In addition the investigation found significant problems with a controversial report the firm produced for the South African Revenue Service (SARS).
The firm is also taking disciplinary action seeking dismissal in relation to Jacques Wessels, the lead partner on the audits of the non-listed Gupta entities.
The internal probe did not find any evidence of illegal behaviour or corruption by KPMG partners or staff but “work that fell considerably short of KPMG’s standards”.
The firm admitted today that there were “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 SA only cut ties with companies controlled by the family in 2016.
The scandal around the powerful Guptas, who are linked to president Jacob Zuma, deepened this week and has already caused the demise of major financial PR firm Bell Pottinger, after it was accused in two separate reports of stoking racial tension in South Africa.
Departing KPMG South Africa CEO Hoole, said in a statement today, “Steven and I have taken the decision to step down, in the best interests of the firm as it rebuilds and moves forward. I absolutely understand that ultimate responsibility lies with me.”
His replacement, Nhlamu Dlomu, said it 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”.
“I want to apologise to the public, our people and clients for the failings that have been identified by the investigation. It is important to emphasise 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.”
KPMG South Africa said that it would donate the 40m rand (£2.2m) it earned from its work with Gupta businesses to charity and refund 23m rand (£1.29m) it earned from the SARS report.