by Jacques van Wyk
Still recovering from the recent Steinhoff debacle, South Africa has once again been rocked by yet another corporate governance scandal. At the beginning of June 2019, sugar giant Tongaat Hulett announced it had requested its shares be temporarily suspended while it carries out investigations into concerns over the accuracy of its published financial statements for 2018. The company also said it would delay publishing its 2019 earnings until the forensic investigation is concluded.
The announcement came as a huge shock, even though Tongaat Hulett’s share price had been declining steadily since the beginning of the year. It is the first time since listing on the London Stock Exchange in 1939, and the JSE in 1952, that the 127-year-old company has taken such a drastic step.
Initial opinion seems to be that the Tongaat situation arose more from incredibly poor judgement than any deliberate fraud or wrongdoing. Regardless, however, of the eventual outcome of the investigation, the news is still bad – not only for shareholders, but for up to 5 000 of the company’s employees likely to lose their jobs.
What Went Wrong?
Industry experts are divided on this one. Some sources quoted in the media suspect the origin of Tongaat Hulett’s problems lies in its ill-judged land conversion and development policies.
The company owns huge tracts of land in and around the greater Durban area. It was a major supplier of the land currently under development around Ballito and King Shaka International Airport on the north coast, as well as at Ntshongweni, located to the west and inland of Durban.
In September 2018, potential red flags were raised about Tongaat’s property portfolio in the wake of the company admitting that the current economic climate wasn’t conducive to land sales. Although investigations are still ongoing, some experts believe at least two sale agreements fell through. Issues relating to municipal approval for basic infrastructure – such as electricity and water – were likely stumbling blocks. The problem was, however, revenue from these failed sales had already been counted – possibly before the land even went on the market – to help make the bottom line look good when the time came to dish out executive bonuses.
One expert summed it up thus: “This industry is cyclical, and my view is they have become a victim of their own growth. “One mistake management might have made was to rely on long-term property development for so much of their short-term performance.”
Capitalisation is another problem. For example, sugar cane plants have to be replaced every eight years. A possible scenario seems to be that the costs of this replacement were “capitalised,” essentially meaning they weren’t counted upfront because eventual benefits would be realised eight years down the line. The problem with this kind of accounting is that things can quickly get out of control, because deferring costs becomes an all too easy way to get them off your income statement.
Is Tongaat Hulett Another Steinhoff?
Comparisons between the two companies are inevitable – not least because they both used the accounting firm Deloittes – which signed off on Tongaat’s 2018 financial results. These are the same results the company is now saying will have to be “readjusted” to the tune of around R4 billion.
Tongaat has now brought in PricewaterhouseCoopers (PwC) to assist it in its review, and this is another move with eery Steinhoff echoes. The latter also brought in PwC to conduct an independent forensic probe after the sudden resignation of Markus Jooste, its chief executive.
Although most of the world’s recent accounting scandals have centred on fraudulent financial reporting, and investment professionals recognise that the Tongaat debacle is deeply worrying, general consensus seems to be that we need more information before we can draw definitive parallels with what happened at Steinhoff.
Deloittes, too, echo these sentiments, saying in a statement that “it is too early to comment on the merits and demerits of the Tongaat case in relation to Steinhoff and, therefore, no similarities can be drawn as yet.”
At the end of the day however, a company’s auditors are paid by that company. If the auditors push too hard, or ask too many questions, the company will fire them. It’s the same as having a policeman paid by the criminals he’s policing.
It doesn’t, at the moment, look as though Deloittes is guilty of fraud. No fictitious invoices have yet come to light. But chickens are nevertheless starting to come home to roost.
How Is It Still Possible For The Wool To Be Pulled Over Our Eyes?
As with so many financial scandals, red flags at Tongaat Hulett were waved, but only very late in the day. How is this possible? Why are we still not discovering this level of skulduggery and financial jiggery pokery until the 11th hour?
A quick look at Tongaat’s 2018 Integrated Annual Report reveals a bold statement regarding its approach to effective governance. It states, in black and white, that:
“The board of directors (the Board) continues with its ongoing commitment to the highest standards of ethical and effective governance, resulting in sustainable organisational performance that creates long-term value for all stakeholders. The Board has adopted and applies the principles of the King IVTM Report on Corporate Governance for South Africa (“King IVTM”), and fully endorses and cultivates the characteristics of integrity, competence, responsibility, accountability, fairness and transparency, as outlined in Principle 1 of King IVTM.”
