The damage is likely to spread beyond Tongaat, with investors applying a risk premium to stated figures on other stocks. This article first appeared in Moneyweb.
Trade in the shares of sugar and starch producer Tongaat Hulett was suspended on the JSE and London Stock Exchange on Monday while new management assesses the extent of financial misreporting by the company.
The shares were suspended at the request of Tongaat itself. In a Sens announcement, Tongaat says it aims to publish its consolidated financial statements for the year to March 2019 by the end of October this year. The listing will be reinstated at that point or sooner, providing sufficiently reliable information can be released.
This follows an announcement on May 31 that Tongaat would have to restate its equity by R3.5-R4.5 billion after incorrectly counting revenue from land sales. It would also have to reverse capitalised costs related to cane roots, projects, maintenance and inventory. What may have happened here is that Tongaat undercounted actual expenses by ‘capitalising’ them – which has the effect of removing them from the income statement and recording them as assets on the balance sheet.
The audit profession, already in damage control for signing off on Steinhoff’s fake figures and facilitating other corporate debacles (such as the looting at VBS Bank), will be bracing itself for another round of public opprobrium.
Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says one likely effect of the Tongaat accounting mess will be for investors to apply a risk premium on all published financial figures.
Investors ‘just can’t rely on the figures’
“Given the current spate of audit and reporting scandals, investors are likely to add a risk premium on financial results and reduce the stated figures with this risk percentage,” says Van Wyk. “They just can’t rely on the figures presented. This doesn’t bode well for the audit profession, but the impact is likely worse for the broader SA economy as increased risks means increased interest rates and an increase in cost of living expenses.
“We need CFOs [chief financial officers] that are skilled managers not ones that are technocrats. SA needs street-smart CFOs who can see the wood for the trees and not be manipulated or bullied into applying liberal interpretations of IFRS [International Reporting Financial Standards] when preparing financial statements.”
Suspension of the trade in Tongaat shares seems a logical move by Tongaat, though it has also triggered speculation that conditions at the company are worse than already believed. To allow trade in its shares to continue would encourage wild speculative activity. By suspending trade, Tongaat can get ahead of the news cycle and control the information flow while audit firm PwC, which has been brought in to investigate certain practices at the company that could impact previously reported financial information, delves into the extent of the misstatement.
The Sens statement says the Tongaat board has “reached a conclusion that the need to restate the March 2018 Financial Statements, and the consequential impact on the 30 September 2018 statement of financial position, renders reliance on the unaudited interim results for the six months ended 30 September 2018 Interim results no longer appropriate. This follows further discussions with the JSE and the Company’s auditors, forensic investigative team, legal advisors and management.”
All this suggests the results released last year are largely a work of fiction, with land sales counted before they were due, and inventory and other capitalised costs padded to allow executives to earn fat bonuses.