Auditing giant Deloitte’s R260m Tongaat Hulett settlement ‘pathetic’

Deloitte – former auditors of accounting-scandal-tainted Tongaat Hulett – has agreed to pay the sugar and property group R260 million to settle claims against the firm, without any admission of liability.

Shareholder activist Chris Logan described the settlement amount as “pathetic” on Thursday, following the settlement agreement being disclosed in a JSE Sens by Tongaat Hulett’s business rescue practitioners (BRPs).

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R260 million does not even cover auditing fees

He told Moneyweb that the R260 million settlement does not even recover the R272 million in actual audit fees paid to the auditing giant from 2011 until 2021 – the time when the fraud started and Deloitte left – without time-weighting these fees to take into account the impact of inflation.

Logan said the audit fees paid to Deloitte represent only a small component because the “real damage” was that Deloitte failed to pick up the fraud.

“If Deloitte had, shareholders supposedly would have been able to see that the management team were mismanaging the business and kick them out and the business would not have been fatally destroyed,” he said.

Logan said that by the time shareholders realised the business was in serious trouble in 2018, Tongaat Hulett was technically insolvent.

He noted that the 2018 audited accounts showed equity of R11 billion, when the actual equity was negative R1 billion as per restated accounts.

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‘Invest in executives with skin in the game’

“The reality is that when you get these professional managers with no skin in the game, they are often unprofessional and these things happen. You must invest with executives who have skin in the game, owner-managers who are on the ball and aligned with you,” said Logan.

“Even after it was known that Deloitte had messed up, the board kept them on and Deloitte received R88 million in 2020 as the audit fee,” he added.

Charles Liasides, a director of Artemis Investments, which holds an about 15% shareholding in Tongaat, said the settlement amount seems low.

“Considering what Steinhoff received and the abysmal accounting they [Deloitte] performed, I think they got off quite lightly and have walked away with a very favourable settlement for them,” he added.

“We had certainly anticipated a much higher number. Without a doubt, the accounting performed by Deloitte over that period was a contributing factor to the demise of the company,” he said.

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Steinhoff settlement

The reference to Steinhoff relates to Deloitte in the Netherlands and South Africa agreeing in 2021 to pay up to €70 million (R1.22 billion) in compensation to claimants who are suing Steinhoff.

Deloitte concluded that settlement without an admission of liability for losses incurred by Steinhoff and its stakeholders as a result of the accounting irregularities in the conglomerate.

The claims against Deloitte in the Tongaat Hulett matter arose from and relate to the firm’s appointment as auditor of the company for the financial years ending 31 March 2012 to 2018.

The former sugar giant originally sought compensation from Deloitte reportedly worth more than R1 billion after the auditor signed off on what turned out to be bogus accounts.

Tongaat Hulett’s BRPs said on Thursday: “After taking advice in this regard, the BRPs are of the considered opinion that a settlement on these terms is in the best interests of the company.”

Moneyweb has requested comment from Deloitte but a response has not yet been received.

Tongaat Hulett has reported operating losses totalling R1.61 billion over its last four financial years from 2018 until 2021.

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Fraud charges

An investigation spanning almost two years into the accounting irregularities at the Durban-based group forced the company to restate its financial results for two prior years and led to the National Prosecuting Authority (NPA) in February 2022 charging several former executives and a Deloitte audit partner with fraud totalling R3.5 billion.

Six former Tongaat executives – Peter Staude, Murray Munro, Michael Deighton, Rory Wilkinson, Kamlasagrie Singh and Samantha Shukla – and Deloitte audit partner on the Tongaat Hulett audit Gavin Kruger appeared in the Durban commercial crime court in February 2022 in relation to fraud charges and were all granted bail.

Their trial is expected to commence this year.

The charges stemmed from alleged fraudulent activity between March 2015 and September 2018 related to the alleged backdating of land sale agreements, which had a significant impact on the company’s financial results and led to a loss of value to shareholders.

The JSE suspended trading in the shares of Tongaat Hulett on 19 July 2022 because of the failure of the company to publish its financial results within the stipulated time period.

Tongaat’s board of directors decided in October 2022 to embark on voluntary business rescue proceedings after the company’s lenders rejected the proposed restructuring plan and declined to advance further funds to the company.

Business rescue plan

The BRPs on Thursday reported that Tongaat Hulett Limited (THL), Tongaat Hulett Sugar South Africa and Voermol Feeds have requested a time extension for the publication of the business rescue plan to 30 June 2023.

The BRPs said it is important to note that the publication of a rescue plan is only one step in a business rescue process, with the other workstreams continuing regardless of when the plan is published.

“An extension to the publication of the plan has no material impact on the ongoing operational aspects of the company. The company continues to operate, with the completion of the off-crop maintenance progressing well. The operations are on track to commence the 2023/2024 sugar season.

“A later release date of the plan will not impact the length or costs of a business rescue, with the same work streams taking place.

“Larger business rescue plans in very successful business rescues typically take months to release, so this is not unusual,” they said.

The extension was requested for the following reasons:

Discussions and negotiations are ongoing with various stakeholders regarding the development of the business rescue plan and additional time is required to finalise the plan.

Due to the complexity and various possible outcomes, the BRPs are of the view that publishing a plan based on currently available information will result in a plan containing speculation and insufficient detail to enable creditors to make an informed decision.

Two key milestones that form part of the business rescue process end in June 2023 and aligning the business rescue plan publication with these matters will be more efficient.

The milestones are:

The process of sourcing a strategic equity partner. This process is underway and clarity on the chosen restructuring path and partner(s) will be established in mid-June.

The current funding arrangements include agreements for a standstill until 30 June 2023. The BRPs have to abide by these, which means that certain transactions cannot be actioned to allow sufficient time to finalise the details of an overall restructuring.

Creditors are required to vote on the extension of the date by Friday evening (24 February 2023).

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.

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