Under the watchful eye of External Auditors, KPMG, Choppies Enterprises Ltd released ‘fabricated’ financial results consecutively for a few years, which were not compliant with the International Financial Reporting Standards (IFRS) and also in contravention of auditing and accounting regulatory requirements. It remains to be seen if the Botswana Accounting Oversight Authority (BAOA) will take action against KPMG or the matter will just be swept under the rug, KEABETSWE NEWEL reports.
In the Choppies financial results for the year ending 30 June 2018, the list of accounting errors, most of which were signed off by KPMG is extensive.
KPMG was dropped as Choppies Auditors and replaced with its direct competitor – PwC in January 2018 after irregularities were found in Choppies’ financial results as well as its operation model. KPMG has been Choppies’ external auditors for ten years.
According to Rudi Binedell, Individual Practicing member at PWC, the statutory financial statements of eighty three of the Choppies Group’s Botswana subsidiaries and all of the Group’s South African subsidiaries have not been issued for up to two years, preceding the current financial year. Further, he said corresponding figures for these entities were audited by the predecessor auditor, KPMG, to enable Choppies Enterprises Limited to prepare consolidated financial statements for the year ended 30 June 2017.
“We were required to obtain evidence over the opening balances presented in the financial information to comply with International Standards on Auditing. During the course of our audit for the year ended 30 June 2018, multiple misstatements relating to the prior period(s) were identified in these and other entities of the Group,” he said.
While the results are terrible as they are, PWC, which chose to ditch Choppies soon as they completed the audit, issued a qualified opinion on the just released financials, which actually means that the financials should not be relied upon by any investor or lender. The auditor is essentially saying, ‘rely on them at your own peril’.
“The results of the legal and forensic investigations, detailed responses thereto from management and other evidence we obtained during the audit indicate interpretations and explanations of the same facts and circumstances, which conflict and differ from one another. The potential interaction of the multiple uncertainties outlined above and their possible cumulative effect on the financial statements have resulted in us being unable to form an opinion on the consolidated and separate financial statements as a whole,” PWC Individual Practicing Member Rudi Binedell wrote in a statement.
Further, the PWC auditor said as a result of the inconsistency of explanations received with respect to the nature of inventory included in the bulk sales transactions and with respect to the commercial substance of the bulk sales transactions themselves, contradictory evidence relating to the actual dates of contracting for the business acquisitions and the agreed purchase considerations, the delayed recognition of liabilities for the business acquisitions and the subsequent impairment of assets arising from these, they were unable to obtain sufficient and appropriate audit evidence over the occurrence and accuracy of these bulk sales transactions, and the valuation and accuracy of the business acquisition transactions and resultant impairment charges.
Kabelo Moyo, KPMG Botswana Chief Operating Officer (COO) was reluctant to explain to The Botswana Gazette, why they failed to pick the red flags in the Choppies accounting methods which are reported to be non-compliant to IFRS.
“We have noted that the Board of Choppies Enterprises Limited has released its financial year end results for June 2018. KPMG’s role as auditor for Choppies Enterprises Limited ended in February 2018. We are not in a position to comment as we were not involved in the legal and forensic investigations, or the restatements recorded in the financial statements for June 2018,” Moyo responded to The Botswana Gazette inquiries.
Independent accounting and audit professionals regulator, BAOA had promised to take action against the ex-Choppies auditors, after the financials have been released. The financial market players are waiting to see if BAOA will live up to its word or prove to be a toothless dog. In an interview with this publication, Duncan Majinda, CEO at BAOA had said after the release of Choppies financials, BAOA will, using findings in the reports establish who were key to the scandal at Choppies and hold them accountable.
BAOA provides oversight to accounting and auditing services firms and is mandated to ensure audit profession in Botswana give investors and all stakeholders’ accurate information for the protection of their investments. Through the Financial Reporting Act, BAOA is the supervisory authority of all Public Interest Entities (PIE), which was established through an Act of Parliament and is answerable to the national assembly and the Minister of Finance and Economic Development. Still in January this year, BAOA summoned new auditors, PricewaterhouseCoopers (PWC) demanding them to come and outline all matters that have caused the delay in the financials. Chief of the reasons was a number of commercial agreements to which the Group was party in Botswana during past years.
These include transactions with entities related to the Group where such relationships may not have been fully disclosed or considered in preparation of annual financial statements for past financial years. It emerged that the companies which transacted with Choppies were owned largely by Choppies Directors especially the CEO, Ramachandran Ottapathu.