Later in the same report, we read”
“The directors are required by the Companies Act to maintain records and prepare financial statements, which fairly present the state of affairs of the company as at the end of the financial year and the results of its operations for that year, in conformity with International Financial Reporting Standards. The financial statements are the responsibility of the directors and it is the responsibility of the independent external auditors to report thereon. To enable the directors to meet these responsibilities, standards have been set, including the application of the company’s Internal Control Framework.”
Clearly someone, somewhere, decided none of that mattered.
A large part of the issue at Tongaat seems to stem from people’s almost blind trust of the company’s charismatic CEO, Peter Staude. Described as being solid and down to earth, Staude inspired confidence in his board and upper management. Even when a whistle blower from Investec highlighted potential problems at Tongaat, it took people a very long time to actually sit up and listen. And even once it became obvious that cash flow statements and profit statements didn’t tally, no one wanted to believe anything untoward was going on.
Another part of the problem is that corporate South Africa has long been smug about the sophistication of its corporate governance ethos. For years we’ve spoken proudly of our accounting practices, and prided ourselves on how our strong corporate culture and liquid financial markets have put our country head and shoulders above fellow emerging markets.
Our very Constitution, in fact, is founded on the principles and values of the rule of law, accountability, responsiveness and openness. So when a company such as Tongaat Hulett publicly admits to unethical and dishonest behaviour, we struggle to believe it. We don’t want to believe it. We battle to admit to ourselves that things are starting to come badly unglued.
There is a deep and worrying system and regulatory failure. It’s an ugly truth, and we don’t want to face it.
Counting The Human Cost
As is so common with every company struggling to affect a turnaround in the wake of financial difficulties, massive retrenchments are on the cards for around 5 000 Tongaat Hulett employees across the company’s operations in no fewer than six countries – South Africa, Botswana, Namibia, Mozambique, Swaziland and Zimbabwe.
The move was made by new CEO Gavin Hudson, who said, “The company’s operating environment has changed almost beyond recognition, and the business simply hasn’t been able to adapt quickly enough to these changes with a business model outdated for a new economy. This in turn means a comprehensive rethink of the company’s business strategy in the immediate future.”
A statement on behalf of the entire Tongaat-Hulett group reads: “In the face of significant business challenges, Tongaat Hulett can confirm that the company is looking to reduce its headcount as part of a broader restructuring of the business, and has issued Section 189 letters to employees. While it is estimated that approximately 5 000 permanent and temporary employees across Tongaat Hulett’s operations in six SADC countries will be impacted by the headcount reduction, the exact figure will only be known once the restructuring process is further down the line. The aim of the headcount review is to make sure that Tongaat has the right skills and experience to take advantage of its new operating strategy, which seeks to address its debt burden, streamline operations and fundamentally change its business model.”
Whatever the official statements, the sad reality for thousands of employees and their families is that while they are facing prolonged uncertainty about how they’re going to put food on the table while, top Tongaat executives still walked away with multi-million Rand salaries and bonuses at the end of 2017 and 2018.
So, What Have We Learned From The Tongaat Debacle?
We may not fully know the answer to this one until the next corporate scandal emerges! But surely we have to be more vigilant than ever? We have to remember that if it walks like a duck and smells like a duck, it’s more than likely a duck – regardless of how badly we want to believe it’s a swan. We have to go beyond the narrative. People may not intentionally want to mislead you, or put a healthy spin on an unhealthy situation. But when such massive vested interests are at stake, it’s difficult to always be completely transparent. So let’s stop relying on people and start demanding that the processes deliver what they’ve been put in place to deliver.
We are quick to focus on corruption in government, but we need to start holding the private sector to the same standard. They need to be accountable – not only to the authorities, but to the people they employ, and the communities in which they operate.
JGL Forensic Services is a multidisciplinary team of experienced forensic accounting and investigation professionals. We strongly believe in the rule of law and the scientific method as it applies to forensic accounting and investigation. Talk to us in confidence, and let’s work together to prevent corporate corruption and fraud.