‘these al­le­ga­tions’

Charges re­late to fi­nan­cial state­ments signed off at African Bank Lim­ited and African Bank In­vest­ments

CityPress - - Business - JUSTIN BROWN justin.brown@city­press.co.za

The two lo­cal Deloitte & Touche part­ners charged with mis­con­duct by the In­de­pen­dent Reg­u­la­tory Board for Au­di­tors (Irba) have de­nied “these al­le­ga­tions” in more than 100 in­stances in a plea doc­u­ment filed with the board’s dis­ci­plinary com­mit­tee in re­sponse to Irba’s charge sheet. The two Deloitte part­ners charged are Mgcin­isih­lalo Jor­dan, Deloitte Africa deputy CEO, and Daniel Crowther.

The 10 charges re­late to the fi­nan­cial state­ments they signed off at African Bank Lim­ited and its hold­ing com­pany African Bank In­vest­ments Lim­ited (Abil), be­fore the en­ti­ties were placed un­der cu­ra­tor­ship. African Bank was placed into cu­ra­tor­ship in Au­gust 2014.

Last month Irba held its first public hear­ings into the charges of mis­con­duct against Jor­dan and Crowther. These will re­sume in Septem­ber.

In the plea Deloitte says that six charges, in full or in part, cover dif­fer­ent as­pects of au­dit work per­formed on the key area of net ad­vances, which re­lated to loans that African Bank made.

“African Bank did not fail in Au­gust 2014 be­cause it did not ad­e­quately pro­vide for credit im­pair­ment. The My­burgh Com­mis­sion found that a com­bi­na­tion of bad busi­ness de­ci­sions and ad­verse eco­nomic cir­cum­stances led to its col­lapse.

“Dis­ag­gre­gat­ing these as­pects rep­re­sents an in­ap­pro­pri­ate split­ting of charges which, if un­cor­rected, might lead to an im­per­mis­si­ble split­ting of con­vic­tions. Even if the facts un­der­ly­ing these charges are proved, which are de­nied, they can lead to only a sin­gle con­vic­tion for im­proper con­duct.”

Deloitte ar­gues that: “The charges dis­ag­gre­gate what is in re­al­ity an overall pro­fes­sional judge­ment by man­age­ment and, sub­se­quently, by the au­di­tor. The charges as­sume an unattain­able level of pre­ci­sion in how the es­ti­mates mak­ing up the var­i­ous com­po­nents of the pro­fes­sional judge­ment are de­rived.”

“In­ter­na­tional Fi­nan­cial Re­port­ing Stan­dards’ (IFRS’s) con­cep­tual frame­work ex­plic­itly recog­nises that the pur­pose of fi­nan­cial re­port­ing is ‘faith­ful rep­re­sen­ta­tion’ [mean­ing un­bi­ased in ei­ther direc­tion]; not per­fect ac­cu­racy, which is unattain­able,” Deloitte said in the plea.

RE­SPONSE TO CHARGE 10

Charge 10, which is the most damn­ing of the lot, ac­cuses both part­ners of be­ing “dis­hon­est in the per­for­mance of any work or du­ties de­volv­ing upon them in re­la­tion to pro­fes­sional ser­vices per­formed by them”.

The Deloitte plea, a to­tal of 114 pages, says the fol­low­ing: “The essence of the 10th charge is that Messrs Jor­dan and Crowther al­legedly suc­cumbed to an in­tim­i­da­tion threat in re­la­tion to the au­dit of the 2013 an­nual fi­nan­cial state­ments of Abil and African Bank. The in­tim­i­da­tion threat is al­leged to be ag­gra­vated by self-re­view and fa­mil­iar­ity threats. Fac­tu­ally, these threats are said to have re­sulted in Messrs Jor­dan and Crowther ac­cept­ing lower lev­els of credit im­pair­ment pro­vi­sions than were in­di­cated by IAS 39 [ac­count­ing stan­dard that deals with the recog­ni­tion and mea­sure­ment of fi­nan­cial in­stru­ments]. Messrs Jor­dan and Crowther are also said to have been dis­hon­est (or at least grossly neg­li­gent) by ‘sti­fling’ the views of Mr [Gus­tav] Rauben­heimer [who was African Bank ex­ec­u­tive of credit and Abil group ex­ec­u­tive of credit], which were ini­tially con­trary to those of man­age­ment and by not giv­ing them due re­gard dur­ing the au­dit.”

