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Suspension of Tongaat trading a potential crisis for other shares

The damage is likely to spread beyond Tongaat, with investors applying a risk premium to stated figures on other stocks.

Trade in the shares of sugar and starch producer Tongaat Hulett was suspended on the JSE and London Stock Exchange on Monday while new management assesses the extent of financial misreporting by the company.

The shares were suspended at the request of Tongaat itself. In a Sens announcement, Tongaat says it aims to publish its consolidated financial statements for the year to March 2019 by the end of October this year. The listing will be reinstated at that point or sooner, providing sufficiently reliable information can be released.

Read: The corporate scandals keep on coming

This follows an announcement on May 31 that Tongaat would have to restate its equity by R3.5-R4.5 billion after incorrectly counting revenue from land sales. It would also have to reverse capitalised costs related to cane roots, projects, maintenance and inventory. What may have happened here is that Tongaat undercounted actual expenses by ‘capitalising’ them – which has the effect of removing them from the income statement and recording them as assets on the balance sheet.

The audit profession, already in damage control for signing off on Steinhoff’s fake figures and facilitating other corporate debacles (such as the looting at VBS Bank), will be bracing itself for another round of public opprobrium.

Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says one likely effect of the Tongaat accounting mess will be for investors to apply a risk premium on all published financial figures.

Investors ‘just can’t rely on the figures’

“Given the current spate of audit and reporting scandals, investors are likely to add a risk premium on financial results and reduce the stated figures with this risk percentage,” says Van Wyk. “They just can’t rely on the figures presented. This doesn’t bode well for the audit profession, but the impact is likely worse for the broader SA economy as increased risks means increased interest rates and an increase in cost of living expenses.

“We need CFOs [chief financial officers] that are skilled managers not ones that are technocrats. SA needs street-smart CFOs who can see the wood for the trees and not be manipulated or bullied into applying liberal interpretations of IFRS [International Reporting Financial Standards] when preparing financial statements.”

Suspension of the trade in Tongaat shares seems a logical move by Tongaat, though it has also triggered speculation that conditions at the company are worse than already believed. To allow trade in its shares to continue would encourage wild speculative activity. By suspending trade, Tongaat can get ahead of the news cycle and control the information flow while audit firm PwC, which has been brought in to investigate certain practices at the company that could impact previously reported financial information, delves into the extent of the misstatement.
 
The Sens statement says the Tongaat board has “reached a conclusion that the need to restate the March 2018 Financial Statements, and the consequential impact on the 30 September 2018 statement of financial position, renders reliance on the unaudited interim results for the six months ended 30 September 2018 Interim results no longer appropriate. This follows further discussions with the JSE and the Company’s auditors, forensic investigative team, legal advisors and management.”

All this suggests the results released last year are largely a work of fiction, with land sales counted before they were due, and inventory and other capitalised costs padded to allow executives to earn fat bonuses. 

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Maybe a bit of clarity for my sake especially with me not having a better understanding on Financial Terms – but this whole Tongaat & Steinhoff situation to a relevant extent – what does it really mean to the public that have really invested in these company’s shares? I see their share price tumbling. What sort of accountability that these companies can be hold for? To me it really sound like gross intended financial negligence which has now resulted to the public investors being the victims in losing their potential earnings.

And regulation 28 is certainly protecting pensioners from undue risk by forcing funds to invest 70% locally.

We tend to point fingers to the audit profession when things do not turn out as we expected. The medical profession has a 100% failure rate, everybody who sees a doctor eventually dies. Some people spend their days blaming doctors, and others spend their days in the gym and by cooking healthy food.

Some professional investors, who trade for a living, sold their holdings in Tongaat, Steinhoff, Resilient, Lonmin, Brait, Coronation, Zeder, Pioneer Foods and Tiger Brands before the carnage started. Serious investors should ask how these investors managed to protect their capital against negative circumstances. They use a proven and recognised system, and blaming the auditors is not part of that system.

Ignore all intangibles on the balance sheet, reverse out the impact on the income statement of changes to intangibles (including capitalised costs) and pay attention to cash, debt and cash flow statement. Also know the environment and client demand changes. Even the best companies cannot survive certain structural changes. Above all, ignore what management says and promises, especially if the promises relate to IFRS earnings in the short term.

