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Steinhoff, Tongaat woes raise South African auditor scrutiny

Auditor profession in the spotlight again.

Steinhoff International’s financial scandal and sugar maker Tongaat Hulett’s admission it may need to restate results is spurring South African auditors to weigh tougher measures for the profession.

Read: The corporate scandals keep on coming

While auditors are expected to reassure the public that the financial statements they have signed off are reliable, the standards used don’t require them to uncover wrongdoing. That may be set to change.

“It could be time for us to strengthen auditor competencies in the areas of testing for the existence of fraud and corruption,” said Bernard Agulhas, the head of South Africa’s Independent Regulatory Board for Auditors. “That’s the expectation from the public.”

Steinhoff in May released its 2017 results, 17 months after Deloitte first flagged a hole in the global retailer’s accounts that whipsawed into a forensic probe and wiped 97% off its market value. The results included a four-page disclaimer from Deloitte on why the firm — Steinhoff’s auditors since 1998 — can’t express an opinion on whether the accounts are free from misstatements; the bottomline of which was that there were just too many uncertainties.

Comprehensive regulation

The board, known as Irba, is investigating Deloitte South Africa over Steinhoff. The regulator has also started looking into the work Deloitte in South Africa did for Tongaat. Deloitte is reviewing work done for the company and has said there is still no evidence of wrongdoing by the auditors involved.

As one of the key guardians of governance and the last line of defense in ensuring sound financials, auditors also “come in a little late,” Agulhas said, referring to the fact that they are pouring over books and documents prepared by their clients.

To address the expectation gap, Irba is considering whether to expand the competency requirements of auditors. Also, because there are multiple lines of defense, including management controls and internal audits, the regulator also plans to give South Africa’s finance minister a model for so-called comprehensive regulation within weeks. This would include oversight through the financial reporting chain and may include audit committee members and chief financial officers.

The move would mirror ones taken in the US and UK in response to accounting scandals at Enron and other companies.

“The reason the profession is currently facing criticism is because auditors have expressed opinions on financial statements saying they fairly present, when they did not and can’t be relied upon,” said Asief Mohamed, the 57-year-old chief investment officer at Cape Town-based Aeon Investment Management, who is also is a registered chartered accountant. “So the public should expect more.”

© 2019 Bloomberg L.P

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if relatively simple businesses such as retailers and sugar/property companies have dubious accounts, what the hell do people expect may be lurking in the accounts of banks and insurance companies? I would venture that 9/10 of Absa or Sanlam users of annual financial statements do not comprehend more than 1/10 such same AFS. I doubt 1/10th of their boards fully comprehend the AFS they approved!

Agree 100%. In my experience the management at life insurance companies are just as willing to bend accounting rules to make bonus targets / earnings promises as management teams at mines. The only difference is that accounting at long term insurers is way more complicated and flexible (easy to bend rules). Trust only the dividends but also check how the dividends were financed

Shareholders appoint the Boards they select and trust. And then they need external auditors to check the hired help :/

Very few companies can afford the audit fee that would be necessary to return a waterproof outcome. Auditors rely on management representations, ESPECIALLY about related party transactions. They are not there to prevent fraud. Sure, they should spot reasonably obvious misrepresentations.

Why hasnt Moneyweb published the outcome of potential risk of the KAP competition tribunbal ruling. If/Definetly KAP Woodindustries is found guitly by the tribunal than they will have to pay a hefty penalty for the outcome of the ruling as well as a class action lawsuite and its current CEO will have to step down because he served as the CEO of PG Bison at the time. Sonae Industria have implicated KAP and have admitted to colluding with them and have agreed to settle with the competition commission.

“Deloitte is reviewing work done for the company and has said there is still no evidence of wrongdoing by the auditors involved.” ????

Of course not, because Deloitte were the auditors of Tongaat…

You mean “PwC” is reviewing work done by Deloitte….

Please get this type of thing correct…

The problem is fair value accounting imposed by IFRS. the definition is

“Fair value is the sale price agreed upon by a willing buyer and seller, assuming both parties enter the transaction freely and knowledgeably. … Fair value also represents the value of a company’s assets and liabilities when a subsidiary company’s financial statements are consolidated with a parent company.”

So companies are forever doing valuations of assets, such as land and buildings, mainly upwards, and increase the value of such assets in the balance sheet – in short value is created via a journal entry, as in the case of Tongaat Hulett.

Analysts are supposed to strip out all IFRS adjustments to get back to “historical cost based accounting”results. It would be better to have the Annual Financial Statements give both “historical cost” accounts followed by IFRS, which would expose all spurious entries that went to make up the doctored IFRS accounts.

Expect Aspen, with its massive numbers of medical patents, to have also indulged in this practice. Also REITS do the same to plump up their numbers … let’s get back to basics.

The trouble is that Financial Statements are like doctors’ prescriptions for highly scheduled drugs: they should only be read by those who can understand them.

Despite the regulation and pronouncement overload, there is no simple “one size fits all” miracle cure. Stating assets at historic cost, as you suggest, can lead to undervaluing resulting in “Slater Walker” asset raids or management producing superior return on investment results.

The separation of ownership and stewardship of companies MUST lead to a conflict, with managers manipulating results to influence bonuses. The best one can hope for is that Financial Statements, which are meant to be financial snapshots, are reasonable impressions (“fairly present”) and not opaque “highly coloured transparencies”, SA’s SOEs being a prime example. Shareholder activism is the only cure, mediated by portfolio/risk management.

Talking of management agendas, IRBA’s Mr Agulhas is far to concerned with “transformation” [sic] to worry about ethics or reliability.

The Independent Regulatory Board for Auditors should set up a hotline where whistleblowers working in these corporations can anonymously call in if they are privy to any wrongdoing of corporate governance. This way the board will receive tip offs which could assist auditors immediately in pinpointing exactly where problems may lie.

Corporations may just start behaving themselves knowing that whistleblowers are now able to report directly to the regulator, anonymously!

You cannot regulate to prevent greed, corruption, lack of integrity.

The only way to address this is through harsh and extremely punitive consequence, which this country with its myriad of laws and regulations, struggle with.

In a banking hall, if a teller is short, whether through error or theft, they get dismissed.

In corporate SA, both public and private sectors, fraud and corruption, becomes entangled in forensic investigations, where the most holiest checker (auditor #2) has to check the work of the more holier checker (auditor #1) who struggled to balance audit costs, IFRS requirements, management assessments and views, etc.

In the meantime, the guilty parties remain innocent until proven otherwise, live their life of luxury as if nothing happened until 10 years later (like Tigon), hopefully, someone runs out of lies.

Will this change any time soon. Probably not. Until then, if it seems to good to be true, it probably is.

“greed, corruption, lack of integrity” are by now deeply embedded in SA’s business and state culture.

It will take an anti-materialism and service revolution to change this. Something like JFK’s inaugural speech “ask not what your country can do for you but what you can do for your country” which defined some of the zeitgeist of his era. Ironically, while the ANC claims to be driven by ubuntu, in practice in government it is the polar opposite.

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