The High Court of Botswana this week delivered a damning judgment against PwC and auditor Rudi Binedell over delays in the release of group audit results which seriously impacted the Choppies share price.
The judge criticised Binedell who was found to have delayed the Choppies Enterprises audit report because a job he had been offered at Choppies had not materialised.
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Choppies, a supermarket chain based in Botswana with stores across the region, is listed on both the Botswana and Johannesburg stock exchanges.
Its two largest shareholders – Ram Ottapathu and Farouk Ismail – are suing PwC and Binedell for a combined R621.8 million for losses on the Botswana Stock Exchange as a result of the delayed publication of Choppies financial results on that exchange, as well as another R416 680 for the similar delay on the Johannesburg Stock Exchange (JSE).
They allege that PwC’s actions caused the loss of over 75% of Choppies market value.
Trading in Choppies shares was suspended on both bourses in November 2018 due to the delayed release of its financial results.
Trading on the JSE resumed in November 2020 after a two-year suspension.
The shares currently trade at around 80c, a fraction of the peak 730c price reached in 2015.
The Botswana court judgment says the Choppies audit was tainted by an offer of employment – with share options – that had been extended to the lead auditor, Rudi Binedell.
Conduct ‘an issue’
The judgment handed down by Justice Boipuso Tshweneyagae in the Botswana High Court this week, said of Binedell: “…[his] alleged conduct is also an issue”.
“The allegation is that he was not arm’s length in his auditing of the Choppies books as he had been offered a job with significant shareholding as incentive.
“When this did not materialise, he used his position as the key lead auditor to compromise the publication of the audit report beyond the publication deadline of 30th September 2018.
“Prima facie … [his] independence as a dispassionate and professional auditor was impaired once he engaged in potential employment discussions with Choppies. He should have recused himself from leading the audit.”
The judgment spells out PwC’s defence in the case: the audit contract with Choppies never stipulated an absolute deadline of September 30 2018 for the audit report. PwC and Binedell argued that the deadline depended on Choppies providing draft annual financial statements for auditing, which did not happen, and that the supporting information was insufficient to complete the task on time.
Seeking greater detail
Ottapathu and Ismail brought the case before the Botswana court, seeking “further and better particulars” about the nature and background of the audit conducted by Binedell and PwC.
This was to remove the element of surprise and ambush in litigation, allowing the other side to better prepare their arguments.
“From the audit agreement, the parties had reciprocal obligations,” reads the judgment.
“Choppies had a duty to provide the information. The defendants had an obligation to finalise the audit report within reasonable time. One might also add that [PwC and Binedell] knowing that Choppies was a listed entity were aware of the timelines of the Botswana Stock Exchange.
“The Plaintiffs [Ottapathu and Ismail] are within their rights to ask what information was not provided by them in order to facilitate the audit. This is because [PwC and Binedell] themselves have introduced the issue of this failure.”
The judge ruled that PwC and Binedell provide the two shareholders with further particulars of their defence, saying: “The information sought from the Defendants is necessary to enable the Plaintiffs to plead and for the court to equally appreciate the issues in dispute.”
PwC was ordered to pay the costs, including the cost of the senior counsel.
Trial date set
The judge ruled that the matter will go to trial from May 9 to 20, 2022, and said there would be no relaxation of the timelines specified for the information to be supplied.
In a written response to the ruling, Ottapathu told Moneyweb that the damage to Choppies went beyond the delay in the audit.
“There was no independent mind behind this audit. Mr Binedell was engaged in discussions with independent board members about his employment.
“When I didn’t support that, because of the conflict of interest, his behaviour changed and all sorts of issues were created” says Ottapathu.
“The judge found that he should have recused himself, and that ‘When [the job] did not materialise, he used his position as the key lead auditor to compromise the publication of the audit report beyond the publication deadline of 30th September 2018’.
“The suspension of Choppies shares that arose from the non-publication of the financial statements damaged Choppies reputation as well as my own reputation and that of my fellow shareholder, Mr Farouk Ismail. We estimate that it caused the loss of over 75% of Choppies market value.”
Choppies appointed PwC as auditor in 2018, with Binedell as the lead auditor. “However, he was in discussion with independent board members about his possible employment as CFO of Choppies with a large financial inducement in shares if he joined. This was a conflict of interest which I did not support,” says Ottapathu.
PwC issued the following response to the judgment: “PwC Botswana confirms that it has received a court order to produce information in relation to its defence early in the court proceedings. The order asks only that PwC Botswana produces information and is not a judgment or decision on the merits of the claim.
“PwC Botswana will comply with the order and produce the information at this stage of the proceedings.
“PwC Botswana is confident that the court will ultimately find that the delay in the finalisation of the audit was due to accounting and governance matters within Choppies that came to light during the audit, causing – amongst others – two independent investigations to be commissioned by the Choppies board of directors.
“PwC Botswana stands by the work it did and will continue to defend the claim.”