“There is no sub­stance in any of these al­le­ga­tions.

“Were it not for the firm stance taken by Mr Jor­dan, man­age­ment would not have passed any­thing close to the ad­di­tional ap­prox­i­mately R2.5 bil­lion of credit im­pair­ment pro­vi­sions booked to the gen­eral ledger in Oc­to­ber 2013.”

THREE PAR­TIAL ADMISSIONS

Deloitte’s plea largely con­sists of a whole­sale de­nial of all charges but some in­ter­est­ing par­tial admissions were made, in­clud­ing the three below:

AD­MIS­SION: CON­CERNS ABOUT ‘GOV­ER­NANCE’

The Irba charge sheet states that: “The re­port to the au­dit com­mit­tee in­di­cates that the au­di­tor was con­cerned about the gov­er­nance pro­cesses around credit im­pair­ment and mod­el­ling.” Deloitte said Jor­dan ad­mit­ted to these al­le­ga­tions.

“The au­dit team com­mu­ni­cated in its fi­nal re­port to the au­dit com­mit­tee of Abil and African Bank in re­la­tion to its au­dit of the 2013 an­nual fi­nan­cial state­ments that:

“We are con­cerned about the gov­er­nance pro­cesses around the credit im­pair­ment and mod­el­ling pro­cesses and rec­om­mend board and man­age­ment con­sider our sug­gested changes to im­prove these gov­er­nance prac­tices de­tailed fur­ther in this re­port ... The num­bers yielded by the model changed nu­mer­ous times dur­ing the au­dit.

“This risk pointed to man­age­ment’s mod­els po­ten­tially be­ing un­sta­ble or volatile with a wide range of out­comes ...

“These con­cerns meant Mr Jor­dan could not be con­fi­dent that ap­pro­pri­ate con­trols were in place on which he could rely.”

How­ever, Deloitte said that: “His con­cerns were ad­e­quately ad­dressed by al­ter­na­tive and ad­di­tional pro­ce­dures.”

AD­MIS­SION: BIAS

The Irba charge sheet says: “Strong in­di­ca­tors of bias were ev­i­dent from the work pa­pers, how­ever these were merely la­belled as ‘less than pru­dent’ es­ti­mates or judge­ments in the work­ing pa­pers and fi­nal re­port to the au­dit com­mit­tee.

“Mr Jor­dan ad­mits that there were in­di­ca­tors of man­age­ment bias and that these were doc­u­mented in au­dit work­ing pa­pers. The use of the term ‘less than pru­dent’ is an in­di­ca­tor of a lack of neu­tral­ity, which is the essence of man­age­ment bias.”

How­ever, the Deloitte plea said that Jor­dan de­nied that in so far as this was im­plied by the use of the word “merely” in this para­graph, that man­age­ment bias led to ma­te­rial mis­state­ments in the 2013 an­nual fi­nan­cial state­ments of Abil and African Bank.

AD­MIS­SION: DIDN’T FOL­LOW IN­DUS­TRY NORMS

The Irba charge sheets says: “The first re­spon­dent [Jor­dan] ac­cepted method­olo­gies re­lat­ing to im­pair­ment pro­vi­sions that were not in ac­cor­dance with in­dus­try norms as set out in the fi­nal re­port to the au­dit com­mit­tee.”

Jor­dan ad­mit­ted these al­le­ga­tions only in­so­far as “in­dus­try norms” re­ferred to the method­olo­gies em­ployed by the big four banks. “The man­age­ment of credit for the clien­tele and prod­uct port­fo­lio of African Bank dif­fered from those of the big four banks and were more akin to those of the other mi­cro len­ders or credit re­tail­ers in South Africa at the time.”

“IFRS does not re­quire mi­cro len­ders to credit re­tail­ers to con­form in all re­spects to ‘in­dus­try norms’ em­ployed by the full­time re­tail banks. In ad­di­tion, ‘in­dus­try norms’ do not in them­selves pro­vide ev­i­dence of the ap­pro­pri­ate­ness of the as­sump­tions in­her­ent in those norms.”

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