/ 7 June 2019

Tongaat mess puts Deloitte in another sticky situation

Tongaat mess puts Deloitte in another sticky situation
(John McCann/M&G)

As animus towards corporate misdeeds in South Africa grows, auditing company Deloitte has found itself at the centre of another corporate crisis in the form of Tongaat Hulett, hot on the heels of controversy over the collapse of Steinhoff.

Tongaat announced last week that its 2018 financials will probably have to be restated — calling into question more than a decade’s worth of books Deloitte signed off for the company.

Deloitte said in response to questions that it was too early to comment “on the merits and demerits of the Tongaat case in relation to Steinhoff and, therefore, no similarities can be drawn as yet”.

But it believed that the review and forensic investigation being undertaken by Tongaat “is critical to establish the reasons for the restatements and any evidence of whether any past practices were deliberate by previous executive management”.

Deloitte has removed its previous team from the Tongaat account, but said it has no reason to believe that any Deloitte Africa partner or staff member acted outside of the required rules and standard guidelines. Should its internal review processes prove otherwise, Deloitte Africa will follow the appropriate steps as required by the firm and the profession.

Last Friday, Tongaat announced that it had uncovered “certain past practices” that were of “significant concern” and that appear to have resulted in financial statements that did not accurately reflect the company’s performance. It expects restatements could amount to as much as R4.5-billion.

There are echoes of Steinhoff’s collapse. Deloitte audited both companies for years; dominant, long-standing chief executives ran both firms and PwC has been called in to review both companies’ financials.

Tongaat’s share price has seen steady declines in recent years but in the last six months it has fallen by about 76%, according to data from Moneyweb.

Calls to nationalise the audit function of firms such as Deloitte and its peers KPMG, EY and PwC, have intensified globally as the role of auditors implicated in a string of company scandals is scrutinised. British parliamentarians have called on the country’s Competition and Markets Authority to separate the audit and consultancy functions of the big four firms.

Deloitte said the firm is following international debates pertaining to reforms in the audit market, particularly in the United Kingdom, and recognises the need for measures to “strengthen the audit profession, guarantee auditor independence and reduce market concentration”.

Investment professionals said this week that although the developments at Tongaat are deeply worrying, more information is needed before direct parallels to Steinhoff can be drawn — particularly given the complex fraud, apparently led by a small cabal of management and former employees, that destroyed Steinhoff.

Key to Tongaat’s problems, said analysts, are questions about the accounting treatment of its land sales, which may have been used to inflate its revenues, and questions about how sugar cane was valued.

The sugar cane valuations, said one analyst, were entirely subject to management’s expertise and there was concern that Tongaat’s board did not have sufficient experience to stand up to or question management’s assertions.

The accounting fraud at Steinhoff was deeply complex and crafted over years, said the analyst, and in Tongaat’s case it seemed less likely that this kind of “crookery” was at play.

Investors should be “extremely worried” about events playing out at Tongaat, said Nolwandle Mthombeni, investment analyst at Investment Asset Managers.

In the case of Steinhoff, red flags had been raised for years, she said, including regarding its aggressive tax rates and string of acquisitions, which made it difficult to separate the retailer’s organic performance from that generated by its purchases. This was not the case with Tongaat and the company needed to provide more information about the problems identified.

Despite the questions raised about the role of auditors in these and other scandals, Mthombeni did not agree with the need to nationalise the audit arms of major firms.

When compared with the roughly 360 companies listed on the JSE, the recent scandals were few in number, indicating that for the most part firms were well governed and managed.

Fraud was a crime and the work of a few skilled criminals should not mean the entire audit profession was painted with a bad brush, Mthombeni said.