 35 entities, and Mr Pickering confirmed this in the affirmative. She asked for the reasons behind KPMG’s resignation.
Mr Pickering replied that the evaluation of the identified red flags that had accumulated over a period of time led KPMG to believe that its association with the group did not fit into the organisation’s risk profile.
Ms Mente asked if there were criminal elements within the red flags and if KPMG alerted law enforcement of such.
Mr Pickering replied that KPMG met all its reporting obligations in this regard, particularly in relation to the PCCA.
The Chairperson noted that KPMG’s compliance to all reporting obligations in this regard was only subsequent, as this was not initially done.
Ms Mente asked if KPMG could provide details of criminal case numbers that has been reported by KPMG.
Mr Pickering replied that KPMG would provide such details to the extent that it needed to pursue criminal action.
The Chairperson interjected to note that KPMG had not pursued any criminal action and neither had any criminal case been opened.
Ms Mente noted that this was another area where KPMG was failing, that is, failure to pursue criminal action after identifying red flags, unlike what obtained in the Office of the Auditor General where Parliament was informed of those responsible for fruitless and wasteful expenditure. She asked for details of all red flags that were identified in the audits conducted for the Gupta family.
Mr Pickering replied that there were several red flags on audits in the public domain, but after evaluating the red flags and the client relationship, KPMG thought it best to resign from working with the Group. However, the organisation would be unable to disclose some the information requested based on the PCCA reporting responsibilities.
Ms Mente said this response was another reason KPMG was not needed by the state, since the organisation found it difficult to provide information on money spent to conduct illegal activities and which would enable SCOPA to probe further and bring the perpetrators to book. She asked for the platform that SCOPA could utilise to get the needed information from KPMG.
Mr Pickering repeated his former response around the impossibility of divulging such information based on PCCA reporting responsibilities.
Ms Dlomu added that for the work in question, KPMG SA requested KPMGI to perform an investigation, which has been done and was contained in some of the findings. What KPMG SA has reported on was the evidence that currently existed within the firm. All other facts falling outside the jurisdiction of the organsiation would be welcomed and investigated. However, no criminality was found based on the existing evidence before KPMG. Nevertheless, KPMG was open to getting more facts that it may have missed, hence the need for the independent inquiry. She repeated her request for the Committee to permit KPMG to revert back to it with answers to questions that KPMG could not provide at the meeting for several reasons.
Ms Mente noted that MPs as representatives of the people, had the responsibility to get information on issues affecting the public, hence the engagement between SCOPA and KPMG. The response given by the CEO was that KPMGI was unable to find any criminality because investigations were conducted based on the norms and standards of the organisation.
She asked if KPMG was aware of the term ‘syndicate’, and Ms Dlomu confirmed this but asked for Ms Mente’s definition of the term.
Ms Mente noted that syndicates were often groups of people involved in criminal activities that were most times, unable to be found or traced. She opined that KPMGI would never be able to unearth the operations of a syndicate, especially because KPMGI was the mother body of KMPG SA, and was prone to withholding information that may harm KPMG SA. This was probably the explanation behind the entire ordeal between KPMG and SARS. There was a possibility that the persons who resigned were not the ones behind the entire matter. The withdrawal of parts of the report by KPMG led to the encouragement of illicit financial flows, tax evasion, and several other corrupt activities taking place in the country. KPMG needed to deal with the syndicates within the organisation. The vague answers received from KPMG has buttressed the fact that state institutions did not need the services of the organisation, especially since there was a capable Auditor General that could carry out the same work done by KPMG in a transparent manner.
Ms K Khunou (ANC) said that she was unsure that KPMG understood the importance of coming before a public platform such as Parliament to state its case, as well as the implication of the hearing. The issue at hand affected a country that was impoverished. MPs deliberated on ways to improve the lives of those living below the poverty line. She found the manner in which KPMG was responding to questions arrogant.
She asked which code of ethics of the accounting profession was problematic for KPMG.
Ms Dlomu began by apologising for coming across as disrespectful and arrogant. On the question asked, she noted that KPMG was a firm that was governed by a code of ethics. It had a social and ethics committee that looked after the responsibility of maintaining compliance to that code. Training was provided to the staff on ethics and ethical related laws to ensure compliance, awareness and competence in dealing with ethical issues.
Mr Maseng added that there was an expectation that accountants and auditors would act in a certain manner, especially if there were individuals with questionable practices. KPMG opined that the results of the engagements in question did not do justice to the considerations around professional skepticism. The issue around professional skepticism itself was not a legislated requirement per se but people could be held accountable based on this if the ethical element was introduced. On this basis, KPMG could not defend the judgment of those involved in the projects under review; their ability to interpret the information that was found; and the ability to judge such information accordingly. KPMG has however developed processes to ensure the continuous understanding of what ethics entailed.
Ms Khunou said that MPs worked with a legislation known as PFMA. It has been discovered that some of the accounting officers expected their subordinates to go through the provisions of PFMA that they themselves could not conform to. She opined that KPMG was doing the exact thing. She read out the ethics binding the KPMG to include being straightforward and honest in all professional and business relationships; objectivity; professional competence and due care; confidentiality and professional behaviour. She repeated her question on which of the code of ethics was problematic for KPMG to adhere to.
Mr Maseng replied that in the context of the team that was deployed to deliver work for SARS, and other pieces of work that were contested, due care would be the problematic one.
Ms Khunou agreed with Ms Mente on the fact that KPMG carried out work for different government departments with the aim of making profit rather than dealing with the root causes identified in any such department. The problem at hand was not only in respect of SARS, it was in respect of all other government departments that KPMG has audited. She asked if KPMG tried to assist a department in resolving the issues affecting the department in course of doing work for that department.
Mr Maseng replied that KPMG has responded to service requests like any other service provider. The organisation has been evaluated in terms of the themes, project plans, and methodologies. The client in this case has agreed that KPMG had a valid act. Although the organisation had been found wanting in respect of some of the projects, in delivering on some of its promises, including the proposals confined to the legal agreements entered with its clients, KPMG has been managed accordingly to date, with the exception of SARS and the issue at hand. KPMG was therefore not aware of the significant concerns raised by some of its clients in the public sector around its work being questionable. Without elaborating on the work done, it was noted that the work produced by KPMG followed a particular process, which was not confined to the KPMG office but was characterised by engaging with the individual clients.
Ms Khunou requested for straightforward answers instead of rhetorics.
Mr Maseng replied that one example of a state institution that KPMG had assisted in attaining a clean audit state was the City of Johannesburg. The services rendered by KPMG to its clients was managed in terms of project governance structures, and in terms of these structures, KPMG was held accountable whenever it was found wanting in the delivery of work. However, apart from SARS, he was not aware of any other project handled by KPMG that has raised a significant concern.
Ms Khunou said that most of the departments were in serious financial need and they desired changes in their financial status. She asked Mr Pickering to clarify the rationale behind conforming to the norms and standards of KPMGI and not to the standard of Parliament, despite the latter being the body that should oversee KPMG SA.
Mr Pickering replied that KPMG SA operated in a highly regulated profession and there were numerous regulatory bodies that conducted oversight on its activities, including IRBA.
Ms Khunou noted the non-cooperation of KPMG SA to the requirements of IRBA, whereas it conformed to the standards of KPMGI. She asked what KPMG SA’s priority was.
Mr Pickering replied that the vast majority of KPMG’s work was done as part of a formal tender process where KPMG was required to table its credentials, skill sets and fees. All the work done by KPMG was subject to those governing processes, which required KPMG to be fully accountable for the work done.
Ms Khunou agreed with Ms Mente that the Office of the Auditor General was sufficient to carry out audits for state institutions, rather than employing KPMG to carry the work. She hoped that the Office of the Auditor General would be expanded to assist with more effective work. Private accounting firms were doing the country a disservice, and the answers from KPMG showed that the organisation did not have the country’s interest at heart. She expressed dissatisfaction at the way private firms like KPMG were looting the country of its resources, instead of assisting public institutions and the country at large in fighting corruption. The persons that were claimed to have resigned were still on the payroll of the organisation. This showed that KPMG was not complying with the ethics as claimed, neither was KPMG taking Parliament seriously. She asked if KPMG was working for some other overhead authorities. She asked about the refund of R23 million and donation of R40 million.
On the people that resigned being still on the payroll of KPMG, Ms Dlomu replied that because of the seniority of such persons and the fact that they were partners of the organisation, there was a three-month notice period. This meant that they were no longer in the physical employ of the company but some information may still be required from them from time to time. They were however still on the payroll of the organisation for the three-month notice period.
Ms Khunou pointed out that KPMG SA had a problem with being transparent in South Africa but was transparent internationally. She asked for an explanation.
Ms Dlomu replied that KPMG SA would like to be as transparent as possible, hence the opening up of the organisation to an independent inquiry. KPMG SA would share information with Parliament, with the exception of areas where it was constrained by client confidentiality. There was already a request from some of the MPs to provide information on areas such as KPMG’s schedule of contracts, and KPMG has committed itself to collating this for submission to SCOPA. It has committed itself to respond to any other question for which an answer could not be provided immediately at the meeting.
