DFSA fines KPMG and former principal over shortcomings in Abraaj unit audits

The Dubai Financial Services Authority (DFSA) has fined KPMG LLP $1.5 million and former audit principal Milind Navalkar $500,000 for failing to follow international standards during audits of Abraaj Capital Limited (ACLD), an Abraaj Group entity, for a number of years up to October 2017.

The DFSA's decisions were issued in June 2021 but only published on Monday as KPMG and Mr Navalkar sought an order from the Financial Markets Tribunal to prevent publication, the regulator said.

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.

A judgment was issued by the Dubai International Financial Centre Court on September 16, 2022, dismissing the appeals of KPMG and Mr Navalkar, meaning that the tribunal's original decision was upheld.

The tribunal's decision will be published on its section of the DFSA’s website, the regulator said.

KPMG and Mr Navalkar deny all of the DFSA’s allegations and have applied for review of the decisions to the FMT, where the parties will present their respective cases.

“The DFSA’s decisions are therefore provisional and reflect the DFSA’s belief as to what occurred and how it considers KPMG LLP’s and Mr Navalkar’s conduct should be characterised,” the DFSA said.

“The DFSA’s decisions may be confirmed, varied or overturned as a result of the FMT’s review.”

ACLD was a wholly owned subsidiary of Abraaj Investment Management Limited (AIML), 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 firm 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 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.

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.

“The DFSA found that Mr Navalkar was knowingly concerned in KPMG LLP’s breaches and he also failed to act with professional competence and care,” it said.

The DFSA fined ACLD more than $15m in July 2019 for failing to maintain adequate capital resources, in breach of its rules, and for providing the regulator and KPMG with false and misleading information relating to its capital resources.

“ACLD also omitted to provide its auditor with information relating to material transactions with other Abraaj Group entities and prepared financial statements which did not accurately represent ACLD’s financial position,” the DFSA said.

“ACLD was also knowingly concerned in unauthorised activities of its parent, Abraaj Investment Management Limited (AIML)", which the DFSA previously fined more than $299m in July 2019.

ACLD was the only Abraaj entity authorised by the DFSA and the only entity in the Abraaj Group audited by KPMG LLP.

The other entities in the Abraaj Group were audited by other audit firms in the KPMG global network that operate outside of the DIFC.