KPMG back in spotlight as R800m in CPS profits raised before ConCourt
DAILY MAVERICK / 18 FEBRUARY 2020 - 14.14 / MARIANNE THAMME
Lawyers acting for NGO Freedom Under Law have written to the Constitutional Court alerting it to the fact that independent auditors appointed by the SA Social Security Agency to verify profit made by CPS through the illegal Sassa tender had underreported to the court R800m in profit.
Not only did the independent audit and verification report prepared by RAiN Chartered Accountants (RaiN) underestimate CPS profits, but the filing of this report by Sassa stating that it was “in compliance” with the court’s order was also in breach of the court’s orders.
Nortons Incorporated wrote to Constitutional Court Registrar Dunisani Mathiba on 11 February stating that Sassa’s affidavit, filed on 30 November 2019, and to which the auditor’s verification report had been attached, were not in compliance.
In 2014, 2017 and 2018 the Constitutional Court ruled that CPS had no right to benefit from the unlawful contract and for its audited statements and accounts to be filed with the court.
“The Verification Report and the Treasury letter raise serious concerns and material discrepancies (including an approximate R800-million underreporting of CPS’s profit) in relation to CPS’s audited profits which were reported to this Court by CPS,” Nortons noted.
The Sassa affidavit also did not properly comply with the order in the AllPay Remedy judgment as the independent auditors had not been given “unfettered access to CPS information”.
Sassa, in its affidavit to the court, had not drawn attention to any of these issues.
The verification report and the letter from Treasury, said Nortons, indicated that RAiN had “fundamentally disagreed with the audited outcomes, as presented to the Constitutional Court by CPS’s auditors KPMG and Mazars”.
Disputed matters included “BEE Service Fees and BEE Retainer” and “BEE transaction equity instrument charge”. RaiN, in its report, had found that “if these disputed matters were corrected, CPS’s total profit over the full period of the unlawful contract (including the extensions by this Court) would be over R1-billion.
“This is more than R800-million additional profit than the profit that CPS’s auditors reported to this court.”
CPS’s auditors, said Nortons, had refused to provide access without RAiN “signing draconian undertakings, which would undermine the purpose of providing access to the working papers”.
With regard to CPS’s “BEE service fees”, RAiN had found that “there is no indication evident from the invoices or any other operational documentation availed to us that any of these BEE partners actually rendered any services linked to the contract with Sassa”.
As a result, it had considered these expenses totalling R255,200,000 “not to be in line with any operational or functional BEE relationship, and in specific conflict with the company’s tender submission”.
RaiN had therefore been of the opinion that the inclusion of at least R143,550,000 in “BEE fees” as set out in CPS’s expenses under the unlawful contract “was inappropriate”.
With regard to CPS’s “BEE transaction equity instrument charge” which had been claimed as an expense, RAiN had found “no basis for valuing the BEE share transaction as an expense given the true facts”.
“RAiN criticised KPMG’s initial valuation of the transaction, which was then used, when KPMG later prepared the audit report for this Court, to reduce CPS’s profits.
RAiN stated that “we express our criticism of KPMG where they issued their valuation report [of the BEE transaction], at the time when they knew, or ought reasonably to have known, that the report had become irrelevant and fatally inaccurate”.
The firm criticised KPMG for its audit of the income received and expenses incurred and for “not repudiating this fictitious charge”.
National Treasury, despite the requirement in the Constitutional Court’s orders that “the audited verification must be approved by National Treasury” also did not approve the Verification Report or its findings.
It only approved the audit verification report “for submission to the Constitutional Court of South Africa”.
“In other words, it is not approving the Verification Report or its findings. Instead, it appears that it is simply agreeing to the report being submitted to this court (evidently for this court to then deal with the serious and material issues identified in the report),” Nortons noted.
The fact that the Treasury had not been willing to approve the Verification Report and its findings was made clear by an extensive list of “shortcomings” that it had identified in the report.
National Treasury had not been able to verify the methods employed by RAiN in terms of the auditing standard “with which the audit verification was performed”.
Treasury had noted also that “the scope of work … is incomplete given that RAiN was not granted access to the CPS audit working papers”.
This did not allow for the interpretation of whether the findings were “of such a material nature that it outweighs the Audit Opinions of the other independent auditors appointed by CPS namely KPMG Services Proprietary Limited and Mazars”.
National Treasury could not find the final opinion for both periods in the report provided to it. It also accepted that RAiN had had to rely on “the limited information provided by the relevant parties”.
RAiN had raised disputed issues regarding “the expenditure areas of Bulk re-registration, BEE service fees, BEE retainer, BEE transaction equity instrument charge, Expenditure not in contract, Legal expenses and Retrenchment costs”, noted Nortons.
This raised concerns about “the quality of audit work performed by firms signing off the audit opinions to CPS”.
If all of the disputed matters had been accounted for, said Nortons, it would indicate that “CPS’s profit was understated by over R800-million”.
The Constitutional Court and Treasury as well as Sassa, CPS and the public were left with an “untenable situation”.
“The court-ordered independent auditors have not been able to complete their audit verification and, therefore, have not been able to verify the profits that CPS reported to this court, inter alia, because they have been denied unfettered access to all the relevant information,” said Nortons.
The purpose of the Constitutional Court’s order was to “ensure that this court, the parties, and the public, knew exactly what (if any) profit CPS made in performing the unlawful contract”.
It appeared that “CPS may have made over R1-billion profit and CPS and its auditors understated CPS’s profit to the court and the public by more than R800-million”.
“The foundational constitutional principles of the rule of law and openness and accountability require that this inadequate and unacceptable situation is urgently remedied,” said Nortons on behalf of FUL.
Nortons asked the court to ask parties concerned to file “written submissions on how the court ought to deal with the issues arising from the Verification Report and the Treasury letter”.
Or to “alternatively, or in addition” request the parties to file affidavits in relation to “how the court ought to deal with the issues arising from the Verification Report and the Treasury letter”. DM
KPMG has responded to a Daily Maverick request for comment:
“The Nortons Inc letter (which appears to be a draft) seeks directions from the Court as to how the parties to the proceedings may or should conduct themselves. KPMG are not a party to these proceedings.
KPMG afforded RAiN Chartered Accountants Incorporated the opportunity to access our working papers under accepted professional and ethical standards.
We identified shortcomings in the draft report entitled “Review of the Statement of Income and Expenses of Cash Paymaster Services (Pty) Ltd for the period ended 01 April 2012 to 30 September 2018” and reported these to RAiN.
We note that The National Treasury also identified various shortcomings in the RAiN report.
We cannot provide further comment in light of the fact that this matter is currently before the Court.”
Head of Communications.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER