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PPC: Critical audit report ‘unprecedented’

Deloitte has highlighted a material breakdown in internal controls over financial reporting.
Errors in its financial results for the year to end-March 2019 resulted in an increase in PPC’s headline earnings per share. Image: Moneyweb

PPC’s independent auditor Deloitte has issued an unprecedented highly critical report that highlights “material weaknesses in internal controls over financial reporting” as one of several key audit matters that need to be addressed by the JSE-listed cement and lime producer.

Deloitte confirmed in its independent auditors’ report, which formed part of PPC’s financial results statement for the year to March 2020 released earlier this month, that its external audit confirmed that there has been “a material breakdown in internal controls over financial reporting”.

“In particular, severe gaps in controls over financial reporting, such as the consolidation process, the preparation and review of the annual financial statements and the completeness and accuracy of information, were identified,” it said.

Deloitte added that challenges were experienced in obtaining sufficient and appropriate evidence, particularly in areas requiring judgement and estimation.

“We have concluded that the breakdown in the controls over the financial reporting process is a key audit matter due to the significant and pervasive impact this had on the overall timing, level of expertise and effort associated with the current year audit of the financial statements,” it said.

Scrutiny

Deloitte said its audit required extensive involvement from senior audit personnel, auditor’s internal specialists and individuals with specialised knowledge.

The firm listed a number of procedures undertaken to respond to and address the impact of the breakdown in internal controls over financial reporting.

It then concluded: “Based on the audit procedures performed and the level of expertise and effort associated with the current year audit, we are satisfied that our audit procedures were sufficient to mitigate the impact of the breakdown of controls over financial reporting.”

Other key audit matters highlighted by Deloitte include impairments, the accuracy of the hyperinflation accounting for the PPC Zimbabwe Limited results, the valuation of Zimbabwe blocked funds owned by PPC Limited, the value of the Zimbabwe derivative financial asset on legacy debt, and “prior year restatements – material errors”.

There were eight prior year restatements in the financial results, including errors in its financial results for the year to end-March 2019 that resulted in an increase in PPC’s headline earnings per share.

Following the publication of PPC’s delayed latest annual financial results, Moneyweb asked PPC CEO Roland van Wijnen for comment on the possible impact of these restatements on the company’s credibility and the mistrust in the financial results they possibly created among investors.

Van Wijnen said PPC had “one of the most diligent audits I have seen in my life”, adding that he views this issue slightly differently despite understanding why investors may lack confidence in a company with prior year restatements.

“But you can turn it around and say maybe this company actually is diligent about its current audits and very frank and open about corrections that had to be made in the past.

“I see it as a positive rather than a negative although I understand the concern that there is,” he said.

‘Not up to scratch’

PPC chief financial officer Ronel van Dijk also addressed the prior year restatements during a presentation to analysts.

Van Dijk admitted that although some of the prior period restatements had a lot to do with technical interpretations of complicated accounting matters, PPC has to “look inward and admit and accept that we have internal control weaknesses and our financial reporting processes are not up to scratch”.

“This [had] been identified a number of months ago and we have therefore initiated a number of improvement projects,” she said.

Van Dijk added that PPC is reviewing its internal control environment to identify all the gaps and opportunities and has initiated a project to standardise all its policies and ensure that its procedures are in line with the policies and address all the risks.

She said PPC has also gone through a restructuring process of its head office group services, particularly the finance team in South Africa, and is currently recruiting appropriately qualified and experienced personnel.

“Putting all these things in place, we are confident we will see improvement in the control environment and the overall financial reporting process of PPC in the not-too-distant future.

“It will be a lengthy project to finalise but I think we will see improvements reasonably soon,” she said.

David Fraser, executive chair of Peregrine Capital, said after the presentation that PPC’s new executive team is “just fixing up somebody else’s mess”.

Deloitte’s candid criticism of PPC’s annual financial statements was described by one auditor as “unprecedented”.

Transparency

However, the Independent Regulatory Board for Auditors (Irba) has encouraged independent audit firms to be more transparent in their reports.

Irba said in May that in light of the Covid-19 pandemic and restrictions arising from lockdown on businesses in South Africa, there has never been a more important time for investors and other stakeholders to pay attention to the key audit matters communicated in the auditor’s report issued by registered auditors on financial statements.

Bernard Agulhas, the then CEO of Irba, said auditors should explain in the key audit matters (KAM) paragraphs why the matter was considered to be one of most significant in the audit, and therefore determined to be a KAM, and how the matter was addressed in the audit.

“KAMs should give investors and users of financial statements greater insight into the conditions under which the audit was performed and how the resulting audit risks were dealt with by the auditor,” he said.

Expectations

Irba conducted a review of the audit profession following the Gupta Leaks on state capture and the collapse of Steinhoff in 2017 to address the “expectation gap”.

However, Agulhas said earlier this year that “at the heart of the expectation gap is the fact that not every business failure is an audit failure”.

“If the profession in South Africa wants to get serious about restoring trust in its corporate sector, it will have to face the fact that changing the audit product to narrow the gap is becoming a necessity.

“Resistance to changes demanded by those who rely on audit opinions is futile,” said Agulhas.

“While Irba can respond to such issues raised by the public, the regulator can only do so much to create the environment for change. Real change will come about when the audit firms follow suit.”

PPC this month reported a 124 cents loss in earnings per share in the year to March compared to the 16 cents profit in the previous year.

The company is planning a rights issue to raise between R750 million and R1.25 billion but has stressed it will only embark on this once it has resolved and restructured the unsustainable $150 million debt of its DRC subsidiary.

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Shares in PPC rose 7.27% on Friday to close at R0.59.

 

 

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In this case the majority largest shareholder controls the board, one wonders about the level of integrity and professional commitment from them?

A bag of cement is expensive

Previous CFO won CFO of the year award for her work in PPC and now this comes out. One really wonders what you can actually believe from all the information coming out. Lies, lies and more damn lies…from listed company reporting.

My company is a reasonably large PPC customer in the Western Cape. I have always found them to be extremely efficient and always helpful, even when they held the monopoly on cement supply in the W.C. (I’ll leave out ridiculous price increases some years ago for the purpose of this discussion)

In my humble opinion, too many middle management staff have been promoted to top level management positions in which, quite frankly, they are completely out of their depth.

You mean BEE numbers have to tally

What is also to be asked is- have they also been cutting corners with the quality of the cement? Thats a we will find out when bridges and buildings start falling down

Is this the much-needed new wave of auditors’ reports, of doing the right thing rather than sucking up to their clients?

Lol, no.

Something like this don’t make KAM unless its really, really bad at the company.

Check the audit fee when AFS comes out and see how much it increased by. It Will give a indicator of how much additional work Deloitte had to do and how bad the controls are at PPC.

But you see, therein lies the problem. The auditor is appointed by the customer to ‘audit’ the books, which basically means that they check that the customer stuck to their own procedures. (If Tongaat Hulett does a valuation of a property and they can show it was done according to their procedure, who is the auditor to tell them that their valuation is wrong? What qualifies an auditor to make a call on an inflated valuation, after all?) Remember, the customer is already unhappy to pay, but now you want the customer to pay the auditor to find out what they have hidden away in their books. Who, in their right mind, would gladly do that and gladly pay for it? Definitely not the customer. Definitely not shareholders, share traders, the tax man or the public in general. Yet people expect auditors to do exactly that. They must catch the Steinhoff or Tongaat Hulett crooks and, to rub salt in the wounds, send the company a tax invoice. In what world does that work? The system is not geared towards that. It is geared towards getting exactly what we pay for. Unless somebody is willing to pay the auditor to check each and every decision, procedure, book entry, etc, crooks will get away with whatever they have hidden as far away as possible, never ever to see the light of day. The problem is not with the auditors. The problem is with the expectation of what an auditor is supposed to do. If it is to catch crooks, then business and the auditing industry must find a way to compensate the auditor for that service. If that can’t be done, then maybe business should appoint less crooks. It would also help if the expectations of shareholders and boards are better managed.

In full agreement. The problem is exacerbated by the poor retention of auditing staff as they flee the profession for other opportunities elsewhere.

The problem lies with IFRS and compliance thereto. Present the AFS stripped of all extraneous adjustments (ie @ Historical Cost) the naked truth, then, by all means, give us the “heavily plastered make up” glitzy model.

PPC is a company which has lost 98% of its value over 10 years. It reflects the destruction of the South African economy and the ability to manufacture in a competitive global environment.
How can a bag of cement shipped from Vietnam or Pakistan cost less than the same product made in Johannesburg? Instead of tackling the cost structure the industry wants to impose tarrifs on the consumer.
The inability to complete financial statements correctly is just more of the same from this company.

…spot on: why cheaper from Vietnam or Pakistan?

The cumulative cost, spread over 25+ years, of an artificial AA/BEE system; socialist labour union demands based on unrealistic expectations; govt compliance/red tape….all having a drag on local businesses. And skills…mostly now migrated to Oz.

SA will increasingly not be able to compete on any fields….what we have left, will be our RAW minerals foreign countries will be after. Declining back to a typical African country to be exploited by more competitive nations. SA’s development heydays are well past it.

Perhaps India, Vietnam and China export at cost or at a loss? Have you tried Indian cement? Their 35MPA is positively appalling with a serious ash content. The same goes for Chinese and Vietnamese. Definitely not superior to local cement.

Buy local from PPC or Afrisam, superior quality and in some cases cheaper.

Blame the local importers for destroying the local cement industry as they chase profits. We should be taking a leaf out of Trump’s book and buying local product rather than imported.

How else are we going to fix this country up?

Big business has no conscience.

Quality of imports are not the same and not as consistent as PPC’s products. Tried them all, PPC is superior in quality, price and service (except the last few months, their service is disappointing).
Overall PPC has excellent quality, balanced prices and good service (for the last 20 years).

In full agreement. The problem is exacerbated by the poor retention of auditing staff as they flee the profession for other opportunities elsewhere.

The problem lies with IFRS and compliance thereto. Present the AFS stripped of all extraneous adjustments (ie @ Historical Cost) the naked truth, then, by all means, give us the “heavily plastered make up” glitzy model.

It’s a manifestation of the SKILLS EXODUS the country has seen.

Not only the accounting/auditing profession, one can search for engineering design failures (many we’re still to see), medical malpractice, corporate management decisions gone bad, etc…all due to shortage (hence the cost) of professionals.

No skills = no economic growth.

(…wait there will be ‘growth’ in SA, that is in the number of unemployed, as the population continues to expand/explode.)

I have to agree 100% with you.
When I was Group Accountant in the 80’s for an overseas Chemical company the standards we had to adopt were strict and woe be tide if I made a single accounting error.
The standards, ethics and moral comprehension of people in senior positions leave a lot to be desired today.
Executives are also in a feeding frenzy in their own troughs having learnt from the best – with NO accountability to the ever suffering shareholder.

End of comments.

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