Founder: Turnaround Talk
Welcome to 2023, may the year be a prosperous one and better than the previous two years. Over the past 10 years, south Africa has seen its fare share of corporate scandals. There was Sharemax and Steinhoff and more recently the drama that unfolded during the South African Airways business rescue. Questionable accounting practices was at the heart of at least one of these major scandals
The SAA rescue, as well as the Comair liquidation, were indicative of the tough operating environment that companies have had to deal with since the onset of the Covid-19 Pandemic and the associated challenges that it has left in its wake. There was also the Hulamin saga where the company lined up a prospective buyer only to be blocked by Government causing the deal to fall through.
The winner in all of this is the business rescue and business turnaround profession. Experts at handling risk and helping companies address key challenges, the services of turnaround professionals have been a heavily sought-after commodity over the past three years.
I recently read an article on News24 which detailed some of the biggest corporate scandals that rocked South Africa in 2022.
Tongaat Hulett
Tongaat Hulett’s battle to survive the fallout of its accounting scandal came to a head in October 2022, when the group’s lenders rebuffed a restructuring plan, putting SA’s biggest sugar producer into business rescue.
The News24 article points out that the accounting scandal, SA’s second largest after Steinhoff, contributed to a 95% fall in Tongaat’s share price over the past four years. But it wasn’t the only thing weighing on the group.
The sugar producer scored an own goal by underinvesting in its operations. It was also hit by flooding and civil unrest in KwaZulu-Natal.
The unrest, which broke out in 2021, resulted in burned cane fields and a downturn in the local property market. This derailed Tongaat’s plan to sell property to service an excess debt pile of over R6 billion in its SA operations, resulting in a cash crunch that put it at the mercy of its bankers.
The article adds that a planned rights issue of up to R5 billion fell through in July after controversial underwriter Magister Investments had a waiver it required from the Takeover Regulation Panel withdrawn amid suspicious third-party share purchases.
Former executives of the group made their first appearance in the KwaZulu-Natal High Court in Durban in September. The case has been adjourned to mid-February.
The News24 article points out that Tongaat’s business rescue process has thrown into doubt the future of a company that contributes more than R10 billion to SA’s GDP. The rescue plan is set to be released by the end of January.
Photo By: Spar
Spar
The News24 article points out that retailer Spar did not have a great year in the news. Its chairperson and former CEO, Graham O’Conner, stepped down in December amid questions about the firm’s accounting practices, its treatment of storeowners, and corporate governance.
The group has faced allegations that it inflated the value of a store in Johannesburg, while evidence of at least two “fictitious loans” to storeowners was uncovered in a report by Spar’s board. (The same report concluded that claims of unfair treatment and racism were uncorroborated.)
The article adds that In December, the Giannacopoulos Group, which operates 45 Spar supermarkets, filed fraud charges against senior executives, including O’Conner, following allegations that the grocer falsely claimed in 2019 that it was owed money in order to gain control over certain supermarkets.
The governance of the firm has also been garnering attention after O’Connor was named chairperson in March 2021, only a month after retiring as CEO. This was at odds with the King Code’s recommendation of at least a three-year break.
Spar, meanwhile, has said it appointed O’Connor after considering his work and expertise with the group, and the fact that it has numerous independent board members. It has also denied treating store owners unfairly or that allegations it is facing are symptomatic of dodgy bookkeeping.
Bain & Co
The local unit of US-headquartered constancy Bain & Co had a torrid time in 2022.
The News24 article points out that, in January 2022, it stepped down as a member of SA’s largest business lobby group following the release of the first part of the State Capture Inquiry report.
The inquiry found that Bain colluded with former SARS commissioner Tom Moyane and former president Jacob Zuma to “capture” the SA Revenue Service in order to weaken it.
The article adds that the inquiry’s chairperson, Chief Justice Raymond Zondo, recommended that authorities investigate all Bain’s contracts with South African departments for potential wrongdoing.
