TONGAAT CHARGES ‘UNPRECEDENTED’

Never before has an auditor been criminally charged for being asleep at the wheel. This changes everything

The sight of the seven Tongaat Hulett accused in the dock in Durban last Thursday carries a significance that echoes far beyond the 24 charges listed in the 49-page charge sheet. As the first arrests for the wave of white-collar crime that encompasses the R106bn fraud at Steinhoff and the larceny at EOH, it was a visceral portrait of what awaits other rule-bending executives.

In court sat Peter Staude, former CEO of the 130-year-old sugar firm, alongside former finance director Murray Munro, former head of Tongaat’s property arm Mike Deighton, former executives Rory Wilkinson, Kamasagrie Singh, Samantha Shukla, and, remarkably, Deloitte auditor Gavin Kruger.

These criminal charges shouldn’t have been a surprise. Lawsuits already filed, as well as a forensic investigation by PwC, have already revealed how Tongaat’s 2018 profits were overstated by 239% and its assets by 34%, due to tricks such as overvaluing sugar cane and backdating land sales. Anyway, court papers filed against Staude and others by Tongaat — detailed in the FM last month — goes much further than the charge sheet in explaining what happened.

Yet, the fact that there were arrests at all was a surprise, given the lack of financial nous of the priority crimes unit, the Hawks. The Tongaat blowout also happened months after the Steinhoff storm, yet that case seems stillborn.

In the Tongaat charge sheet, the first 18 counts apply to all seven accused, relating to the backdating of land sales worth R2.4bn. Prosecutors say they lied to investors because they knew that “revenue was not correctly stated in the annual financial statements”, as sales had been “backdated”.

Counts 19 to 22 are couched in general terms, with few specifics. The inflated value of sugar cane, for instance, isn’t mentioned, nor is the fictitious Zimbabwe sugar sales detailed by PwC, or the fact that expenses were wrongly capitalised.

For count 19, fraud, prosecutors say the accused breached their fiduciary duties as they “knew that the financial statements presented a materially false state of affairs of [Tongaat] by overstating their revenue and understating their liabilities”.

Count 20 involved contravening the Financial Markets Act, by “publishing false, misleading or deceptive statements”. Counts 21 and 22, which apply to the Tongaat executives only, is for contravening the Companies Act by “falsifying accounting records” and breaching the corruption act by “failing to report the offence of fraud to a police official”.

But the most intriguing aspect is that charges 23 and 24 were brought against Kruger alone. This is precedent setting as it’s the first time ever that an auditor has been criminally charged under the Auditing Profession Act. No auditors were prosecuted for the fraud at Masterbond, Regal Bank, Fidentia, Tigon, African Bank, Brett Kebble’s companies or Leisurenet.

Even globally, this is vanishingly rare. One exception was Bernie Madoff’s auditor, David Friehling, from the small firm Friehling & Horowitz, who pleaded guilty to several crimes, admitting: “I did not question what I should have questioned.”

And while KPMG partner Sipho Malaba was charged criminally two years ago in the VBS Mutual Bank fraud, the facts were different, since prosecutors claimed he got R34m to look the other way. As advocate Terry Motau put it, Malaba “gave an unqualified audit opinion in circumstances where he knew the financial statements were misstated”.

Most times, though, an auditor’s sin is negligence for failing to spot a fraud, rather than outright complicity in a scam.

Imre Nagy, the CEO of the Independent Regulatory Board for Auditors (Irba), says it’s certainly unprecedented. “Criminal action against an auditor under those provisions of the Auditing Profession Act is something I haven’t seen before,” he says.

Interestingly, Irba wasn’t involved in drawing up the criminal charges, nor was it consulted; Nagy says the first he heard about this was when he read about it in the media.

“It has sent shockwaves through the profession. I heard one firm say it will instil fear among their partners, that they could be arrested even if they’re later acquitted. I guess it remains to be seen whether the charges are proved in court,” says Nagy. Either way, it raises the stakes for auditors and those charged with governance, he says.

For charge 23, Kruger is accused of breaking the Auditing Profession Act by “unlawfully failing to report reportable irregularities”; and charge 24, for “unlawfully expressing an opinion or statement which was false”.

Surprisingly, it claims Kruger “had knowledge of the irregularities taking place in relation to sales of land”. And it says that when he incorrectly certified Tongaat’s assets and revenue, he did this either “knowingly or recklessly”.

Charging Kruger with fraud, alongside Staude, also took insiders by surprise. “I haven’t seen anything in the PwC report that suggested he was complicit in the fraud, or that he had any intention to benefit from what happened. Perhaps investigators have stumbled upon something new,” says one.

Deloitte isn’t saying much. In a carefully worded statement, it says it is “currently not aware of any evidence that may indicate unethical or criminal conduct on the part of Kruger”.

Freeman Nomvalo, CEO of the SA Institute of Chartered Accountants, says: “It’s the first time I’ve seen a case against an auditor charged under the Auditing Profession Act. We hope it’ll create an environment in which auditors are more diligent in their work, and think carefully about the ramifications of the decisions they take.”

While Nomvalo is heartened that “accountability is happening at last”, prosecutors will need to have a rock-solid case — if this first case of its kind against an auditor fails, it could imperil future efforts to ensure accountability.

Zwelakhe Mnguni, CEO of Benguela Fund Managers, says it’s a big step forward for the corporate sector. “If he gets jail time, it might help improve the level of scrutiny of auditors, thereby reducing the risk of further scandals,” he says.

The seven accused are back in court on April 11, and it’ll be intriguing to see whether the prosecutors will provide greater detail on the fraud — and the evidence against Kruger.

If this first case of its kind against an auditor fails, it could imperil future efforts to ensure accountability