According to a statement issued by the company on Friday, the overstatements were a result of the executives’ use of “undesirable accounting practices”, including revenue recognised in earlier reporting periods than it should have been and in expenses being inappropriately capitalised to assets.
The Big Four firm, which was hired in June to investigate what had been going on, also found that employees did not question the basis of the accounting practices because of the company’s culture of deference and lack of challenge, and there were also a number of governance failures when internal policies, guidelines and frameworks were not followed. This all combined to create “an environment in which senior executives could initiate or participate in the financial reporting misstatements”.
“The PwC investigation identified major historical shortfalls in a number of important areas, including, inter alia, governance practices, delegation of authority, decision-making, oversight, financial discipline, record keeping, systems usage and financial reporting,” TH said.
One of the key areas requiring financial restatement is where there had been early recognition of revenue from the sale of land. The investigation found that at Tongaat Hulett Developments (THD) a number of internal policies, guidelines and frameworks had either been ignored or incorrectly applied, including the internal processes to be followed for land sales, the meaningful deposit guideline (the criteria for calculating the deposit to be paid for land sales), and the revenue recognition policy.
Worse, a number of land sales transactions that took place between FY 2013 and FY 2019 had been backdated and methods had been used to enable the company to recognise sales before zoning and sub-division approvals had been obtained.
Another key area involves the overstatement of the carrying amount of cane roots and standing cane. This arose because there was excessive capitalisation of expenses, such as head office overhead costs, as well as the inclusion of the full value of share cropped cane (farmed by tenants on land owned by third parties) in the standing cane valuation.
The company was found to have used overly optimistic estimates in the standing cane valuations, employed standard costing models rather than actual costs, and overstated the value of fallow land. The carrying amount of capital work in progress and plant and machinery was inflated as well, through “the inappropriate capitalisation of maintenance and other internal costs to capital projects”.
PwC discovered that operating expenses, including repairs and maintenance costs, were incorrectly capitalised into assets instead of being expensed as generally required. As a result, the carrying amount of assets, including capital work in progress and property, plant and equipment, was overstated.
In other important areas, financing arrangements were structured as sales of significant sugar stocks, and accounted for as sales at the financial half year and year-end. Certain infrastructure costs – such as electricity provision, roads and bridges – that should have been expensed against land sales were “inappropriately allocated and capitalised” to future land development projects, making earlier land sales seem to be more profitable.
PwC also found that the projected revenue from certain projects used in the allocation of infrastructure costs to land was overstated because the company had included infrastructure rights that hadn’t yet been approved in the estimate, and that bulk infrastructure costs were allocated based on these “rights”.
TH has announced that, on the basis of the PwC findings, it is considering taking out civil proceedings against 10 individuals – including Michael Deighton, former managing director of THD, Sydney Mtsambiwa, former managing director of TH’s Zimbabwean operations, Murray Munro, former CFO of TH, and Peter Staude, former chief executive of TH – “who appear to have been responsible for, or party to, the undesirable activities”.
“Their involvement was such that at the very least they knew or ought to have known, inter alia, that the 2018 AFS contained information that was materially inaccurate,” it said.
However, it adds, the executives did not appear to have made money out of the accounting activities beyond the financial incentives paid to them during the years in which they achieved their employment targets.
The company is also working with the South African Police and law enforcement agencies in Zimbabwe and Mozambique.
As far as the existing company is concerned, it now has a new chief executive, Gavin Hudson, who is working hard with the board to turn the business round. He has decided on a policy of transparency as far as possible given the circumstances, “on the work it is doing to turn around the business and restore the company’s reputation as a leading corporate in the consumer goods business”.
“A fundamental reshape of the business is needed to restore trust and put the business on a sustainable footing,” he added.