JAUNDICED EYE

It’s obvious, but it bears repeating. Garbage in, garbage out.

To thrive, individuals, companies and governments all depend on the input of sound information. This information needs to be analysed dispassionately and acted upon effectively.

That’s Management 101, Life Skills Kindergarten, a deceptively simple process that maddeningly few manage to get it consistently right. 

Nurtured ignorance doesn’t help. A recent World Economic Forum index on the levels of critical thinking inculcated in teaching, both school and tertiary, placed South Africa at 95 out of 134. More boxed thinking than thinking out the box.

Emotion also gets in the way, swaying intelligence. So, too, ideological paralysis and magical thinking. 

One must wonder which of these factors it could have been that last week caused the African National Congress government to present a Budget predicated on present and future growth, only to have StatsSA release, just a few days later, figures showing that the economy is already in a recession?

Is it ignorance, the left hand of government honestly not knowing what the right hand is doing? Or is it political manoeuvring, an attempt to time the release of bad economic news to take the angry winds out of the Congress of SA Trade Union’s sails over the Budget announcement that the government planned to slash the public sector wage bill?

It might just be optimism. Rosy economic spectacles are standard issue for politicians who need to keep voter enthusiasm bubbling. When the reassuring figures later don’t add up, and invariably they don’t, there will always be an external agency to blame.

Whatever the explanation, it doesn’t give one much confidence in the government’s ability economically to finesse its way unscathed between the proverbial rock and hard place.

In this regard, perhaps the most remarkable aspect of last week’s Budget, and President Cyril Ramaphosa’s State of the Nation Address before it, is the coronavirus. Not the coronavirus’ presence but its complete absence.

Neither of these speeches, the annually most important defining policy and delivery documents of the government, even mentioned it. Yet almost every assumption being made in both those programmes will be negatively affected by the Covid-19 pandemic that is rearranging the face of the world, even although it has only just reached South Africa.

One doesn’t have to be Nostradamus to predict that SA’s manufacturing industries supply chains will be interrupted and that our export markets are going shrink. Or that SA Airways is being “rescued” in order to fly empty skies, as international tourism drops precipitously. 

And that’s the best-case scenario. Far worse is on the cards if Covid-19 rips through the SA healthcare system, as some predict, like a bullet through tissue paper.

It is worrying for SA that the private sector provides an only limited fail-safe to government dereliction, since it, too, is bristling with wilful ignorance. Over the past decade, the country’s accountancy and management consultancy sector failed dismally to prevent at least a trillion rand of state looting during the Zuma presidency.

There is compelling evidence that in many cases they actively facilitated corruption but, as yet, not a single accountant or auditor has been charged by the police or disciplined by the professions’ “oversight” bodies. They are all still beavering away in back offices for vast amounts of money, “auditing” SA’s corporates and advising its state-owned entities.

That failure is not because there’s a shortage of regulatory bodies. There’s the SA Institute of Chartered Accountants, and the SA Institute of Professional Accountants, as well as minor supervisory offshoots for management accountants and internal auditors. There is also the statutory Independent Regulatory Board for Auditors.

A good example are the recent events at Tongaat Hulett, one of SA’s iconic corporate giants, where it was found that the financials had been systematically overstated for years, to reach R11.8bn in 2018. Its share price has dropped almost 90% in a year, wiping out billions of investment value.

This week, the new CEO, Gavin Hudson, told PwC’s global economic crime and fraud conference that Tongaat had laid criminal complaints against five former executives in SA and eight in Zimbabwe. Hudson noted that in the three years before the collapse, the group management committee had not held a single meeting. There are no minutes to be found for the past 13 years of meetings, something that KPMG, who assisted Tongaat’s internal auditors, somehow never noticed.

Sustained corruption, fraud and mismanagement cannot take place at a listed entity without some degree of collusion or criminal incompetence on the part of the board and the auditors. Yet, Deloitte, which was Tongaat Hulett’s external auditors for at least 21 unbroken years, apparently noticed nothing.

Sceptical that Deloitte, given its decades of uninterrupted association with Tongaat Hulett, could have been unaware of these irregularities, I asked them.

The full Deloitte’s response is appended below the column, so that you can make up your own mind as to its evasiveness. In essence, Deloitte says that Tongaat-appointed PwC investigation into the meltdown did not specifically blame Deloitte, any Deloitte partner, or any Deloitte employee for anything that occurred at Tongaat. Hence, overall, “we are of the view that PwC findings are positive for Deloitte”.

