Deloitte should not have missed African Bank red flags, says auditing board
The Independent Regulatory Board for Auditors says the firm ignored warnings on an overestimation of cash flows
Deloitte ignored its own report that raised red flags about African Bank management’s aggressive cash-flow forecasts, the Independent Regulatory Board for Auditors (Irba) alleged on Monday. The regulatory body also said Deloitte did not address risks to African Bank’s ability to remain a going concern.
Presenting evidence at the disciplinary committee looking into Deloitte’s audit of African Bank prior to its collapse in 2014, the regulator said African Bank’s forecasting model led to overestimation of cash flows by R510m in the 2013 financial year.
Even though one of Deloitte’s technical partners, Pravin Burra, had constructed an estimation model that picked up this overestimation, Irba said Deloitte’s engagement partner for African Bank, Mgcinisihlalo Jordan, accepted the model used by the bank’s management as correct. Burra was brought in to help Deloitte’s partners responsible for African Bank with the impairment model.
“There are at least three indicators in this document that show bias in the model. There are lots of things that could have happened once bias had been identified and responses to the risks could have been made more appropriate,” said an Irba investigator who presented evidence on Monday.
In March, Irba charged two Deloitte partners, Jordan and Danie Crowther, with misconduct. Jordan is facing 10 charges, while one charge has been levelled against Crowther.
Irba’s investigator, whose name has been withheld, said he could pick up a number of biases in African Bank’s estimation model just by reading the audit file, and therefore an auditor who spent more time on these issues “should not have missed that”.
Burra’s model also detected that African Bank management’s estimation model led to a further R83m overvaluation in the bank’s nonperforming loan book and R218m in its book of partially written-off loans.
“Mr Jordan should have done more in terms of model risk and the gap in the near memorandum ledger. There’s a long list of potential bias. If he had responded to those risks he’d have identified further mistakes,” said Irba’s investigator.
Deloitte had itself acknowledged that the bank’s loan book was deteriorating and that using a 10-year estimation model could lead to overforecasting of future cash flows. But in its defence, Deloitte said Burra’s report had concluded that the deviation between his model and African Bank’s was “marginal” and could therefore be accepted.
As far as African Bank’s going-concern status is concerned, Irba argued that uncertainty about the status of furniture retailer, Ellerines, as a going concern increased uncertainty about African Bank’s ability to stay afloat too. Irba said Deloitte did not subject cash flows from Ellerines, which the bank bought in 2008, to any stress testing. It said the fact that Ellerines was not generating profits and was itself a credit risk was not considered.
“There was an additional level of risk related to lending to Ellerines. But there wasn’t separate assessment of that additional credit risk to African Bank,” said Irba’s investigator.
Deloitte said after inspecting the retailer’s payment profile and considering it was expecting future cash flows from loans granted, its audit partner had satisfied himself that Ellerines would be solvent.
It also argued that the main factor affecting African Bank’s status as a going concern was liquidity and Ellerines did not directly affect the bank’s liquidity.