A former Deloitte partner has been charged with fraud following massive losses at Tongaat-Hulett. So far, the audit giant has not taken the high road, argues Simon Mantell.
The arrest last week of several ex-Tongaat Hulett executives together with Gavin Kruger, former Deloitte lead partner responsible for the Tongaat audit, on numerous criminal charges would have brought some consolation to investors and loyal employees hugely affected by the collapse of a once proud blue-chip company.
Whilst the arrests of these "suits" are not unexpected, it is the speed at which a hollowed-out Directorate for Priority Crime Investigation (DPCI) and National Prosecuting Authority (NPA) have proceeded, which is most encouraging.
What has been surprising in all of this is the statement by Deloitte reported in Fin24 that "Deloitte is currently not aware of any evidence that may indicate unethical or criminal conduct on the part of Mr Kruger."
It beggars belief that the current partnership of Deloitte South Africa, with thousands of years of collective auditing experience, can even consider such a response unless Deloitte has commissioned thorough internal and independent external investigations of their audit working papers and conduct which have resulted in findings providing incontrovertible evidence of compliance by Deloitte with all statutes, guidelines and professional conduct.
To date, I am unaware of Deloitte driving such a process and, in the event that such investigations have taken place, then I am unaware of the release of findings and recommendations flowing from such investigations to support Deloitte’s current position.
High probability of audit failure
In the absence of any Deloitte-driven investigations, then the only plausible reason for Deloitte being unaware of any evidence of unethical or criminal conduct is that Deloitte has opted for a low road of deliberately avoiding any process which might potentially reveal malfeasance on its part.
The uncomfortable high road scenario would have required a swift public acknowledgement by Deloitte that the total business failure of a blue-chip company shortly after receiving a clean audit suggested an extremely high probability of audit failure.
Deloitte should have then drawn on the expertise of international Deloitte offices for the purposes of conducting an unhindered internal investigation, whilst simultaneously appointing an independent external service provider to conduct a separate investigation on it audit working papers and all other aspects of its work and conduct relating to the audit.
Transparency would have demanded the sharing of the objective and scope of the investigations together with the timeline for completion. Also, Deloitte should have committed that it would hold all its staff accountable in terms of the requirements of legislation, rules and guidelines including, but not limited to, the Prevention and Combatting of Corrupt Activities Act (PRECCA), the Auditing Profession Act (APA), International Standards on Auditing (ISA), Independent Regulatory Board for Auditors (IRBA) guidelines and IRBA and the South African Institute of Chartered Accountants’ (SAICA) Codes of Professional Conduct.
Key sections of applicable legislation, guidelines and the code of professional conduct explained below provide a menu of decisive action which Deloitte, in the event of malfeasance being established, could have followed, had it elected to follow the high road.
The DPCI has issued reporting guidelines which respect to PRECCA which include the following:
- S 34(1) of PRECCA requires that any person who holds a position of authority as defined and who knows or ought reasonably to have known or suspected that any person has committed an offence including fraud in an amount of R100 000, or more, must report such knowledge or suspicion or cause such knowledge or suspicion to be reported to a police official.
- S 34(2) of PRECCA provides that any person who has a responsibility to report and who fails to do so, is guilty of an offence.
Auditing Profession Act (APA)
- S 45 sets out the requirement that if a registered auditor is satisfied or has reason to believe that a reportable irregularity has taken place, then it must be reported without delay to the IRBA.
- S 52 sets out that a registered auditor is guilty of an offence if such auditor fails to report a reportable irregularity or knowingly or recklessly expresses an opinion or makes a report or statement which is false in a material respect.
- S 52 (3) explains that a person convicted in a court of law to an offence in terms of the S 52 is liable to a fine or imprisonment for a term not exceeding 10 years or to both a fine and such imprisonment.
The IRBA guideline for Reportable Irregularities
In summary, this guideline clearly explains that a reportable irregularity is an unlawful act or omission committed by any person responsible for the management of an entity which has caused or is likely to cause material financial loss to the entity or is fraudulent or which represents a material breach of any fiduciary duty.
