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Tongaat: Deloitte in the firing line

But Tongaat can’t have ‘that’ discussion now because it still needs the audit firm.
Deloitte’s head office in Midrand. Tongaat says preparing a strong legal case against the firm is a complicated matter. Image: Supplied

Tongaat Hulett chair Louis von Zeuner assured shareholders attending Monday’s AGM that the board “will take action where we believe it needs to be taken” but stopped short of committing to taking action against external auditor Deloitte.

Much of the focus of the two-hour-long meeting was on Deloitte’s role in the near-collapse of the company.

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“The fact that we are not public in our discussions does not mean we’re not willing or will not take action,” said Von Zeuner, adding that Deloitte is “very aware of the fact that the case against it is not closed.”

Shareholder activist Chris Logan, who tagged problems at the sugar group as far back as 2014, questioned whether the board realised “how badly Deloitte let the company down”.

Logan said the issue was not just the repayment of audit fees.

Read: Stockholm Syndrome in the corporate world

Failure to perform

“If Deloitte had done its job properly and had picked up the massive misstatements early on, it would have alerted shareholders to the gross mismanagement in this company three, four or five years ago, and shareholders would have been able to change management.”

Logan said that by not doing its job Deloitte facilitated the write-off of R12 billion equity.

“So it’s not just a matter of getting fees back – the R12 billion write-off is the real damage.”

Von Zeuner told Logan that the board “fully understood that to be the case”.

He said the board has approached the JSE as well as the Financial Sector Conduct Authority (FSCA) and is continuously engaging with the Independent Regulatory Board for Auditors (Irba) on the issue. (Recently appointed Irba CEO Jenitha John was previously a Tongaat director and chair of the audit committee.)

Read:

The various approaches appear to be part of a concerted attempt to build a water-tight case against the audit firm.

“I absolutely agree this isn’t just a fee matter,” said Von Zeuner.

The write-off resulted in the share price plummeting from over R100 in early 2018 to a low of R2 in April; it has recently edged up to a current R5.95.

In financial 2020 Tongaat paid Deloitte R88 million in fees, equivalent to 10.5% of the company’s current market capitalisation.

Linda de Beer, current head of the Tongaat audit committee, told the meeting the steep fee increase – up from R30 million in 2019 – was because of the “massive additional work that had to be done”.

In addition, the company was dealing with a difficult major asset sale and other debt restructuring initiatives and felt it needed an auditor with knowledge of the company.

De Beer said the board could not have “the firing discussion while we have to work with them [Deloitte].”

Deloitte will remain as the group’s auditor this year but is expected to be replaced in 2022.

De Beer acknowledged that the matters relating to the misstatement were not complex but indicated that preparing a strong legal case was a complicated matter.

Deloitte Africa’s newly-appointed chair Ruwayda Redfearn, who was attending the meeting, was asked by Von Zeuner to comment on the issues but declined, referring to the ongoing Irba investigation.

Board commended

Financial analyst Dave Woollam, who had early on warned the board of the extent of the problems within the group and had written an extensive report on the matter, commended the board at Monday’s AGM for steering the company “away from the abyss”.

But he urged the directors to take decisive action.

“It doesn’t seem right that the company that suffered the damage has to pay twice to rectify the situation. You must get back money from anyone who was paid to do a job and didn’t do it.”

Woollam also queried the group’s remuneration policy, which used considerably larger companies for benchmarking purposes, as well as the payment of R100 million to the top six executives.

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COMMENTS   13

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It is clear that the entire auditing (so-called) profession is rotten and dysfunctional and needs to be completely restructured and professionalized. All registered individuals involved in failed audits like at Eskom or Tongaat, have to be suspended, investigated and then scrapped from the register. This to be followed by SARS-like fines for the guilty companies.

The easy part out for activists, boards and management of companies is to blame the external auditors for mismanagement or failures to report. No board or management is supposed to know their own company and its operations better than the board itself! Why weren’t there internal controls, or were they inefficient and what did the internal auditors do?

Guys, if a company is allowed to choose their auditor then they will NEVER choose an auditor that will expose their wrong-doings publicly… The auditors will also NEVER expose their “clients” publicly as this will tarnish their image with other clients… why would the auditor bite the hand that feeds them?

Can you not see that the entire system is flawed!! The only way to solve this will be to force companies to use an auditor that is chosen independently… but this will never happen.. so these cases will continue

The audit profession will have to be reformed so that external auditors can be held liable if material fraud is not flagged by them. Material Fraud implies the financial statements are materially misstated and as such a qualified opinion or adverse opinion should be issued on the financials.

Audit firms can no longer hide behind the fact that their mandate is not to detect fraud. We are not talking about the R100 that went missing from petty cash here, but rather the millions / billions missing or misstated on the balance sheet causing companies to collapse. Surely the auditors are required to pick this up with their audit procedures.

Management and Exco are however the first line of defense and as such they should be held accountable in the first place.

Why go after the auditors? After all they “only report that the AFS of the company are fairly presented”.

Go after the board, the valuators who signed off on the (land mostly) valuations, and the people who manipulated the results, first.

The auditors did not draft the Annual Financial Statements, they simply reported on them. Yes, there maybe some culpability negligence on their part on the review process but the onus lies on the company, the board and its financial team to prepare the AFS. Companies are very good at rationalizing their

Blame the crooked management teams first before gunning for the auditors … then prove negligence on the part of the auditors.

One of the many important roles of a professional Auditing in corporate governance is to protect the interests of shareholder and stakeholders of a company. External auditors are required to state the finances of the company and attest to the validity of financial reports that may have been released.

Its not in the interest of the department finance executives and the ministers to stop this as they get rewarded when they leave the department and join the private sector.

The hunt is always on to find a culprit and not the perpetrator. The Board and top management are the perpetrators in this case. They committed the irregularities. The auditors are complicit in the crimes because they did not report their findings.
It is like blaming the traffic police for for an accident because he did not stop a motorist from skipping the robot.

Auditors and accountants are not rotten. The public is fickle as usual. Including you lot. It all stems from the same thing (unmentioned in this article). all the comments have touched on the various symptoms. But this is the only true BOTTOMLINE!
1. The public is inherently greedy and hence law-breaking (screw tax and screw the shareholders.)
2. Laws are enforced on the public by government
3. Auditors/accountants work for the public
4. And never the twain shall meet.

Readers who care would do well to go through the 2020 AFS of Tongaat. I am busy analysing and it makes for very interesting reading.

If you wish to do so here is the link

https://www.tongaat.com/2020AFS.pdf

At least read the auditors’ report on page 7 in its entirety and see what it is all about.

Also read this generic audit report, in this case of SAIPA, to understand what auditors report on.

https://www.saipa.co.za/wp-content/uploads/2020/06/SAIPA-Audit-Report_-31-Dec-19-Signed.pdf

Contrary to popular belief the entire auditing profession is not rotten or dysfunctional. It is the reporting standards that favour the cooking that goes on. Blame the irrational International Financial REporting Standards instead that obfuscate results and allows for all sorts of provisions that complicate matters.

End of comments.

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