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Tongaat Hulett scandal raises more red flags about governance in corporate South Africa Tongaat Hulett is an agriculture and agri-processing business, focusing on the complementary feedstocks of sugarcane. It has a unitary Board structure, which comprises of nine non-executive and two executive directors, drawn from a broad spectrum of the business community. The directors possess a wide array of skills, knowledge, diversity and experience, and bring independent judgement to Board deliberations and decisions, with no one individual or group having unfettered powers of decision-making. When sugar producer Tongaat Hulett produced its financial statement for the year ended March 2018, the company had the usual spiel about the quality of the reported results: “The summarised consolidated financial statements for the year ended 31 March 2018 have been prepared in accordance with the JSE Limited Listings Requirements for provisional reports, the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, and as a minimum, contains the information as required by International Accounting Standard 34: Interim Financial Reporting and the requirements of the Companies Act of South Africa.” Almost no one bothers to read such sections, which are basically like a guarantee of quality, in financial reports. But there is a lot packed into this if one takes the trouble to go through it. For one, the statements, we are told, comply with JSE requirements for “provisional” results. And there is a lot more impressive-sounding gobbledygook thrown in here. International Financial Reporting Standards (IFRS) are invoked as are domestic reporting guidelines. The Companies Act South Africa also gets an honourable mention. So investors have an assurance that the numbers have been crunched properly and everything is in order. Tongaat also noted that: “These summarised consolidated financial statements, which have been derived from the audited consolidated financial statements for the year ended 31 March 2018 and with which they are consistent in all material respects, have been audited by Deloitte & Touche.” So here is another assurance of quality. One of the big global auditing firms has been through the books. No need to worry folks, and a dividend will also be paid. Then a curious thing happened last week. It seems that all of this compliance and (presumably) attention to detail and devotion to IFRS and the sign off by Deloitte & Touche missed a few things. On Friday, Tongaat said it would need to restate its 2018 financial results based on the sobering assessment of a review which remains on-going. “The review has revealed certain past practices which are of significant concern to the Board and the Company’s auditors. These past practices appear to have resulted in financial statements that did not reflect Tongaat Hulett’s underlying business performance accurately,” the company said. In other words, its 2018 results were smoke and mirrors. This happened despite Tongaat Hulett’s approach to an strategic risk management (and its integration with seeking and maximising the connected or related opportunities or the conversion of the risk into opportunity). The risk management framework is reviewed continuously and updated when relevant. The framework includes a focus on risk tolerance (ability to withstand or even survive the issue/event) and risk appetite (risk limits desired or risk level willing to be taken), which have been detailed previously and remain applicable. “The estimated reduction in the amount reflected in the 2018 Financial Statements as the Company’s equity as at 1 April 2018 is anticipated to be between R3.5 and R4.5-billion. The adjustments are of a non-cash nature and relate to the reassessment of land sales against the revenue recognition criteria defined by International Financial Reporting Standards and the associated profit margins,” it said. So the equity on its balance sheet will be cut by somewhere between R3.5-billion and R4.5-billion. As misses go, this one is pretty big. “Once the forensic investigation and report findings are complete and the final accounting treatments are resolved by the Company, the auditors will then complete the outstanding audit processes,” Tongaat said. The company will likely come with all of the same assurances that were included in the company’s previous financial statements. Presumably, it expects to be believed this time. Jenitha John, the audit and compliance chair of the Tongaat board, stepped down last week “owing to other work commitments, and Tongaat’s increased demands on her time, given the current business challenges”. The Audit and Compliance Committee assists the Board in overseeing the consistent application of and compliance with the Code through reports compiled by the corporate security manager and reported to the committee by internal audit. It is also important to note that on appointment, new directors have the benefit of induction activities aimed at broadening their understanding of the company and the markets within which it operates. The Company Secretary ensures that directors receive accurate, timely and clear information. The Chief Executive Officer and key executives hold detailed discussions with new directors on business performance, strategic objectives and key themes. Investors must be furious. Business Day quoted Chris Logan of Opportune Investment as saying that past executive bonuses should be repaid if it transpires they were the product of inflated — in other words, fraudulent — profits. A reckoning of some sort seems to be looming. This is being looked into by company’s Remuneration Committee, which meets at least twice a year, is chaired by an independent non-executive director and comprises only non-executive directors. This latest accounting scandal is clearly a black eye for South Africa’s corporate sector, which likes to portray itself as doing things by the book rather than cooking the books. It comes in the wake of the Steinhoff debacle, which is on a far more massive scale, and KPMG’s woes in the sordid State Capture saga.

Critically discuss the major challenges that have been highlighted that sanction the need for a focus in risk, compliance and control structures, and evaluate the situation with respect to the Tongaat Hulett scandal.

The question should be answered in the following style:

The 3 major challenges highlighted in the theory that sanction the need for a focus in risk, compliance and control structures should be identified , explained and applied to the case study