International Standards on Auditing (ISA)
The numerous international auditing standards which registered auditors must comply with, clearly set out the responsibilities and duties of registered auditor when conducting an audit.
SAICA Code of Professional Conduct
The SAICA Code of Professional Conduct applies to registered auditors (who have to be chartered accountants) as well as chartered accountants in business.
SAICA’s jurisdiction with respect to discipline in the Tongaat matter includes executive directors and non-executive directors (especially those who served on the Tongaat Audit and Risk Committee) and who hold the CA(SA) designation.
The Code of Professional Conduct is clear and expands upon the five fundamentals of the profession: integrity; objectivity; professional competence and due care; confidentiality and professional behaviour.
It is extremely unlikely that any committed internal or external investigation of the Deloitte working papers and partner conduct would not have yielded significant evidence of professional misconduct and the failure to report reportable irregularities at best, and at worst, a finding that there was evidence of fraud or suspected fraud.
In the event of findings confirming evidence of professional misconduct and the failure to report reportable irregularities, then Deloitte would have been well placed to have:
- Drafted its own complaint to IRBA with respect to the conduct of its lead audit and review partners.
- Lodged a complaint with SAICA relating to the conduct of all the chartered accountants at Tongaat board level including non-executive directors for their failure to comply with the SAICA Code of Professional Conduct for chartered accountants in business.
- Actively participated in the driving of a criminal prosecution of applicable audit partners for their failure to report a reportable irregularity in terms of S 53 of the APA.
In the event that the investigations had yielded evidence of fraud or a suspicion of fraud, then Deloitte would have been required to lodge an affidavit with the DPCI in terms of S 34(1) of PRECCA.
It is not apparent whether Deloitte has taken any active steps to ascertain whether it is complicit in the Tongaat tragedy and in the absence of information to the contrary, the negative inference is that it has purposefully failed to do so.
Many questions will no doubt be raised with respect to the conduct of Deloitte in the Tongaat audit. At this early stage, answers to the following questions will provide some clarity:
- Did Deloitte appoint internal and external investigations for the purpose of establishing whether there had been any unethical or criminal conduct on the part of Deloitte and if not, then why not?
- In the event that Deloitte facilitated these investigations, then what was the scope and terms of reference?
- In the event that these investigations did take place, then have these investigations produced findings to support the Deloitte’s claim that it is unaware of any alleged unethical or criminal conduct on the part of its former lead audit partner?
- Has Deloitte lodged its own complaints to the IRBA with respect to affected audit partners and if not, then why not?
- Has Deloitte lodged its own complaints to SAICA with respect to former executive and non-executive directors of Tongaat holding the CA(SA) designation and if not, then why not?
- If no Deloitte-driven investigations have taken place, then does Deloitte believe that there is no reasonable suspicion of fraud on the part of the former audit partner in the Tongaat matter and if so, then on what basis does Deloitte arrive at this conclusion?
- In the event that Deloitte believes that there is a reasonable suspicion of fraud on the part of its former partner, then has Deloitte lodged an affidavit with the DPCI in terms of PRECCA S 34(1) and if not, then why not?
In the event that Deloitte believes that there is a reasonable suspicion of fraud and has not lodged an affidavit in terms of PRECCA S 34(1), then does Deloitte believe that this failure is a contravention of S 34(2) by its South African partnership and if not, then why not?
It is a disgrace that thousands of students working towards qualifying as chartered accountants and those already qualified but still finding their commercial way should face an uncertain future with a cheapened professional designation because certain individuals within the older guard have sacrificed the integrity and competence originally associated with the CA(SA) designation at the altar of avarice.
Where applicable, criminal and professional accountability of these miscreants should not be negotiable.
Simon Mantell is a businessman and works in a biscuit factory in Cape Town. He did his articles with a large audit firm at the start of his career. Views expressed are his own.