The Financial Sector Conduct Authority (FSCA) has fined Tongaat-Hulett R20 million for making ” false, misleading or deceptive statements” relating to its 2017 and 2018 annual results.
Tongaat failed to meet its obligations under the Financial Markets Act, with the misstatements stretching back over six years. These were eventually corrected in the March 2017 financial statements.
The FSCA originally fined Tongaat R118 million for contravening Section 81 of the Financial Markets Act, which prohibits company officials from making statements or forecasts they know to be false, misleading or deceptive. However, to avoid penalising Tongaat shareholders any further, the FSCA opted to reduce fine to R20 million.
In 2019, PwC conducted an investigation into accounting irregularities at Tongaat and found several areas of wrongdoing:
- certain senior executives initiated or participated in undesirable accounting practices that resulted, amongst others, in revenue being recognised in earlier reporting periods than it should have been, and in expenses being inappropriately capitalised to assets. This resulted in profits in the respective years being overstated, and in the overstatement of certain assets in Tongaat’s financial statements;
- there was a culture of deference and lack of challenge at Tongaat that resulted in employees following instructions on accounting practices, without questioning the basis for those accounting practices; and
- there were a number of governance failures pursuant to which internal policies, guidelines and frameworks were not followed, creating an environment in which senior executives could initiate or participate in the financial reporting misstatements.
In particular, Tongaat was found to have recognised revenue from land sales before they had occurred, and over-stated stock carrying values, as well as inflating land values by capitalising infrastructure costs such as provisions for electricity, roads and bridges. These costs should have been expensed rather than capitalised, and had the effect of inflating property values.
The FSCA statement reads: “Noting Tongaat’s current financial position; to avoid penalising innocent Tongaat shareholders further and Tongaat’s commitment to continue co-operating fully with the FSCA in all future actions taken against any persons allegedly responsible for the wrongdoing, the FSCA has resolved, under Section 173 of the FSR (Financial Sector Regulation) Act, to remit a portion of the administrative penalty resulting in the FSCA issuing an order for Tongaat to pay a penalty of R20 million, inclusive of the costs incurred by the FSCA in investigating this matter.”
Section 173 of the FSR Act allows regulators to “remit” or reduce penalties and interest on fines.
Tongaat’s misstatement of its financial results was one of the most serious accounting scandals in recent SA history, though was dwarfed by the multi-billion accounting fraud at Steinhoff.