- VBS liquidator Anoosh Rooplal is going after KPMG SA to try to recover some of the funds lost in large-scale fraud that the firm's auditors failed to report.
- They filed summons at the Johannesburg High Court on Tuesday.
- The summons shows that KPMG lead audit partner on the VBS account Sipho Malaba was severely conflicted when he took on the account.
Liquidator of the defunct VBS Mutual Bank, Anoosh Rooplal is suing KPMG SA for R863.6 million plus interest for signing off the bank's 2017 financial statements as correct when there were material statements and fraud that should have been glaringly obvious to its auditors.
VBS was declared insolvent and placed under liquidation in March 2018 after large-scale corruption at the bank defrauded its customers out of roughly R2 billion.
KPMG fired the auditors who were responsible for signing off VBS's financial statements, and the lead partner on the VBS account, Sipho Malaba, was later arrested in June last year.
But the summons that was submitted to the Johannesburg High Court on Tuesday says KPMG has to answer for it as a firm as well.
In the summons, the Rooplal said cash and cash equivalents in the bank's 2017 statements were "significantly inflated" by R690 million and assets were overstated by the same amount. VBS was technically insolvent at that point as its liabilities exceeded its assets by some R451 million.
Given the magnitude of these, the liquidator are arguing that KPMG was aware of the falsification of the financial statements, or ought to have been aware. Still, the auditing firm gave VBS a clean audit opinion, saying everything in those fraudulent statements represented the bank's financial position fairly.
"In purporting to perform the 2017 audit, KPMG, acting through one or more of its employees, wilfully, and in bad faith, alternatively grossly negligently … breached its obligations under the agreement," the summons reads.
The basis of the R863.6 million claim
KPMG was the external auditor of VBS between March 2017 and March 2018 and had come in at the height of large-scale fraud that had been going on in the bank since April 2016, the summons shows.
During that period, VBS board chairperson, Tshifhiwa Matodzi, the bank's CEO, the CFO, and the head of the bank's treasury created fictitious accounts in their names and helped themselves to funds they were not entitled to.
The liquidator's summons shows that these executives unlawfully transferred at least R863.6 million from VBS between September 2017 and March 2018.
Breach of the Auditing Profession Act
Rooplal pointed out that KPMG breached its obligations under the Auditing Profession Act. This is because KPMG was supposed to approach the Independent Regulatory Board for Auditors without delay as soon as they had a reason to believe that there were reportable irregularities at VBS. Instead, it failed to inform both the VBS board and the auditing watchdog.
"KPMG had a duty to report any material irregularity or undesirable practice in the conduct of VBS's business to the board of VBS, and if it was not rectified or discontinued within a month, KPMG had a duty to report such material irregularity or undesirable practice to the Registrar of Banks," the summons states.
Furthermore, KPMG had a duty not to sign off VBS's financial statements as fairly and appropriately presented as the unqualified audit opinion did, unless it had satisfied itself that there were no material misstatements and that all assets and liabilities shown were correct based on accounting records available to back this, reads the summons.
Conflict of interest
The liquidator said KPMG was not supposed to become VBS's auditor in the first place because there was a conflict of interest as prescribed by the Independent Regulatory Board for Auditors.
The summons shows that two of Malaba's wife's companies held bank accounts with VBS which had "significant financial obligations overdue". Malaba was also the finance manager of one of these companies when he was appointed the audit partner of VBS.
With all of Malaba's wife's business accounts overdrawn, and mortgage facilities and vehicle accounts in arrears by many millions of rand each, the liquidator argued that Malaba had every reason to turn a blind eye on the VBS fraud.
"Mr Malaba was aware of the fraudulent scheme and/or was aware that the balance in respect of cash and cash equivalents recorded in the 2017 financial statements was significantly inflated which he deliberately failed to disclose and report because of his conflict of interest and compromised position," the summons states.
Rooplal has given KPMG ten working days since it filed its summons on the Tuesday to indicate if it wants to defend itself against this claim. They have also asked for KPMG to pay interest of 7% per annum from the date of the claim until a final payment is made.