Ms Khunou concluded by noting that the KPMG situation was worrisome, particularly because where were people controlling the affairs of the country from outside the country. It was important for South Africa as a country, to embark on introspection, particularly because international partners of KPMG were intruding into the affairs of the country. This was a serious concern that should be addressed as a matter of urgency. She questioned KPMG’s decision to donate the money from SARS to a charity organisation. She suggested that this act was a form of recouping the money back into KPMG, and wondered why the organisation could not donate the money towards the cause of serious problems in the country, such as education.
The Chairperson said that the Auditor General was invited to the SCOPA meeting because of the nature of the engagement with KPMG which related to public funds.
On the role that KPMG needed to play in general and in the South African economy at large, Mr Ross said that KPMG’s role was recognised and it was unfortunate that some critical issues have arisen. However, he was happy about the engagement, which in his view, had addressed some of the issues at hand. He expected KPMG to implement the interventions suggested by MPs. He requested that KPMG ensure that the additional independent inquiry was as transparent as possible; and perhaps to nominate a Member of Parliament to serve on the independent inquiry. It was important for SCOPA to receive KPMG’s memo and briefing on its original mandate with SARS on the rogue unit. He therefore urged KPMG to submit the documents to the Committee, as already promised. He concluded that the engagement was fruitful.
Mr Maynier revisited KPMG SA’s audit of the Gupta entities, and noted that this was an area where it seemed KPMG SA provided some sort of corporate grease to lubricate corruption. He asked KPMG to explain what constituted a reportable irregularity; what obligations it had in terms of reportable irregularities; and whether it indeed reported any reportable irregularity to the regulator on the audit of the Gupta entities, and if it did, how many reportable irregularities were reported and of what were the reports made.
Mr Pickering replied that KPMG’s reporting responsibilities in terms of reporting irregularities was to identify any illegal act or otherwise during the conduct of its audit, which should be reported to the regulators within a short period of time. At the time of conducting audits for the Gupta entities, KPMG did not find criminal activities to be reported up until the date of its resignation.
Mr Maynier asked about KPMG’s submission that it found no reportable irregularity throughout the period of its contract with the Gupta entities over a period of years and for approximately 35 entities.
Mr Pickering repeated his previous answer and said that the level of professional skepticism exercised in these audits was insufficient and should have resulted in more audit work being done in certain areas.
Mr Maynier referred to the case of Linkway where a junior auditor of KPMG raised a question about certain expenses being claimed as business expenses. He asked if any reportable irregularity was forwarded to the regulators in this regard.
Mr Pickering replied that no reportable irregularity was found in that regard.
Mr Maynier asked if KPMG believed that it would be reasonable for a member of SCOPA and a member of the public to conclude the organisation turned a blind eye in the audits conducted by KPMG SA on the Gupta related entities.
Mr Pickering replied that KPMG would disagree with that conclusion, based on its submission that the amount of work done for the Gupta related entities was insufficient to arrive at such conclusion.
Mr Maynier remarked that the responses of KPMG summarised the points already made by MPs to the effect that audit firms had the obligation to provide regulators with reportable irregularities and identified possible unlawful activities. KPMG turned a blind eye to the irregularities in the audits of the Gupta related entities; a matter which would now be investigated by IRBA. He repeated his questions on the several statements that could not be relied upon in the SARS report, as well as those that KPMG was unsure of.
Mr Pickering repeated his answer to the effect that the section of the SARS report was withdrawn because of aforementioned reasons.
Mr Maynier stressed the need for clarity on how KPMG determined which statement could be relied upon and which one could not be relied upon, despite the submission of KPMG SA that the issues in question were not specifically examined by KPMGI.
Mr Pickering repeated his previous answer on the scope of work done by KPMGI.
Nevertheless, Mr Maynier asked for the basis upon which KPMG SA initially submitted that the statements could be relied upon before the report was reviewed by its international partners.
Mr Pickering replied that KPMG SA stood by the media statement that was presented.
Mr Maynier said it seemed KPMG SA was confused about the situation and the responses it was giving.
The Chairperson asked that the matter should be left as it was.
Ms Mente asked if KPMG could provide information on whether any of the 35 Gupta related entities had been conducting transactions with the state, as the information would be related to taxpayers’ money. She pleaded with the Auditor General to review its auditors since it was obvious that KPMG could not be trusted to audit for the Office of the Auditor General. It should review its relationship with KPMG.
