Penny stock Choppies has won a second round in the Botswana high court in a long case in which it is trying to make PwC liable for losses the directors faced when the share was suspended from two stock exchanges — after the auditor would not sign off on the accounts.
Choppies, a retailer in Botswana, Namibia, Zambia and Zimbabwe, was suspended from the JSE and Botswana stock exchanges for not publishing its 2018 financial statements within the required time frames.
PwC in Botswana had been employed to do the audit, which it would not complete without ordering a forensic audit done first, delaying the release of the financials.
The stock lost about 75% of its value as a result of its suspension from stock exchanges in 2018.
CEO Ramachandran Ottapathu and former director and co-founder Ismail Farouk have large shareholdings.
They allege PwC’s audit partner Rudi Binedell delayed the audit on purpose, and that he and PwC are liable for the amount of its stock loss. They want more than R610m in damages for loss in value in their shares in late 2018.
The case has continued since 2020.
Reputation
Ottapathu told Business Day on Monday he is also fighting to restore Choppies’ reputation.
Ottapathu and Farouk have argued that because Binedell’s offer of a job as financial director by board members did not materialise, he purposely delayed the audit and his independence was compromised.
PwC has previously said that governance and accounting issues in Choppies led to the delay in completing the audit. It also quit working with the firm, citing reputational risk.
Ottapathu and Farouk had applied to the Botswana high court to have one part of the case heard first and leave other arguments for later, which PwC objected to.
Last Wednesday, the Botswana high court ruled in favour of Ottapathu and said the initial case looking into whether PwC was negligent or acted with bad intent in delaying the audit can be heard first.
This will take place in June. Later, the court can look at other claims that they make — such as Ottaptahu’s claim that PwC’s insistence on a forensic audit was unlawful and usurped the role of management.
In the ruling on whether to separate the case into two different parts, the court found PwC audit partner Binedell had held discussions with senior board members about a job at the group as finance director after he had been signed on as auditor.
This is usually not allowed by auditing regulators as it compromises the independence of the auditor.
At the time, CEO Ottapathu had been ousted but later returned to the company he founded. When he returned he did not offer Binedell the job as board members had promised.
The court also found that PwC knew when the audit needed to be completed by, as it was aware the firm was listed on stock exchanges. The JSE requires firms to release financials within four months of a business’s financial year-end.
PwC had previously argued in court that it was not aware when the audit needed to be completed by.
Ottapathu welcomed the judgment.
“We are very pleased with the Botswana high court’s ruling. [It is] the second such ruling in our favour. This legal pursuit is not only about addressing the significant value destruction we believe resulted from PwC and its audit partner’s actions.
“It is also a matter of principle as we hold the gatekeepers of governance to account and seek restitution of our good name in the investment and business community, both in Botswana and abroad.”
Choppies was later relisted on the JSE and Botswana Stock Exchange in late 2020. Allegations of money laundering were also raised in media reports in 2018. Later, when Ottapathu returned to the firm, the board cleared him of any wrongdoing, as did an Ernst & Young investigation.
Choppies is a scarcely traded stock on the JSE.
The company’s debt also exceeds its assets, making it high risk, but the leadership has stated an intention to recapitalise the firm.
The 2022 audit refers to “numerous related-party transactions” involving insiders, “with the risk that transactions are entered into on a non-arm’s length basis”.
There is also concern about leases not receiving proper accounting treatment, supplier rebates and accounting goodwill.
Auditors are under pressure worldwide to detect fraud after failing to do so in scandals at Steinhoff and Tongaat Hulett and the German wire-card case.
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