The Independent Regulatory Board for Auditors (Irba) has initiated an investigation into whether international audit firm BDO has properly verified the independent valuation of The Villa shopping centre in Pretoria.
The centre is owned by and represents the single biggest asset of the Nova Property Group, the rescued vehicle that emerged after the collapse of the Sharemax investment scheme.
It has also emerged that BDO has not concluded its own investigation into the financial affairs of Nova. This investigation started in November last year after Moneyweb submitted a range of questions to the auditor related to Nova’s financial statements and the original Section 311 Scheme of Arrangement.
The audit watchdog confirmed this week that it had received a complaint relating to the BDO audit of Nova, but declined to disclose the nature of the complaint or the identity of the complainant.
However, Moneyweb can confirm that Charl Kocks, CEO of Ratings Afrika and a chartered accountant, submitted the complaint, which was related to the valuation of The Villa.
In the complaint, Kocks states that The Villa’s valuation is “overwhelmingly material” to the group’s financial position, but that he feels that BDO did not go far enough to verify this valuation.
“I conclude that the auditor and Mr Bradley White as the responsible partner or director, had not done such work as to ascertain whether the presentation was in accordance with current accounting standards, or fair. The audit report was not qualified,” he states in the complaint.
The complaint follows a Moneyweb article that questioned the valuation of The Villa.
The disclosed valuation in the unqualified 2016 financial statements is R1.612 billion. This is significantly higher than the independent valuation of Amanda Bruyns of Amanda de Wet Consultants and Investments of R770 million. This valuation is for 100% of The Villa and since Nova accounts for only 80% of the centre’s value, the R1.612 billion should be compared to an official valuation of R616 million – a difference of more than R1 billion.
BDO seemingly did not verify the accuracy of this valuation. Kocks states in the complaint that Bruyns confirmed to him that BDO did not contact her during the audit process.
This valuation has a profound impact on Nova’s already precarious financial position, especially the income statement where an increase in property values is accounted for as income.
Kocks highlights this impact in his complaint: “The value disclosed for The Villa is thus material to Nova, and a difference of some R1 billion in its value would be overwhelmingly material to the financial position of Nova, as well as in relation to its comprehensive income, were the difference to be charged in the F2016 year as a fair value adjustment.”
The comprehensive income and accumulated profit disclosed in the 2016 statements amounted to R135.7 million and R1.22 billion respectively.
An overvaluation of R1 billion would therefore have a significant impact on the statements.
In response to Moneyweb questions, BDO issued a statement confirming “it received a complaint of improper conduct from the Irba in relation to the audit of Nova”.
The auditor was not prepared to provide any further details or disclose the identity of the complainant.
BDO independent investigation
BDO confirmed to Moneyweb that its own internal investigation into Nova’s financial affairs was ongoing. This investigation started nearly eight months ago in November last year after Moneyweb submitted a range of questions to BDO. Several external consultants and experts also participated in this investigation.
These questions were related to apparent discrepancies contained in Nova’s financial statements, as well as the fair and reasonable statement BDO signed in relation to the Section 311 Scheme of Arrangement that brought the Nova group into existence.
The scheme of arrangement saw the companies’ four directors – including the author of the scheme and current Nova chairman, Connie Myburgh – receiving 87% of the company’s issued shares for free. This is in stark contrast with around 2 000 former Sharemax investors who saw debentures worth R94 million cancelled for a collective stake of less than 4%.
In response to Moneyweb questions related to this investigation, BDO stated:
“BDO is continuing with the review of the issues raised by Moneyweb around the Nova Property Group, and are currently satisfied that the pace of the review is necessary to ensure a complete and thorough examination of the issues.
“BDO are in the process of obtaining the final input from independent third parties and, once complete, will consider what action is required in line with its duties under the APA, Irba Code of Professional Conduct or any other legislation. It is again important to emphasise that given the nature of all client relationships, and in full compliance with accepted industry standards, this information remains confidential.”
Dominique Haese, Nova’s CEO, did not respond to email questions.
Since Moneyweb published recent revelations related to Nova, the company has suspended all communication with Moneyweb. Here is an earlier response from Haese confirming this:
Dear Mr Van Niekerk,
It is regrettable that our efforts in engaging Moneyweb openly, constructively and in a bona vide fashion has not been reciprocated. In response Moneyweb has chosen to publish articles without prior reference to us, and in breach of your undertaking to allow us to see and comment on the articles first, which articles twist the facts, articulate a number of inaccuracies and untruths and seek to slander and defame the Nova Group and its directorate. We are considering our position and our rights in this regard are reserved.
It has become clear to us that any information that is provided by us to Moneyweb, will be twisted and used out of context for the purpose of further negative reporting of and concerning the Nova Group and its directorate and given that no further productive purpose would be served in engaging with Moneyweb, the Nova Group has decided to break off all forms of communication with Moneyweb. We will accordingly no longer respond to questions Moneyweb pose to us, requests for commentary on proposed articles or for that matter to any articles that Moneyweb might publish, subject of course to a reservation of the right to deal with any matter Moneyweb might publish, in a court of law.
Please ensure, should you elect to publish anything further regarding the Nova Group and any of its functionaries, that you include in such publication our above position, verbatim.
CEO Nova Property Group