Deloitte ignored African Bank’s inflated loan book — regulator
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.