Then, in late September, National Treasury banned Bain from tendering for public sector contracts for a decade, for engaging in “corrupt and fraudulent practices” at the tax agency.
The article points out that the decision to ban the group came a few weeks after the UK government instituted a similar ban which would run for three years.
Bain’s public sector ban was the first time a major company had been barred from state work due to the State Capture Inquiry’s findings.
The article adds that, following the ban – which is only set to expire in 2032 – Bain wrote to Treasury to argue it had been “singled out” for punishment, arguing the ban was based on “unproven allegations”.
“There is no evidence that Bain SA engaged in any ‘corrupt and fraudulent’ practices,” Bain said in October.
The News24 article points out that Treasury was unmoved. The company is still listed on Treasury’s Database for Restricted Suppliers, alongside groups accused of fronting in BEE deals, using fraudulent BEE certificates or supplying bogus tax certificates.
Photo By: Getty Images
Gold Leaf Tobacco
The News24 article points out that claims of unsavoury business practices, tax dodging and illicit tobacco deals had swirled around low-cost cigarette manufacturer Gold Leaf Tobacco for years.
The group, which holds distribution rights for brands such as Voyager, RG, Chicago and Sahawi, always strenuously denied wrongdoing, arguing it was the victim of a “smear campaign” instituted by its rivals to harm its business.
In late August, news broke that the SA Revenue Service had won a provisional preservation order against the Gold Leaf and its two directors, Simon Rudland and Ebrahim Adamjee.
The article adds that the order blocked the tobacco producer and its directors from selling any of their assets while the tax agency continued with a probe into tax evasion.
It later turned out that SARS had first approached the High Court in April behind closed doors to argue there were reasonable grounds to think that Gold Leaf and its directors had been underpaying tax and hiding assets.
The court allowed SARS to convene a tax inquiry under Chapter 5 of the Tax Administration Act to investigate whether the tobacco producer had an outstanding tax debt.
The article points out that, after the preservation order was granted, a legal representative for Gold Leaf’s said the tobacco group and Rudland “strongly deny any wrongdoing”, including “any participation in any money laundering activities whatsoever”.
The two sides will meet again in court this month to argue over whether the provisional preservation order should be tossed aside.
Constantia Insurance
The News24 article points out that, in late September 2022, SA’s financial watchdog (ther Financial Sector Conduct Authority) put out a warning to policyholders of Constantia Insurance Company Limited (CICL), saying they should immediately contact their brokers to switch insurers.
The reason? Constantia had been liquidated by order of the Gauteng High Court in Johannesburg. Its policyholders would soon be uninsured unless they took out new policies at other insurers.
The article adds that, while the Reserve Bank had had its eye on Constantia for years, its liquidation still came swiftly. In August – the month before it was wound up – it had been placed into curatorship after the central bank found it in breach of capital requirements.
The curators soon established there was no hope in saving the insurance group, and argued it be liquidated.
The article points out that, following its liquidation, the FSCA said that all of Constantia’s unpaid claims would be considered “in due course” by its liquidators as part of the winding-up process.
“There is no guarantee that any insurance claims submitted against CICL will be paid either in part or in full.”
A common threads of distress
If we look at Steinhoff, the rumors around Spar (which have yet to be substantially proven), and to a lessor extent Tongaat Hulett, we can see that the common thread in all of these cases was poor accounting practices.
While these allegations have not been proven in the cases of Spar and Tongaat Hulett, the old proverb of: where there is smoke, there is fire rings true. If unpleasant things are said about someone or something, there is probably a good reason for it; or in this case, if a red flag has been raised about a company, it would be foolish to ignore it.
Poor accounting practices was the cause of Steinhoff’s downfall, and one would have thought that law makers and industry watchdogs would have come together to address the situation and impose more stringent measures. Serious attention needs to be paid to the fact that one of South Africa’s biggest auditors was involved in the Steinhoff saga and now the Tongaat Hulett saga. More attention will be given to this next week.
Perhaps this is the year where law makers will draw a line in the sand when it comes to accounting practices. Time will tell.