If the directors of the companies that traded with Choppies were also directors at Choppies and there was no disclosure of these interests, it may have been in violation of the companies Act.
According to BAOA, if this could be found to be true, it would show a serious breach of corporate governance and intended misconduct because the directors would allegedly have been financially benefitting from the company but hiding it from the shareholders.
The auditors approved the financials notwithstanding the potential conflict of interest.
It terms of the improper accounting methods or the falsification of books, Section 300 of the Companies Act says that any person who conceals, destroys, mutilates, falsifies or makes or is privy to the making of a false entry in, or with intent to defraud or deceive, makes or is privy to the making of any erasure in any register, book, security, account or document of any company or external company shall, unless he satisfies the court in each case that he had no intention to defraud or deceive, be guilty of an offence and shall be liable to a fine not exceeding P1000 or to imprisonment for a term not exceeding three years or both. Further, PWC revealed that Choppies’ financial reporting methods, which were approved by KPMG, were found to have been non-complaint to the International Financial Reporting Standards (IFRS) and contained accounting irregularities.
If this is found to be true, Majinda said auditors may have knowingly violated principles of accounting and turned a blind eye on matters like the company’s transactions with its directors and accounting irregularities. “How can our trained accountants fail to meet the reporting standards,” Majinda rhetorically asked.
According to the BAOA boss, accountants if found to be guilty could be individually held liable and face fines of up to P20 000 as per the BAOA Financial Reporting Act of 2010. He also said that accountants will further be reported to the Botswana Institute of Chartered Accountants (BICA), which could, depending on the gravity of the offences, suspend them from practice or even deregister them.
At the time KPMG were external auditors to Choppies, and they have been there for ten years before PWC took over at the time of the pending of the financials release.
KPMG has for the past few years been signing off Choppies financials. As it turns out, while PWC was preparing to sign off Choppies financials for the year ended 30 June 2018, it raised eerie concerns which involved a number of commercial agreements to which the Group was to party in Botswana during “past years” which KPMG were auditors. Majinda says after the investigations are complete and the financials are released BAOA will establish when the problem had started and which auditors had been appointed at the time. “If Choppies was non-complaint we will find out why did not they pick it, did they carry out the audit and if they did why did they not pick this up?”
He said BAOA’s principles are stricter when it comes to auditors. If post the investigations, KPMG is found to have approved financials which had irregular transactions with company directors, were non-compliant to the IFRS and had accounting errors, KPMG could, according to the BAOA Act be liable and will be subjected to hearing and face fines of up to P500 000, 10 years in prison/both. Further, auditors could face suspension or exclusion which may never see them practice.
The Choppies financial misstatements happen at a time when the auditing profession is sweating to restore its credibility worldwide after several disasters involving members of the “big four” including KPMG, Deloitte, PwC and Ernest & Young. KPMG itself, has been involved in a few scandals in Botswana which have also attracted the attention of parliament.
KPMG is even at the risk of losing business from government.
In December last year, the Umbrella for Democratic Change (UDC) Members of Parliament demanded answers from government on why they continue to engage the auditing firm despite its documented series of scandals not only just around the world but in Botswana.
They questioned the firm’s role as the external auditors of Bank of Botswana (BoB) in connection to the alleged missing billions of Pula at the central bank which is said to have happened between 2009 and 2018.
Former president Ian Khama and his associates have been implicated in a court case by the state to have had a huge a hand in this alleged crime. However Khama has denied the allegations.
The Minister of Finance and Economic Development Dr Thapelo Matsheka confirmed that KPMG are the central bank’s external auditors until 2020, having first been contracted in 2011. KPMG has in recent years been accused of producing fraudulent financial result for several companies
In 2017, liquidator of Kingdom Bank Africa (KBAL), John Little accused KPMG Botswana of misconduct in signing off the books of the bank which collapsed a few years ago and filed a lawsuit of close to P200 million against the accounting and auditing firm on behalf of creditors”.
Last year October, Chief Executive Officer at BAOA Duncan Majinda also raised deep concerns over KPMG’s dealings when appearing before the Committee on Statutory Bodies and State Enterprises in Parliament.
“I have even talked to the Office of the President that the company must be monitored and look at how they have been doing books as it shows that we might be sitting on a ticking financial bomb,” he said adding that almost 70 percent of companies in Botswana are using the firm.