KPMG LLP and former audit principal withdraw request for review of DFSA fines

Penalties were issued in June 2021 but only published last month

The DIFC Gate building in Dubai. Sarah Dea / The National

KPMG LLP and its former audit principal Milind Navalkar have withdrawn their request for a review by the Financial Markets Tribunal against the Dubai Financial Services Authority’s decision to impose financial penalties on them.

Both Mr Navalkar and KPMG had referred the DFSA’s decision to the independent appeal tribunal after they were fined $500,000 and $1.5 million respectively for failing to follow international standards during audits of Abraaj Capital Limited, an Abraaj Group entity, for a number of years up to October 2017.

The rulings were issued in June 2021 but only published on October 3 as KPMG and Mr Navalkar sought an order from the FMT to prevent publication.

The tribunal subsequently refused both KPMG’s and Mr Navalkar’s requests for privacy and both then appealed to the DIFC Court against the FMT's decision.

However, the two parties have withdrawn their FMT references and “will not contest the DFSA’s findings in its decisions”, the DFSA said on Thursday.

The fine imposed on KPMG reflects that it was only responsible for the audit of ACLD. The other entities in the Abraaj Group were audited by other audit companies in the KPMG global network that operate outside of the Dubai International Financial Centre, the DFSA said.

ACLD was a wholly owned subsidiary of Abraaj Investment Management Limited, a company incorporated in the Cayman Islands, which acted as the primary investment adviser and manager of private equity funds in the Abraaj Group.

The Abraaj Group, which was founded in 2002 and claimed to manage about $14 billion of assets at its peak, was the Middle East’s biggest private equity company and one of the world’s most active emerging market investors, with interests across Africa, Asia, Latin America and the Middle East.

It was forced into liquidation in 2018 after investors including the Bill & Melinda Gates Foundation commissioned an audit to investigate the alleged mismanagement of money in its $1bn healthcare fund.

That probe served to deepen scrutiny of the company, and allegations of misappropriation of funds secured from US investors attracted the attention of the Securities and Exchange Commission, as well as other US authorities.

In its decision issued on June 29, 2021, the DFSA said KPMG considered the Abraaj Group to be one of its most valued clients, classifying it as a “global priority” client and referring to it as “one of our crown jewel clients” when discussing it with other KPMG member firms.

This action underscores the important role auditors play, as corporate gatekeepers, in enhancing investor confidence and maintaining the DIFC’s reputation as a global financial services hub

Ian Johnston,
chief executive, DFSA

The DFSA maintains that, had KPMG performed its audit of ACLD to the expected standard, it probably would have identified that for more than five years ACLD’s financial statements did not conform to accounting rules, and that the unit had failed to maintain adequate capital resources and was concealing the true state of its finances from the audit firm.

As Mr Navalkar was KPMG’s audit principal who was appointed to the ACLD audit, he was responsible for signing off the report on ACLD’s audited financial statements and also ensuring that the audits and reviews of its financial statements and DFSA returns were carried out to the required standard, the authority said in its October 3 statement.

“KPMG LLP’s practices and Mr Navalkar’s professional competence fell far below the standard expected, which allowed ACLD to conceal its practice of window dressing for many years,” Ian Johnston, chief executive of the DFSA, said on Thursday.

“This action underscores the important role auditors play, as corporate gatekeepers, in enhancing investor confidence and maintaining the DIFC’s reputation as a global financial services hub.”