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The corporate scandals keep on coming

Tongaat must restate its 2018 figures. But will it end there?

Just when we thought the worst was behind us, along comes Tongaat Hulett with an announcement that it overstated its 2018 figures and will have to adjust them downwards. Then there was the public spat between retailer Choppies and its suspended CEO. But we’ll come to that in a minute.

Alarm bells started ringing in February when Tongaat’s share price slumped nearly two thirds to 1650c over a period of days. From a purely timing point of view, it seems some people had wind of this before others since the price drop occurred well before the financial year-end.

No doubt the JSE will take a close look at this. Tongaat will have to restate its equity by between R3.5 billion and R4.5 billion due to the incorrect recognition of revenue and profits in terms of International Reporting Financial Standards (IFRS).

Read: Tongaat shares slide on accusations of accounting irregularities

Also to be revised are “growing cane valuations” and it will be forced to reverse costs capitalised for cane roots, projects, maintenance and inventory.

Based on last year’s reported revenue of nearly R17 billion, Tongaat will have to shave this by 20-26%. Profit figures will also take a pounding once the numbers are restated. Deloitte, the auditor, will have some explaining to do, and will surely dread the comparisons already being drawn with dog-in-the-manger Steinhoff, of which it was the auditor at the time accounting irregularities were first reported.

Tongaat’s debt-equity ratio has been climbing steadily over the last four years and will have to be pared back through asset sales.

In 2018 IFRS amended its revenue recognition criteria for land sales. Without more detail from Tongaat, it is difficult to surmise what went wrong other than Tongaat not adhering to the new accounting standards.

Toll on Tongaat

IFRS deals with a number of revenue recognition scenarios, particularly where there are concerns about the collectability of money from property that is being co-developed with outside partners. In simple terms, it was easy to fudge the figures under the old accounting standards and report revenue that was neither cash-based nor collectable with certainty. Property deals in the works are inherently complex, with multiple legal contracts and their associated liabilities that make it difficult to assess when revenue should be recognised and by whom.

Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says red lights were flashing when Rob Aitken stepped in late last year as an acting chief financial officer, a position that was made permanent in February this year. A new CEO, John Hudson, was appointed in February.

Bermuda Triangle

“Connecting the dots between the CEO, CFO and auditors reveals the Bermuda Triangle of financial reporting,” says van Wyk.

“In this case it’s not ships and planes that disappear but billions in shareholder value due to this unholy alliance.”

He adds: “What facilitates this is the misreading of the Companies Act vis-à-vis financial reporting standards. Corporate executives and their auditors forget that the Companies Act trumps IFRS. The act places the needs of users above that of the directors. IFRS allows directors to apply judgement as to when revenue and expenses should be recognised.

“The act requires adherence to IFRS when preparing financial statements but also requires that these statements are fairly presented, not misleading and not incomplete. It’s clear that neither the auditors nor management passed muster when it comes to the Companies Act even though the low bar of IFRS may have been passed.”

The company recorded revenue of R8.8 billion for the six months to September 2018, and R17 billion for the full year to March 2018. The last interim results show it collected R630 million from land sales in October 2018, leaving land debtors of R1.934 billion, “most of which is expected to be collected over the next 12 months, as administrative, planning and other conditions are fulfilled,” according to the results announcement.

This is possibly one source of the revenue misstatement, particularly if the planning and administrative conditions were not fulfilled.

Tongaat is a huge landowner in and around Durban, and has released more than 3 500 hectares of formerly agricultural land for sale and development. It has been a major supplier of land for new development areas around King Shaka International Airport, Ballito and Ntshongweni (west of Durban).

Indications of potential trouble in the property portfolio were flagged in September last year when it conceded that the current economic climate was not conducive for land sales. The company negotiated two sale agreements and said it was taking steps to obtain the necessary planning approvals to conclude those transactions, while focusing on collecting proceeds from previously concluded land deals. It’s likely that some of these fell through the slats and revenue was counted before the deals were hatched, which looks good come executive bonus time.

There are now calls for the repayment of executive bonuses tied to misstated profit figures.

Tongaat holds a substantial asset base including controlling interests in sugar operations in SA, Swaziland, Botswana, Namibia, Mozambique and Zimbabwe. It also has an extensive property portfolio, which it has been selling and developing in recent years, as well as starch operations.

Assets to be sold

The company says it is committed to selling certain assets and is making progress in reducing interest-bearing debt, which stood at R5 billion in March 2018. This will strengthen the balance sheet and improve its liquidity position. “The company has obtained independent valuations of its various businesses as well as its land portfolio, which is currently reflected in the financial statements at historical cost,” says the statement issued by the company this week.

It has been negotiating with its debt funders to waive their rights arising from any breach of financial covenants contained in the facilities agreements for the measurement date falling on March 31 2019.

Negotiations with its funders for a moratorium on repayments – other than interest on its long and short-term SA debts – are at an advanced stage. Annual interest payments have climbed from R609 million to R878 million over the four years to March 2018.

Choppy waters

What’s also alarming, but on a smaller scale, is the very public spat between retailer Choppies and its suspended CEO Ramachandran Ottapathu.

Choppies shares have been suspended on the Botswana Stock Exchange and JSE since November last year after it failed to produce its 2018 annual report on time.

What makes this mess even more convoluted is that Ottapathu is the company’s largest shareholder, with nearly 20% of the shares. He was suspended “as a result of an aggregation of activities and conduct” which the company would make public in due course, according to a Sens notice released on Monday.

Ottapathu told the press he has had to defend himself against unstated charges and would bring the matter of his suspension to court at the soonest opportunity. The latest results for Choppies date back to December 2017 when it reported a 23% increase in revenue for the six month period, and a 22% increase in profits. There are concerns over the retailer’s reporting of its inventory, but that’s a story for another day.