In full agreement. Companies should report in good old Historical Cost Basis and then comply with IFRS which is not much more work as they start out with Historical Cost Basis anyway. Two sets of financial statements is not much to ask for.

Most times the various adjustments are very obscure and dificult to identify making life difficult for users of the financial statements.

IFRS = the Weapon of Mass Destruction in the financial world.

Do not think your doctor analogy is sound. We all going to die anyway. But from the little that I know about accounting it seems clear that the modern day accounting practices resemble fiction more than the financial reality.

Very sad that some of the most important accounting principles that used to be taught when I went to university are no longer taught/practiced, including consistency and prudence. There is no accountability and no trend analysis possible if accounting is inconsistent from period to period. Some companies I look at restate and resegment every 6 months. Some companies I’ve come across have intangibles which can never be recovered from current-client net cash flows which force them to diversify and look for clients / IFRS earnings elsewhere, away from their core competencies/ mandates (just like Tongaat).

Agreed but problems for unit trusts, ETF’s Pension funds as they don’t do that. Example. If a counter forms part of say the top 40 and a trust, fund or ETF invests in the TOP 40 they don’t throw one or two counters out from time to time. Only once it is to late and the counter falls out of the Top 40.

Again that show’s how unfair Regulation 28 is. It is not protecting pensioners it is exposing them to undue risk.

On top of that even if none of these scandals had taken place, SA’s returns compared to the US for example have been poor. I understand investing locally and all but there is zero growth, how the hell is r28 supposed to help me retire peacefully? Its a good idea in principle…only

When are you going to sell your shares in KAP seeing that there are huge problems on their balance sheet as well as the huge risk they are facing on their chemical division and the competition commission ruling on the Wood Industry side. Their current CEO and CFO will have to step down because they were part of the colluding as claimed by their competitor/collusion partner Sonae.

Diversify.

Diversification does not help against the contagion this article talks about (higher interest rates, lower market prices) except if you move your investments out of SA which are not possible for pension funds (regulation 28). Index trackers suffered as much as the market from exposure to Steinhoff. I would argue against diversification in SA given that the average management team appears incompetent / morally flexible, and I would not want to be spread over this lot. I know of only a few companies I’m willing to invest in. But I watch for management / cash flow / client changes at these too, and the list gets smaller and smaller each year.

When will the ex CEO and ex CFO be arrested for fraud. By misrepresenting the results (and signing them off) they appear to have committed a misrepresentation resulting in financial benefit to themselves. ( ie bonuses). So a prima facie case of fraud.

And the somnolent NPA is challenging some appeal for crimen injuria while this Steinhoff, Zuma, Gupta, arms deal, Transnet etc etc goes un-prosecuted.

A country run by ANC fools!!

just finished reading a book on the Enron collapse and their accounting
(mark to market as opposed to cost accounting)
obvious similarities,
How many more out there?

How did we end up here? From being ranked no.1 in the world for auditing and reporting standards, to this unholy mess! Makes me think that just maybe we were never really no.1 to begin with!

We also have the “best constitution in the world” and the most advanced and sophisticated bill of Human Rights in the world. We also have the highest incidence of rape, and our murder rate is higher than for any warzone on earth. We also have the most criminal government on earth. Our constitution and Human Rights are nothing more than crumpled pieces of paper in a pit-latrine in rural South Africa.

There is no correlation between a wishlist en the actual execution of that list.

Also implicated should be the institutions who sold large holdings before last years financials were released. What did they know and how. It all needs to be exposed, just like Steinhoff and the Zuptas need to be fully exposed and action taken against those that colluded and robbed. The credibility of SA economic and political future depends on this.

Unfortunately…in my opinion…when the CEO and management of African Bank got away with what they did and were not brought to account, this opened the door to wholesale plunder by those that saw an opportunity. It needs to be stopped…if it’s not already too late. Our reputation as an honest place to do business is already in tatters and it seems like the plunderers without a conscience are sitting in the wings waiting for the next lull before striking.

It not the job of the JSE to protect value but to allow trade. Furthermore, it hurts current shareholders as it does not give them a choice to dispose or take up more shares , and the suspension gives buyers and sellers less of an opportunity to trade as we operate in a free market . We do not need a nanny to protect the sharedealing public please.

The request from the company should have been put through a vote of the shareholders and then the JSE should have taken a decision accordingly.

In the interim please investigate previous trades of Tongaat of directors the auditors and big institutions who sold before the bad news.

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