Over the past week two surprising developments related to corporate governance played out in the public domain. At Tongaat Hulett, the directors who were part of the company in 2018 when it revealed the existence of “accounting irregularities” were hauled before the Durban commercial crimes court. When the scandal broke, there was consternation on multiple fronts. The first was that the Tongaat scandal happened while South Africans were still trying to understand the Steinhoff scandal of 2017.
The parallels were irresistible. Both companies had strong CEO personalities, while those tasked with overseeing them — the board of directors — were less than forceful in the execution of their duties. Second, the practice at both companies was for frequent transactions involving complicated deal-making, which required the overseers to be even more vigilant. Third, the CEOs managed to put in place executive teams that were either complicit in the shenanigans or too paralysed and compromised to stop the rot.
The fact that both companies were audited by Deloitte and then hired PwC to unravel the maze of irregularities completed the sequence of strange parallels. The second element of consternation concerned accountability. In a bizarre turn of the screw, the fines levied against the companies whose directors had led them astray were paid by the company itself, which hit the remaining shareholders with a double whammy. As a result, the R27.5m fine on Tongaat, and the R1.5bn imposed by the Financial Sector Conduct Authority on Steinhoff, which was discounted to R53m, and the R13.5m imposed by the JSE, became problems for those who remained in the room. Individual initiators of the crimes and those who failed in their oversight duties largely fade into oblivion.
The developments at Tongaat, where the new board of directors seems explicitly committed to ensuring accountability, have been helped by a surprisingly quick turnaround from the law enforcement agencies, which have been able to present an outline of their case in court. More importantly, the net of accountability has been cast wider, as Tongaat has also launched a civil claim against Deloitte in its capacity as auditor. The basis for the claim is that as external auditors responsible for scrutinising the books of Tongaat, Deloitte should have picked up that something was amiss.
While the idea of holding auditors to account is rare, it helps Tongaat that in the Steinhoff case Deloitte agreed to pay R1.3bn to avoid being dragged into protracted litigation — without admitting liability for anything. Such a precedent gives Tongaat an entry point in its case. Additionally, the auditor in charge has been added to the current case in his personal capacity, where the charge is that his conduct violated the Auditing Profession Act. For the investors and shareholders who lost out when the scandal was discovered — especially those who have had to stump up even more during the recent rights issue — these developments bring hope for some restitution.
Last week, the JSE also banned two former directors of Ayo Technology from serving on any listed company board for a period of five years. The two were part of the audit and risk committee of Ayo when it listed on the JSE just two weeks after Steinhoff’s implosion in 2017. As it turned out, the type of skills and expertise necessary to properly oversee the audit and risk matters of Ayo were something the directors did not possess, individually or collectively. During their oversight Ayo produced financial statements that were so flawed the company attracted a penalty of R6.5m from the JSE.
The admission by the directors that they were simply clueless about what they had signed up for is sobering but also leads one to question the robustness of the processes used to appoint directors to companies. Given the litany of recent shenanigans and the ongoing sagas at Oceana, Dimension Data, Delta and Trustco, there is clearly still a lot to be fixed.
• Sithole (@coruscakhaya) is an accountant, academic and activist.
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