Deloitte ig­nored African Bank’s in­flated loan book — reg­u­la­tor

Business Day - - FRONT PAGE - Londiwe Buthelezi Fi­nance & Busi­ness Writer buthelezil@busi­nesslive.co.za

African Bank au­di­tor Deloitte knew four years be­fore the col­lapse of the un­se­cured lender that it was in­cor­rectly cal­cu­lat­ing im­pair­ments in its loan book.

The re­sult was that the bank over­stated the size of its loan book and un­der­stated im­pair­ment charges by bil­lions.

This is what the dis­ci­plinary com­mit­tee look­ing into Deloitte’s role into the bank’s col­lapse in 2014 heard from the in­ves­ti­ga­tor ap­pointed by the In­de­pen­dent Reg­u­la­tory Board for Au­di­tors (Irba).

“The is­sue had been iden­ti­fied as a risk all of those years ago, but noth­ing had been done to re­spond to that,” said Irba’s in­ves­ti­ga­tor, adding that Deloitte had never dealt with the risks when it iden­ti­fied them at African Bank.

Irba would not dis­close his iden­tity for fear of vic­tim­i­sa­tion.

Thurs­day’s hear­ing came af­ter Irba charged two Deloitte part­ners, Mgcin­isih­lalo Jor­dan and Danie Crowther in March with mis­con­duct.

Jor­dan is fac­ing 10 charges, while one charge has been lev­elled against Crowther.

The reg­u­la­tor is now pre­sent­ing ev­i­dence to show that the au­dit part­ners’ fail­ure to per­form their duty played a role in the bank’s col­lapse.

The SA Re­serve Bank placed African Bank un­der cu­ra­tor­ship in Au­gust 2014.

The bank had to be res­cued by the Trea­sury and the Bank, which pro­vided a R3bn in­dem­nity fund to the bank as a pro­tec­tion against claims from its for­mer in­vestors.

Irba’s in­ves­ti­ga­tor said the in­cor­rect cal­cu­la­tion of im­pair­ment pro­vi­sion at African Bank was raised back in 2009 by Deloitte. The reg­u­la­tor pre­sented ev­i­dence that Deloitte knew African Bank was us­ing an in­cor­rect in­ter­est rate to dis­count its im­paired loan book, and that it was pro­vid­ing for im­pair­ments much later than other banks usu­ally did.

The au­dit­ing stan­dards re­quired that im­paired loans be dis­counted at their orig­i­nal in­ter­est rate, but Irba said what African Bank “did be­hind the scenes was not what it said”.

Deloitte’s au­dit part­ner raised this red flag in his au­dit plan­ning doc­u­ments, but never fol­lowed up on it. In­stead, Jor­dan re­lied on a 2009 opin­ion that this er­ror was not ma­te­rial.

By 2013, this in­cor­rect rate had re­sulted in a R1.6bn over­val­u­a­tion of African Bank’s loan book.

“Mr Jor­dan was aware from prior years that the rev­enue recog­ni­tion [used by African Bank] was not in line with the [ac­count­ing] frame­work,” said the in­ves­ti­ga­tor.

The bank’s hand was forced by the cu­ra­tor to re­state its 2013 fi­nan­cial state­ments af­ter one of its ex­ec­u­tives, Gus­tav Rauben­heimer, dis­cov­ered that the par­ent com­pany Abil’s im­pair­ment charge was un­der­stated by R3.75bn as a re­sult of African Bank.

Yet, Deloitte is­sued an un­qual­i­fied au­dit opin­ion for African Bank in 2013, con­tra­ven­ing the pro­vi­sions of In­ter­na­tional Stan­dards on Au­dit­ing.

“One would have ex­pected the au­di­tor to in­sist that man­age­ment cor­rect the mis­state­ments or is­sue a qual­i­fied opin­ion in the form of a dis­claimer,” said Irba’s in­ves­ti­ga­tor.

The hear­ing was ini­tially set to con­clude in 20 days, but so far only six of the 10 charges have been dealt with.

Deloitte is ex­pected to take the stand ei­ther in De­cem­ber or early in 2019. But in Oc­to­ber, the au­dit­ing firm’s CEO, Lwazi Bam, said look­ing at the in­ter­nal as­sess­ment Deloitte had com­pleted on the is­sue, he was com­fort­able with the qual­ity of au­dit work they pro­duced.

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