DELOITTE’S GETOUT-OF-JAIL CARD

The audit giant was at the scene of a R12bn fraud at Tongaat Hulett. This week it settled the case for R260m, admitting no liability

In auditing circles, it’s all the rage. When you find yourself at the scene of a blood-curdling megafraud that prompts investors to roar “But where were the auditors?”, the go-to reflex is to get your carnivorous lawyers to score you a quick settlement, complete with a “no admission of guilt” clause.

Last week, it was the turn of ransacked sugar firm Tongaat Hulett, which announced that its former auditor Deloitte has “concluded an agreement” whereby it will pay the sugar company R260m “without admission of liability”.

As it happens, Deloitte is also the firm that paid a R1.3bn settlement to Steinhoff two years ago. But it was adamant this was “not in any way an admission of any liability” for the immense fraud that saw R106bn in “fictitious or irregular” profits included in Steinhoff’s accounts.

At least at Steinhoff, Deloitte can argue that the fraud only emerged after its auditors refused to sign off the 2017 accounts

much to the fury of CEO Markus Jooste. But at Tongaat, the audit firm has no such fig leaf.

So how in the world can this be a “no liability” settlement?

Isn’t Tongaat the company where forensic auditor PwC determined there’d been “undesirable accounting practices” that included land deals being backdated and sugar cane roots being overvalued, all signed off by Deloitte? And this wasn’t small beer either: the fraud wiped out Tongaat’s entire R12bn in equity, while inflating its profit by 239% in 2018 alone.

How, in fact, can Deloitte claim “no fault” when its auditor on the Tongaat account, Gavin Kruger, was charged criminally in the Durban magistrate’s court a year ago, along with six of Tongaat’s former executives including ex-CEO Peter Staude?

This made Kruger the first auditor to be charged with violating the Auditing Profession Act by “unlawfully failing to report reportable irregularities” and “unlawfully expressing an opinion or statement which was false”.

Deloitte evidently doubts these charges will stick, saying it was “not aware of any evidence that may indicate unethical or criminal conduct on the part of Kruger”.

As one Deloitte insider told the FM this week: “There are 20,000 pages of a forensic report that lays this fraud firmly at the feet of the former executives, so I’m not sure how they’re going to prove this case against Gavin.”

Nonetheless, critics say Deloitte got off far too lightly.

Asief Mohamed, chief investment officer at Aeon Investment Management, says this sort of settlement happens all the time. “Glencore, for example, allegedly bribed people all over the world, and at the end of it, they agreed to pay $400m to settle, but they still didn’t admit guilt. It’s sickening, because everyone knows the truth,” he says.

It’s also the view of Simon Mantell, the former accountant and the founder of Mantelli’s Biscuits. He uncovered accounting malfeasance at SAA that led to its auditor, PwC, being sanctioned by the Independent Regulatory Board for Auditors.

“Has Deloitte taken responsibility for its actions? No. Instead, it reached a Mickey Mouse settlement nowhere close to the damage its supine conduct has caused,” he tells the FM.

Mantell says Deloitte should be taking out full-page adverts, telling the public: “Sorry, we didn’t do our work properly, and this is what we’re doing to rectify it.”

At Tongaat’s AGM two years ago, shareholder activist Chris Logan argued that had Deloitte done its job, it may have averted the collapse by alerting shareholders to the shenanigans earlier.

Logan calculates that Tongaat paid Deloitte R282m since 2010 when the problems began. “That’s obviously more than the R260m settlement agreed to this week,” he says.

For this reason, Hennie van Vuuren, executive director at Open Secrets, describes the settlement as woefully inadequate. “It’s a few drops in the ocean, given that Deloitte made R1trillion in revenue last year globally.”

Contacted for this article, Deloitte wouldn’t comment.

But the Deloitte insider says it has improved to the extent that it was the only audit firm with zero negative findings against it in a standards review of selected files last year by the regulator. “And we have upgraded our processes — particularly when it comes to using technology — so we’re able to detect red flags earlier.”

Still, R260m is a lot to pay if you don’t think you’ve done anything wrong. Surely this undercuts that contention of innocence?

“Look, we were at the scene of the accident, and we can’t ignore that,” says the insider. “[But] a settlement is the best option because it would have taken years for this to get to court, to prove that we didn’t know there was a fraud being perpetrated by the management, while the vulnerable continue to suffer.”

This is, however, far less than the R1bn touted by some shareholders as a “fair” compromise.

David Holland, a former adjunct professor at the University of Cape Town Graduate School of Business, says the settlement “does strike me as light, but then Tongaat is trying to get as much as they can, as quickly as they can, since time is not on their side”.

Will this help to save the company? Holland isn’t sure. “Tongaat’s future seems to rest on whether its bankers — led by Standard Bank — agree to convert part of their R6.7bn in debt into equity.” He says the banks should be willing to take a haircut, “given that they enabled financial distress by lending huge amounts to Tongaat when they shouldn’t have”.

The truth, he says, is that Tongaat was already destroying value before the fraud: even the manipulated financial statements showed that its returns were below the cost of capital.

But it’s also true that had the auditors flagged how the accounts were being artificially sweetened earlier, the banks might have closed the taps sooner. And then Tongaat might have avoided being crushed by the debt repayments that propelled it into business rescue.