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Auditors, auditors and auditors lie at the heart of this problem. They get too cosy with their clients and earn such fat fees that they will never blow the whistle because they stand to lose too much. Except when it’s too late like the case was in Steinhoff’s December of 2017.

My thoughts exactly. If a doctor is negligent and the patient loses a limb, he can lose his license to practice. An engineer had better make sure the bridge he designs, doesn’t collapse, or else he’ll also have his registration cancelled. It’s called “being a professional.” This seemingly doesn’t apply to the auditing “profession.” Clearly many of them are worse than negligent; they are complicit in these shenanigans. It is high time this so-called profession is cleaned up and all of them are made to re-certify or retake their CA exams.

Auditing is a waffle profession that charges exorbitant fees for made up services that don’t deliver any value.

The only reason that they exist is because they convinced some government minister that they have to be made mandatory by law and that every company has to have an auditor go through their financial statements once a year.

jnrb:

If management was not crooked the Company would not need auditors!

But I have sympathy for your comment – auditors need to get more practical and less IFRS-compliance focused. With today’s IFRS, I could take the same 1 million transactions of a company and present two IFRS compliant sets of results that nobody would imagine is the same company.

Investors and the fun damagers need to upgrade their skillset or just simply understand how to interpret cash flow, especially over time and be very wary of serial acquirers and regular big journal type entries. IMHO our listed property sector for example is overdue more than the Steinhoff mess in downward asset valuations. Increasing the values was a journal entry that was crowed about and counted for hired help bonuses. Slashing values is similarly a journal entry but I suspect this will be presented as a one-off, bygones, theoretical, nothing to see issue.

I wish our companies rather presented the kind of info you see in US. Download Apple annual filing. You see detailed expense categories by segment. In SA we have 50 page glossy AFS about sustainable this and governance that, but that actually do not present the kind of information a business manager would want to see. And that is how an investor should be approaching results.

Been like that for years. Just the amount of greed has increased and auditors are now prepared to take greater risks.

fully agree with you, we need to increase the level of oversight for this publicly listed companies. These impact greatly on investor funds, pensions and so on…. Audit firms are no longer a machanism to be relied on they are found wantingand the shenanigans are getting more complex.

100% in agreement. All other sectors is taking a hit these days due to greed i.e. meeting stretch targets in an economy that is not growing.

All that it comes down to is that there should be a lot more auditors in jail

It seems Tongaat became a cesspit of greed, corruption and incompetence under Staude and his cohorts …?

#PayBackTheBonuses!

I wonder if Investec will now apologise to their analyst Anthony Geard whom they roasted after he instead that Staude resigns after posting a decade of poor numbers?

Another great example of how Regulation 28 protects pensioners again risk by enforcing 70% local investment.

Steinhoff, African Bank, Tongaat, all have one thing in common, Deloitte is the auditor for all of them…

Is it just me, but it does look like the entire South Africa economy is just one big ponzi scheme? Between bent auditors and utterly corrupt execs and government officials, there appears to not be a single honest man left….

Milo, I share the same sentiment.

Accepted, one cannot generalise, but this reduced integrity even manifests itself in the way fellow South Africans drive on our roads: we’re getting more careless / don’t care attitude, rolling stops seem to be the norm / moving violations.
When one witness another driver making an idiotic moving violation, and oh boy, if one dare to correct him/her, it is you/me that get the middle finger.

Possibly the same thread into the corporate/business environment(?)

Milo : More like capitalism in itself is based on the notion of continual growth mostly trough externalizing cost ( pollution, not paying workers&taxes ) which given the limitations of the biosphere clearly can not and has not worked out.

The problem i see is that people think all or even many of the problems we face in South-Africa is unique when even a cursory examination of the world will reveal that there are many societies with far worst problems and that those with fewer problems are democratic enough to reign in the worst private sector abuse and exploitation. This isn’t going to go away and if there isn’t auditors to cover for the corporations they will find a different way to externalize the risks associated with the fraud the system itself will keep rewarding them for committing.

You will lie if you are going to lose a client account by telling the truth- that is how sick big business is.

The JSE will do exactly what they did with Steinhoff and Ayo ie nothing substantive.

JSE management lacks substance and effectiveness. Should fire the entire Exco and bring in people who can do what they are paid to do

Bonuses, share prices and funding rely on IFRS earnings. Management teams have found the auditors pliant / incompetent and helped themselves to massive windfalls at the expense of investors (in SA, mostly pensioners). The incompetence and ostrich mentality I’ve come across with auditors have astounded me. If I was a bit less honest I would have long ago started a company fully funded with promises and IFRS earnings (read, a Ponzi scheme)

What I know is this…Investec knew what was happening and what was going to happen in February of last year. They controlled a large portion of shares held in a family Trust, the majority were sold at R112. Insider formation? Maybe – you decide! In my opinion, something stinks!
On a positive note – this is probably a good time to buy at a reasonable price…. if you have the courage!

In other words, do not invest in any companies that Deloitte audits.

That’s a pretty decent price for brisket…I’m surprised there’s issues when they could be selling brisket by the bakkie load!!

Tongaat isn’t a good buy even at this price. Staude cost-cut the productive assets into destruction. Every factory pours untreated waste directly into the environment. The management are all Staudes pet yes-men. Nowhere to go but down until its all gone

If the company execs have the express intention to misrepresent the financial position and financial performance, does Van Wyk really think the subjective requirement of the Companies Act would have prevented them from doing so. Utter drivel imho.

The writing should have been on the wall when a company that requires land, to grow the main raw material for its products started selling off vast portions of said land for short term profits.

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