The Auditor General noted that the 2001 final report of the Nel Commission of Inquiry into the affairs of the Masterbond Group and investor protection in South Africa was very relevant in understanding what gave rise to the failure of certain entities including Master Bond in this case and many others. He suggested that MPs should consider this report for the purpose of picking up certain sentiments that were expressed in it, and which made him conclude that South Africa had been in this position before. He referred to the introductory part of the report which stated that “the investigation into the Masterbond Group and its associated companies revealed serious deficiencies in the South African supervisory system and in those sections of the Companies Act designed to protect investors. It revealed an astonishing degree of dishonesty, inefficiency, lack of professional integrity and lack of independence on the part of some of the auditors involved with these companies”. The Auditor General suggested that the country had once been in the same situation it had recently found itself, as the report covered periods in the 90s where some of the mentioned issues were evident in the investigations conducted; investigations which were wider than the one audit firm.
He went to refer to another part of the report which stated that “… it became apparent that with a few notable exceptions the auditors involved seemed to believe that in addition to auditing the books of a company, their function was to assist and protect the management of such companies as far as possible. They seemed to believe that the end justifies the means.”
The Nal Commission canvassed the matters on a wide scale that covered major entities and a number of auditing firms. The report went further to state specific examples of illegal activities carried out by the auditors, which ranged from issuance of false certificates in respect of participation bond schemes to signing of unqualified reports relating to blatantly false financial statements; failure to comply with the requirements of Section 25 of the Public Accountants and Auditors Act; change in accounting policies to convert loss into profit without proper disclosure; failure to report relevant matters after balance sheet date; failure to perform procedures designed to identify all relevant material events occurring after the balance sheet date; failure to scrutinise minutes of relevant directors’ meetings; failure to comply with the disclosure requirements in respect of debentures issued; failure to establish whether a company had issued debentures when the contrary was recorded in the notes to the financial statements; and assisting in misleading the receiver of revenue. He suggested that some of the points made in the report could be considered in addressing the current issues affecting the profession in a broader sense. Such an exercise could however not be complete without the involvement of IRBA, South African Institute of Chartered Accountants (SAICA), the principal players in the auditing profession, and those that transmitted information to members of society.
He had read the KPMGI report. He referred to the introductory parts of the report that stated that “this investigation did find work that fell considerably short of KPMG standards”, which reflected an internal admission of the substandard quality of KPMG SA’s work. The Office of the Auditor General after reading through the report, undertook an engagement with the leadership of KPMG, particularly because the report contained details of decisions made in respect of details not included in KPMG SA’s report itself. The issue caught the Office of the Auditor General off guard, as the office usually tested for independence and professional competence when engaging any audit firm with the aim of contracting work out. The Office of the Auditor General therefore decided to get clarity from the leadership of KPMG on those two elements. Although the engagement did not yield any comprehensive answer, the leadership of the organisation assured the Office of the Auditor General of the continued existence of the two elements. Nevertheless, the Office of the Auditor General has decided to reduce its contract with KPMG from a two-year period to a one-year period, until the outcome of the investigation by IRBA and SAICA has been completed.
The Auditor General clarified that the audits for the just concluded financial year that ended in March 2017 assigned to different firms, have been completed. The Office of the Auditor General was hopeful that the independent investigation would be concluded before the end of the next financial year in March 2018. He urged that the investigation by IRBA and SAICA should be given priority.
The Chairperson thanked the KPMG tem and MPs for the robust engagement. He urged KPMG to cooperate with any investigation that may be carried out; publicise the timeframes for the independent inquiry that KPMG seeks to appoint; and to consider not bidding for any public contract during this period until the completion of all investigations. He noted that MPs had a heated conversation about the current meeting, and the crux of the conversation was whether KPMG was an isolated case that needed more policing or other firms should be investigated. He said that the only issue that was not addressed was the IFMS. SCOPA came across allegations in the presentation of the Director General, which alluded to three findings of irregular payments, but the KPMG response was just a standard response. The findings from internal audit showed that KPMG was paid two amounts of R2 522 084 and R2 200 657, for work that had not been delivered. SCOPA has decided to wait for the outcome of the forensic investigation on this matter.
The Chairperson noted that he was leaving the engagement with a negative view from what he initially had before the commencement of the meeting. His views were based on the fact that KPMG failed to respond directly to the question posed on the legal implication of submitting and withdrawing a final report. It was unfortunate that this critical part of the entire engagement was not addressed. He refrained from asking whether the people that resigned from KPMG agreed with or challenged the findings of the report. It appeared that the issues under review were not isolated as far as the operation of KPMG was concerned.
He referred to KPMG’s conduct in handling the SARS matter. It would be difficult to justify KPMG’s act of issuing a press statement to announce the withdrawal of the report as a matter of urgency, after which it engaged with SARS. This conduct raised the question of what constituted the urgency that resulted in making the withdrawal public before engaging with the client. It was possible that the conduct of KPMG and responses given could be a result of factors that were beyond the representatives before SCOPA. He urged KPMG to continue to promote its positive elements and work not contaminated by corrupt activities.
The meeting was adjourned.