THE AUDITORS WHO REFUSED TO BUCKLE
Oceana’s annual report reveals that PwC, which has just taken over its audit, lodged five ‘reportable irregularities’ with the regulator
Fishing giant Oceana, which sells Lucky Star pilchards to 4-million South Africans every day, has performed a miracle in keeping a lid on the accounting high jinks evidently taking place in the back office. That it managed to do this, even after its CEO Imraan Soomra quit suddenly on Valentine’s Day, and its CFO Hajra Karrim was placed on a “precautionary suspension” in January, is a feat of immeasurable phlegmatism.
Oceana, after all, isn’t some inconsequential firm; it’s one of the 20 largest fishing companies in the world, worth R7.4bn. More than 5,600 individuals hold its shares, as well as 405 pension funds, 91 banks and 41 insurance companies.
This month, however, Oceana released its annual report, which laid bare how it clashed with its new auditors PwC over its questionable accounting treatment.
Most eyebrow-raising is that PwC has now reported five “reportable irregularities” to the regulator, the Independent Regulatory Board for Auditors (Irba).
In Oceana’s accounts, PwC outlines these irregularities as, first, the “nondisclosure” of a “relationship conflict with a staff member for whom an ex gratia payment was approved”. Second, it points to “behavioural” matters that “contributed towards a culture of dominance and bullying involving a senior member of management”.
Third, PwC says there was “obstruction and/or interference with the forensic investigation by deletion of certain information from their electronic devices by two senior members of management”. Fourth, it talks of “suspected irregularities” in the “backdating” of a R63m insurance claim. And fifth, two members of Oceana’s management “were found to have contravened a confidentiality instruction from the forensic investigators to not discuss the investigation”.
On the insurance claim, Oceana insists there was no “deliberate attempt to misrepresent” anything, and disciplinary action has been taken against those involved.
Still, these revelations particularly that evidence needed by investigators was destroyed will alarm investors.
While Oceana doesn’t say who did this other than “senior members of management” who are “no longer with the company suspicion immediately turns to the swiftly exiting Soomra.
Yet it turns out that Soomra is leaving
Oceana with an R11.1m payout — including his salary of R6.4m and R4.2m he got by exercising share options. Karrim, who remains on “precautionary suspension”, was paid R5.3m.
Hopefully, shareholders will pressure chair Mustaq Brey at Oceana’s AGM on May 5 into revealing exactly why Karrim was suspended and whether Soomra bears any culpability for this debacle.
Perhaps more disturbingly, it seems Oceana’s board wasn’t even convinced that PwC needed to tell the audit regulator of all these “irregularities”.
In its report, Oceana said: “Whilst the board was unanimous in the actions that needed to be taken to respond to the issues, there was extensive debate, with legal advice and input, as to whether the matters should have been reported.”
The argument was that three of the five matters were “behavioural and conduct matters with no impact on the financial statements”, “remedial action had already been agreed”, and the issues are “not ongoing”.
It’s an unconvincing argument. After all, “a culture of bullying” can have implications if it means employees don’t feel they can speak freely about serious issues. And destroying evidence in a forensic probe suggests a breach of fiduciary duties, not to mention contempt for governance.
Either way, it can’t have been easy to be PwC’s audit partner Richard Jacobs, who took over from Deloitte this year.
In particular, Oceana admits there was a “difference in opinion” between its board and PwC over a fishy deal struck in
2015. In that case, Oceana paid R4.6bn for US fish processing company Daybrook, as well as a company called Westbank, which operates the vessels that catch the fish sold to Daybrook.
The problem was, the American Fisheries Act says that only companies with 75% American ownership qualify for fishing rights. So Oceana ran a “bidding process” to find someone to take 75% of Westbank. Only, who should pop up as the winning bidder in 2018, but Oceana’s CEO himself — Francois Kuttel — who happened to be an American citizen.
Given this close link, PwC now believes that Oceana actually has “joint control” Westbank. Which meant it should account for it as a 100% subsidiary, rather than an associate in which it owned only 25%. Oceana’s board, however, argued ferociously that it shouldn’t have to do this.
In the end, PwC got its way. In the financials for the year to December, Oceana has been forced to account for Westbank as if it had 100% “joint control”, rather than as a 25% associate over which it wielded “significant influence.”
It meant Oceana had to “restate” last year’s accounts. Luckily, this didn’t hugely affect its bottom line, though it did shave R58m off its R1.25bn in total comprehensive income; push its assets up by R567m; and its liabilities up by R601m.
But given how rough a ride auditors have had in recent years, it’s an important story. PwC stood firm against a defiant board who thought it knew better. It’s a rare show of audit independence which should be roundly commended.