PPC’s independent auditor Deloitte has issued an unprecedented highly critical report that highlights “material weaknesses in internal controls over financial reporting” as one of several key audit matters that need to be addressed by the JSE-listed cement and lime producer. PPC is currently under suspension from trading on the Zimbabwe Stock Exchange.
Among key audit matters highlighted by Deloitte in its independent auditors’ report, which formed part of PPC’s financial results statement for the year to March 2020 released earlier this month, include impairments, the accuracy of the hyperinflation accounting for the PPC Zimbabwe Limited results, the valuation of Zimbabwe blocked funds owned by PPC Limited, the value of the Zimbabwe derivative financial asset on legacy debt, and “prior year restatements — material errors”.
Deloitte’s external audit also confirmed that there has been “a material breakdown in internal controls over financial reporting”.
“In particular, severe gaps in controls over financial reporting, such as the consolidation process, the preparation and review of the annual financial statements and the completeness and accuracy of information, were identified,” it said.
Deloitte added that challenges were experienced in obtaining sufficient and appropriate evidence, particularly in areas requiring judgement and estimation.
“We have concluded that the breakdown in the controls over the financial reporting process is a key audit matter due to the significant and pervasive impact this had on the overall timing, level of expertise and effort associated with the current year audit of the financial statements,” it said.
Deloitte said its audit required extensive involvement from senior audit personnel, auditor’s internal specialists and individuals with specialised knowledge.
The firm listed a number of procedures undertaken to respond to and address the impact of the breakdown in internal controls over financial reporting.
It then concluded: “Based on the audit procedures performed and the level of expertise and effort associated with the current year audit, we are satisfied that our audit procedures were sufficient to mitigate the impact of the breakdown of controls over financial reporting.”
There were eight prior year restatements in the financial results, including errors in its financial results for the year to end-March 2019 that resulted in an increase in PPC’s headline earnings per share.
Following the publication of PPC’s delayed latest annual financial results, Moneyweb asked PPC CEO Roland van Wijnen for comment on the possible impact of these restatements on the company’s credibility and the mistrust in the financial results they possibly created among investors.
Van Wijnen said PPC had “one of the most diligent audits I have seen in my life”, adding that he views this issue slightly differently despite understanding why investors may lack confidence in a company with prior year restatements.
“But you can turn it around and say maybe this company actually is diligent about its current audits and very frank and open about corrections that had to be made in the past.
“I see it as a positive rather than a negative although I understand the concern that there is,” he said.
“Not up to scratch”
PPC chief financial officer Ronel van Dijk also addressed the prior year restatements during a presentation to analysts.
Van Dijk admitted that although some of the prior period restatements had a lot to do with technical interpretations of complicated accounting matters, PPC has to “look inward and admit and accept that we have internal control weaknesses and our financial reporting processes are not up to scratch”.
“This (had) been identified a number
of months ago and we have therefore initiated a number of improvement projects,” she said.
Van Dijk added that PPC is reviewing its internal control environment to identify all the gaps and opportunities and has initiated a project to standardise all its policies and ensure that its procedures are in line with the policies and address all the risks.
She said PPC has gone through a restructuring process of its head office group services, particularly the finance team in South Africa, and is currently recruiting appropriately qualified and experienced personnel.
“Putting all these things in place, we are confident we will see improvement in the control environment and the overall financial reporting process of PPC in the not-too-distant future.
“It will be a lengthy project to finalise but I think we will see improvements reasonably soon,” she said.
David Fraser, executive chair of Peregrine Capital, said after the presentation that PPC’s new executive team is “just fixing up somebody else’s mess”.
Deloitte’s candid criticism of PPC’s annual financial statements was described by one auditor as “unprecedented”.
However, the Independent Regulatory Board for Auditors (Irba) has encouraged independent audit firms to be more transparent in their reports.
Irba said in May that in light of the Covid-19 pandemic and restrictions arising from lockdown on businesses in South Africa, there has never been a more important time for investors and other stakeholders to pay attention to the key audit matters communicated in the auditor’s report issued by registered auditors on financial statements.
Bernard Agulhas, the then CEO of Irba, said auditors should explain in the key audit matters (KAM) paragraphs why the matter was considered to be one of most significant in the audit, and therefore determined to be a KAM, and how the matter was addressed in the audit.
“KAMs should give investors and users of financial statements greater insight into the conditions under which the audit was performed and how the resulting audit risks were dealt with by the auditor,” he said.
Irba conducted a review of the audit profession following the Gupta Leaks on state capture and the collapse of Steinhoff in 2017 to address the “expectation gap”.
However, Agulhas said earlier this year that “at the heart of the expectation gap is the fact that not every business failure is an audit failure”.
“If the profession in South Africa wants to get serious about restoring trust in its corporate sector, it will have to face the fact that changing the audit product to narrow the gap is becoming a necessity.
“Resistance to changes demanded by those who rely on audit opinions is futile,” said Agulhas.
“While Irba can respond to such issues raised by the public, the regulator can only do so much to create the environment for change. Real change will come about when the audit firms follow suit.”
PPC this month reported a 124 cents loss in earnings per share in the year to March compared to the 16 cents profit in the previous year.
The company is planning a rights issue to raise between R750 million and R1,25 billion but has stressed it will only embark on this once it has resolved and restructured the unsustainable US$150 million debt of its DRC subsidiary. — Moneyweb.