Question: What about the internal investigation that Deloitte last year announced? Might I see it? 

No response from Deloitte.

Question: Does it remain Deloitte’s position, as imparted to the media in the wake of the Tongaat Hulett scandal, that “we have no reason to believe that any current or previous Deloitte partner or staff member may have acted outside of professional standards.” 

No response. Deloitte does manage to imply that it still has Tongaat’s confidence, since it has been reappointed for the current financial year. It understandably neglects to mention that Tongaat told shareholders that it wanted to replace Deloitte but because of the now massively delayed financial statements, felt compelled to reappoint them for 2019/20. Nor does Deloitte mention that withdrew its entire Tongaat audit team — from senior partner down to apprentice pencil-sharpener — and a new team has been despatched to clean up the mess.

Question: Deloitte stated last year “Should our internal review processes prove otherwise, we will follow appropriate steps as required by our policy and the standards that regulate our profession.” So, what “appropriate steps”, if any, have been taken? 

No Deloitte response, except to say that its Tongaat audit is being investigated by the Independent Regulatory Board and that it is co-operating.

Not much meat in that to munch upon. But then again, there’s not much Deloitte can credibly say. To my mind, what happened at Tongaat Hulett can be boiled down to a simple multiple-choice poser.

Question: 

Under under Deloitte’s watch, an enormous amount of shareholder value was destroyed at a public-listed entity over a long period of time. How come?

Answer:

A. Deloitte’s staff were implicated

B. Deloitte’s staff were incompetent

C. Both of the above

The Deloitte debacle at Tongaat and its unwillingness to accept any responsibility or show any contrition is symptomatic of a South Africa audit, accountancy and management sector that reeks to high heaven. The outrageous behaviour of the big firms and the pusillanimity of the oversight bodies must be a source of misery and embarrassment to those in the profession with integrity. 

Deloitte have had an audit role two other major collapses that rocked the business world, those of African Bank and Steinhoff International. Again, they noticed nada. They were also this year accused of impropriety, which they deny, in Eskom contracts of R207m awarded to them.

It’s tempting to be hard on Deloitte, which brands itself as being Always One Step Ahead. It does, after all, boast on its website of running both the Deloitte Africa Centre of Corporate Governance and the Deloitte Alchemy School of Management. (With magicking expertise and their track record at Tongaat, maybe they should change that tagline to We Make Assets Disappear.)

But KPMG (Cutting Through Complexity), legal firm Hogan Lovells (Legal Challenges Come From All Directions), as well as the consultancies McKinsey & Co (Change That Matters) and Bain & Co (Results Not Reports) have all been implicated in skulduggery. Indeed, none of SA’s big players is blameless. And all are still operating merrily, free of any legal or professional sanction. 

Garbage in, garbage out doesn’t only apply to state entities.

Follow WSM on Twitter @TheJaundicedEye

Here is the full response from the Deloitte Africa spokesperson:

- Tongaat had announced earlier in 2019 that it was engaged in a strategic and financial review and that it had appointed PwC as independent forensic investigators to establish any evidence of whether any past practices were deliberate.  Deloitte was involved with and co-operated with Tongaat and PwC in this review and investigation.  Tongaat has since released a summary of the PwC report. 

- The summary report reveals a coordinated and tightly managed process, of overstating profits by capitalising costs, conducted by the group executive directors, and accounting policies were consistently and aggressively interpreted over many years. Furthermore, it now appears that certain fraudulent activities were undertaken to back-date agreements and recognise land sales early.

- Importantly, neither the summary nor the underlying report cast blame on Deloitte or any Deloitte employee or partner and the summary does not mention Deloitte at all. Overall, we are of the view that the PwC findings are positive for Deloitte.

- More importantly, evidence suggests that Tongaat directors and employees colluded and actively concealed accounting irregularities from Deloitte.

- Deloitte worked with the company to finalise the 31 March 2019 audit, and the audited financial statements were released on 10 December 2019.

- Deloitte has been reappointed as the auditors of Tongaat for the financial year ended March 2020.

- Our obligations to client confidentiality prevent us from commenting on any aspects of Tongaat’s financial affairs, or its general committee meetings, and any enquiries in this regard should be directed to Tongaat.

- The Independent Regulatory Board for Auditors (IRBA) is currently investigating our audit of Tongaat and we are co-operating with this investigation.  As this is an open investigation, we suggest you direct any additional questions to the IRBA.