KPMG International has taken several significant actions—including leadership changes, governance changes, and enhanced quality control procedures in certain areas—following an internal investigation concerning KPMG South Africa’s work on behalf of the politically connected Gupta family.

KPMG is just one of several international firms to get entangled in a widespread corruption scandal involving the Gupta family in South Africa. Specifically, various allegations have been raised concerning KPMG South Africa’s work on behalf of the Gupta family and work performed in 2014 and 2015 on the “Report on Allegations of Irregularities and Misconduct,” which KPMG South Africa produced for the South African Revenue Service (SARS) report.

“While the investigation did not identify any evidence of illegal behaviour or corruption by KPMG partners or staff, this investigation did find work that fell considerably short of KPMG’s standards,” KPMG stated.

Following results from the investigation, KPMG South Africa has made changes to both its leadership team and its governance of KPMG South Africa. Additionally, it announced enhanced quality control procedures in certain areas.

“The findings of the investigation have reinforced the criticality of a leadership and governance model that sets the right tone from the top and ensures appropriate accountability and responsibility at every level of leadership within the firm,” KPMG stated. “The South African Board, working with KPMG International, has taken a series of actions to address both those responsible for specific failures and those who, by virtue of their knowledge and leadership role, should have acted to ensure that those failures ended and appropriate actions were taken.”

Leadership changes. Nhlamu Dlomu, previously KPMG South Africa’s head for people and change, succeeds Trevor Hoole as chief executive officer, who tendered his resignation to the board of KPMG South Africa and stepped down as CEO. Additionally, Steven Louw resigned as chief operating officer and country risk management partner, and Ahmed Jaffer resigned from the firm and stepped down as chairman of the board.

“Ethics and integrity are fundamental values of KPMG, and these will be the guiding principles of my leadership,” Nhlamu said in a statement. “To this end, my first order of business will be to build a management team committed to these principles.”

Included on that team will be Andrew Cranston, a senior partner from the KPMG International network, as interim chief operating officer. Cranston is a former CEO of KPMG in Russia and Commonwealth of Independent States and a former KPMG International COO.

Dlomu said she will also appoint another partner from the KPMG International network to serve as the interim risk management partner “to bring international expertise and best practice to improve risk management and quality control for KPMG South Africa.”

Several KPMG partners will also be leaving the firm, including:

Mike Oddy, head of audit and board member;

Muhammad Saloojee, head of tax and board member;

Herman de Beer, former head of forensic and board member;

John Geel, head of deal advisory; and

Mickey Bove, risk management partner for deal advisory.

KPMG South Africa said it will take disciplinary action seeking dismissal in relation to Jacques Wessels, lead partner on the audits of the non-listed Gupta entities.

Governance changes. In addition to the leadership changes, KPMG South Africa will enhance its corporate governance processes. Currently, the risk management partner role is combined with that of chief operating officer for KPMG South Africa. “Going forward, the two roles will be separated to ensure that the risk management partner has sufficient time to focus on this crucial role,” KPMG stated.

Additionally, KPMG South Africa said it’s “committed to overhaul the firm’s public reporting, including a commitment to publish an annual Transparency Report detailing the firm’s quality processes and controls.”

SARS report findings. In December 2014, the South African Revenue Service engaged KPMG South Africa to perform an extensive document investigative review, resulting in the “Report on Allegations of Irregularities and Misconduct.” A version of the report dated Sept. 3, 2015 was leaked and made public on Oct. 4, 2015. The report was accepted as final on Jan. 26, 2016.

This mandate involved an extensive document investigative review and a collation of the documentation. At a later stage, this mandate was extended to the provision of a report, which included conclusions, recommendations, and legal opinions, KPMG said. During the engagement, the scope of the work changed. “KPMG International has concluded that KPMG South Africa did not properly grasp the new risks associated with this change and consequently the appropriate consultation with risk management did not take place.”

Quality controls associated with the September 2015 version weren’t performed to the standard expected by KPMG. Specifically, the final deliverable of this work was not subjected to second partner review, as required by KPMG standards.

“The SARS Report refers to legal opinions and legal conclusions as if they are opinions of KPMG South Africa. However, providing legal advice and expressing legal opinions was outside the mandate of KPMG South Africa and outside the professional expertise of those working on the engagement,” KPMG stated. “KPMG South Africa acknowledges that such opinions should have been caveated as recommendations of legal advisors and not formulated in the manner contained in the report.”

Furthermore, KPMG said, language used in certain sections of the report is unclear and results in certain findings being open to more than one interpretation, suggesting that Pravin Gordhan “knew, or ought to have known, of the establishment by SARS of an intelligence unit in contravention of the rule of law that was ‘rogue’ in nature,” KPMG concluded.

“This was not the intended interpretation of the report,” KPMG concluded. The evidence in the documentation provided to KPMG South Africa does not support that interpretation, it said. “KPMG South Africa had no political motivation or intent to mislead. The partner responsible for the report is no longer with the firm.”

