The Public Company Accounting Oversight Board (PCAOB) found that the firm had relied on technical reports as valuation evidence even though it had been prepared by a company which Deloitte’s South African practice had later acquired.
In a settled order with Deloitte Canada, the PCAOB said that in early 2012 the company, Venmyn Rand, wrote a report for Banro on its Namoya gold mine in the Democratic Republic of Congo.
The report covered a number of gold mineral resource estimates and a related valuation of the mine based on a discounted cash flow analysis. It estimated Namoya’s fair value at $366m.
In November 2012 Deloitte South Africa acquired Venmyn Rand as an associate which meant that Venmyn Deloitte (as it was renamed) was deemed to be part of Deloitte Canada for the purposes of the auditor independence rules.
Venmyn’s managing director told the Deloitte Canada audit engagement team that he was the “qualified person” responsible for the Namoya report. The engagement team then used the report’s valuation as audit evidence to support management’s representations regarding the carrying value of the Namoya mining assets in Banro’s financial statements, and Banro’s ability to continue as a going concern.
In 2013 and 2014 Venmyn prepared two more technical reports for Banro, one on Namoya and the other on the Lugushwa mine. Both contained gold mineral resource or reserves estimates that had previously been disclosed publicly in press releases.
The press releases revealed that Venmyn’s managing director had reviewed and approved their content and that he was the qualified person responsible for the estimates. Similarly, the technical reports named him as the person with responsibility for their contents.
The relationship between Venmyn and Deloitte Canada meant that the Canadian firm’s independence during the 2012, 2013 and 2014 audits was impaired.
“Deloitte Canada was in essence auditing its own work during the 2012 audit of Banro by relying on Venmyn’s valuation of Banro’s mining assets, in clear violation of independence rules,” PCAOB acting director of enforcement and investigations Mark Adler commented.
“This case also emphasises the need for auditors to consider not only the types of non-audit services provided to audit clients, but also the impact of public statements made to investors when providing those services.”
Under the settlement terms – in which Deloitte Canada did not admit or deny the findings – the firm was ordered to review its independence policies, procedures and training, and to report back the results to the PCAOB as well as any changes it has made.