The Independent Regulatory Board for Auditors (Irba) on Friday charged two partners at Deloitte & Touche with misconduct related to the financial statements they signed off on at African Bank Limited and its holding company, African Bank Investments Limited, before the entities were placed under curatorship.
The SA Reserve Bank placed African Bank, which was an unsecured lender, under curatorship in August 2014. The failure of African Bank due to mounting losses caused the bank’s shareholders to forfeit billions of rands.
In the 31-page charge sheet, of which City Press has a copy, Irba lays out 10 charges of misconduct. The charges apply to Mgcinisihlalo Jordan, who is deputy CEO and partner at Deloitte Africa, and Danie Crowther, a Deloitte partner.
Jordan is a respondent in all 10 charges of misconduct, while Crowther is a respondent only in charge 10, which is the most damning of the lot.
However, Fritz Malan, an attorney with ENSafrica who is representing Irba, said that charge 10 had not been finalised and was being altered.
Irba was established in 2006 and its CEO, Bernard Agulhas, said that the board had not held this kind of public hearing before.
On the whole, Irba holds one or two disciplinary hearings a year.
“Sometimes in a year we have one [disciplinary hearing] ... We probably have one or two [disciplinary hearings a year] as most of our disputes are settled by consent orders, where the auditor will agree that there was misconduct, and they will pay a fine and it won’t go to a hearing. So it doesn’t mean that there aren’t many cases – it just means they are settled by consent order and it doesn’t go to a full hearing,” Agulhas said.
At the public hearing on Friday, Irba’s advocate Shem Syman said that African Bank failed to comply with accounting standard IAS 39, which deals with the recognition and measurement of financial instruments when it came to the impairment of loans, which resulted in impairment of defaulting loans being understated and created a false impression of the state of the bank.
Deloitte, as the bank’s auditor, should not have permitted this, Syman said.
When it came to African Bank’s audited financial statements, the Deloitte partners signed off on unqualified reports when they should have qualified, or emphasised a matter or included a disclaimer in the audit report as the financial statements weren’t “free of material misstatement”, he added.
Syman said the issue of “net advances” – the amount loaned – was “fundamental” to the financial statements of African Bank and African Bank Investments Limited.
The Deloitte partners did not present the “net advances” in terms of IAS 39 and weren’t in compliance with relevant standards, he said.
The maximum fine per charge is R200 000. If Deloitte is guilty of all 10 charges, the maximum fine that the auditor would face would be R2 million, Agulhas said.
Another sanction that the Irba disciplinary committee could issue is a cautionary reprimand, which is a rap over the knuckles, he said.
“When we take away the [auditing] licence – that means they are guilty of a major offence,” Agulhas added.
“The matter has gone to a disciplinary hearing so we believe [there are] good grounds for our charges. We believe there is a strong case for alleged misconduct that we are charging them with.”
Deloitte this week won a postponement of all hearings planned for June and July.
Michael van der Nest, the advocate representing Deloitte, argued for the postponement because the public disciplinary hearing was an “enormously complex matter”.
This matter was the “most complex matter that Irba has adjudicated”, he said.
“Careers are on the chopping block ... There is a reason we have been engaged for three and a half years – this is a matter of enormous importance. Personal and corporate reputations are at stake. These are serious matters.”
Deloitte, Irba and the Irba disciplinary committee agreed on five days of hearings this month and another 23 days of hearings from September to December.
Irba is also investigating the auditing work that Deloitte did on Steinhoff’s 2014, 2015 and 2016 financial statements.
Agulhas said that Deloitte had also been the auditor of LeisureNet at the time of its failure.
REACTION FROM BEE GROUPS TO EVENTS AT THE DELOITTE HEARINGS
The shareholders of Hlumisa and Eyomhlaba are looking to claim nearly R2.1 billion from Deloitte and the former directors of African Bank and African Bank Investments Limited.
The former directors filed three exceptions against the case brought by the plaintiffs. In its response, Deloitte filed two exceptions against the plaintiffs’ case.
The matter was heard late last year and Judge Letty Molopa reserved judgment in the matter after hearing arguments. Molopa is expected to present her ruling soon.
CHAIRPERSON OF HLUMISA INVESTMENT HOLDINGS, DESMOND LOCKEY:
“They [Deloitte & Touche] knew exactly what the [Irba] charges were. There is the Myburgh Commission, which deeply implicates them. All that it [Deloitte] is doing now is playing for more time in a hope that the storm will go away.
“This is a typical Jacob Zuma strategy. For 10 years, Jacob Zuma tried to run away from his responsibilities to appear in court. Ultimately, [the law] caught up with him.
“Deloitte is deeply implicated in the demise of this company [African Bank]. It produced fraudulent auditing reports. It has been found guilty by the Myburgh Commission. Now it is trying to run away from the responsibility. What is the honour in that? You need to trust an auditor’s report.
“Deloitte has been involved in some of the biggest corporate failures [African Bank, Steinhoff and LeisureNet] this country has seen ... How is this possible?
“In its heyday, African Bank was a R40 billion company. A fine of R2 million is peanuts. Deloitte should be banned from operating in South Africa – that is the only thing that would work for me.
“These people think that they can operate in our environment with impunity. They think that they can give unqualified audit reports when they know that there is something wrong.”
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