Given the failure to appropriately apply our own risk management and quality controls, that part of the report which refers to conclusions, recommendations, and legal opinions should no longer be relied upon. KPMG South Africa contacted SARS and offered to repay the R23 million fee received for the extensive work performed or donate the same amount to charity.

Finally, KPMG said its forensic practice has since made changes to certain of its controls and methodologies. For example, discussion with, and approval by, the firm’s executive committee is now required before accepting contentious engagements. In addition, prior to finalizing an investigation report, engagement teams must provide anyone who is the subject of the report an opportunity to respond to relevant findings.

Gupta-related audits. Concerning the audits of the Gupta entities, KPMG said it is evident from the investigation that the audit work in certain instances “fell well short of the quality expected, and that the audit teams failed to apply sufficient professional skepticism and to comply fully with auditing standards.”

KPMG International, however, “found no evidence of dishonesty or unethical behavior on the part of the audit partners and audit teams working on the audits for the Gupta group of companies.” The investigation did find, however, that management of many Gupta entities “responded misleadingly and inadequately to audit teams’ inquiries about the nature of related party relationships and the commercial substance of significant unusual transactions,” KPMG stated.

While the firm’s last audit opinions for the Gupta group of companies were for the year ended Feb. 28, 2015, KPMG South Africa should have resigned as auditors earlier than March 2016, it stated.

KPMG International said it will work actively with KPMG South Africa to improve audit quality and risk management processes. Numerous processes are in place that give us assurance as to the general level of audit quality in the South African firm, including an annual Quality Performance Review program that assesses audit quality.

The firm is also subject to inspection on a regular basis by both local and other national regulators. KPMG South Africa will supplement these processes with additional audit controls to ensure that KPMG’s standards are met consistently. Additionally, “KPMG South Africa will fully cooperate with the Independent Regulatory Board for Auditors to assist in its investigation.”

Tax evasion. KPMG is alleged to have facilitated tax evasion and corruption by the Guptas and their entities, and specifically that tax advice given to Gupta entities involving offshore structures was illegal or improper. An independent review, however, concluded that KPMG did not act unlawfully or improperly in giving the advice, KPMG stated.

Many of the tax services provided by KPMG South Africa to the Guptas and their entities was routine tax compliance work, which were reviewed “to confirm they were of a professional quality and consistent with the tax advice given, where applicable,” KPMG stated.

“The tax advisory services provided to the Guptas since the start of the tax advisory engagement in 2014 were also reviewed, including the technical quality of the services, the facts upon which the advice was based, and whether the tax advice was consistent with KPMG’s Global Principles for a Responsible Tax Practice.”

The investigation found nothing to indicate that in the delivery of these tax services, KPMG South Africa, its partners or staff, were involved in any activities of the Gupta family involving potential money laundering, tax evasion, corruption, or any other illegal activity.

Oakbay listing. KPMG is further alleged to have been involved in the valuation of Oakbay Resources and Energy Limited (ORE) at the time of listing in November 2014, in which it has been alleged that the share price was fixed.

The investigation confirmed that KPMG’s responsibility at the time of listing was limited to issuing audit opinions in respect of the historical financial information of ORE for the three years ended Feb. 28, 2014 contained in the Pre-Listing Statement (PLS) and for issuing a reporting accountant’s report on the pro forma financial information of the group. KPMG was not engaged to provide a valuation.

Quality controls. KPMG must reassess its clients annually, and more frequently than that if significant events or matters come to the firm’s attention. This process lacked the necessary rigor that prevented KPMG South Africa from ceasing work for the Guptas at an earlier date.

The investigation found certain red flags that came to KPMG South Africa’s attention regarding the integrity and ethics of the Guptas that were not appropriately considered and addressed at that time. “Had one or more of those red flags been heeded, KPMG South Africa would have stopped working for the Guptas earlier,” KPMG stated.

KPMG South Africa’s client acceptance and continuance process will be centralized into a specialized team led by an experienced KPMG South Africa partner with the appropriate skills to evaluate the information provided on new and existing clients. “Whenever integrity issues are identified, either the firm risk management partner or an ad hoc panel of senior partners will be consulted and decide upon the acceptance decision,” KPMG stated.

KPMG’s investigation did not, however, find any evidence of participation by KPMG South Africa, partners, or staff in illegal activity or corruption due to the work performed on the engagement, or due to the information that became available to them.

“This has been a painful period, and the firm has fallen short of the standards we set for ourselves, and that the public rightly expects from us,” Dlomu said. “I want to apologize to the public, our people and clients for the failings that have been identified by the investigation.”

Dlomu added: “It is important to emphasize that these events do not represent KPMG, our people or the values we have adhered to over decades of committed client service. My pledge and promise to the country is that we can and will regain the public’s confidence.”