Covid-19 halts Sharemax auditors’ disciplinary hearing

A disciplinary hearing by the Independent Regulatory Board for Auditors (Irba) against the former auditors of the failed Sharemax property syndication scheme has been brought to a temporary halt by Covid-19.

The Irba disciplinary committee was told on Monday that an expert witness for the auditors had on March 5 returned from the UK, where he attended a conference that was also attended by participants from several high-risk Covid-19 countries.

The disciplinary hearing was adjourned until Wednesday while the expert witness undergoes a voluntary Covid-19 test.

Saw no evil

The disciplinary hearing is against three directors of ACT Audit Solutions Incorporated – Jacques van der Merwe, Danie Dreyer and Petrus Johannes Jacobus Bekker.

Van der Merwe was at the time also the managing partner of the firm.

All three pleaded not guilty on Monday to all of the improper conduct charges brought against them.

Irba is a public protection statutory body established to protect the financial interests of the public by ensuring that registered auditors and their firms deliver services of the highest quality. 

Michael Blackbeard, deputy registrar of banks at the South African Reserve Bank, issued a directive in September 2010 to the Sharemax companies in terms of Section 83 of the Banks Act after concluding that Sharemax Investments (Pty) Ltd was conducting the business of a bank without being registered as a bank.

In terms of that directive, the statutory managers were directed to repay all the monies Sharemax Investments had obtained from investors.

Worthless debentures 

However, the directors of Sharemax subsequently successfully proposed a scheme of arrangement and offer of compromise to the approximately 40 000 people who invested about R4.5 billion in Sharemax’s various syndication schemes.

Nova Property Group, a rescue vehicle born out of the scheme of arrangement, now owns all the syndicated properties, while the investors were offered either shares or debentures.

Read: Irba reports Nova to Sars and CIPC

Debenture holders have claimed that Nova failed to repay them the required capital by the maturity date and these debentures and shares are now widely regarded as being worthless.

The charges the three directors are facing relate to The Villa, Zambezi and Flora Centre syndication schemes.

Advocate Kate Hofmeyr, appearing for Irba, said on Monday the Reserve Bank stepped in at a time after ACT Audit Solutions had been doing reasonable and limited assurance for the various Sharemax entities for more than two years.

Hofmeyr said that during that period, as the charge sheet sets out, Dreyer, Van der Merwe and Bekker had engaged in 11 acts of improper conduct.

She said they:

• Failed to recognise that the scheme operated by the company was in breach of the law relating to property syndication schemes.

• Failed to realise that they were required to provide a report in accordance with Schedule 3 of the then Companies Act of 1973 with each prospectus.

• Stated positively and repeatedly that the prospectuses complied with the requirements of Government Notice of 2172, which regulates the issue of commercial paper by entities which are not registered as banks in circumstances when the companies did not comply.

• Identified procedures for their limited assurance work which they themselves failed to carry out.

• Consented to their reports being published with the prospectuses in circumstances where there were no actual annual financial statements for the entities despite the fact that the law required these to be available and to accompany the prospectuses.

• Failed to adhere to requirements of the very guides that they themselves indicated would apply to their assurance work.

• Thought and continued to maintain, at least in so far as their pleas before this committee are concerned, that a going concern assumption was not applicable to their performance-related work when in fact the law required that it be applied.

• Failed to adequately address the material uncertainties evident from directors reports in the various financial statements they audited.

• Accepted a property valuation for Flora Centre that was inexplicably higher than the previous year’s valuation which was prepared by a relative of one of the directors of the company.

• Failed in three instances to report reportable irregularities to Irba when these were clearly called for.

• Committed numerous assurance reports to be prepared with exactly the same errors, year in and year out.

Hofmeyr said these 11 failings will be the essence of the subject matter that the disciplinary committee will have to consider over the next three weeks.

Dodgy valuation

She referred to forensic accountant Andre Prakke questioning in media articles in August 2010 the 89% increase in valuation of the Flora Centre in 2009 to R197 million from R104 million in 2008.

Hofmeyr said this jump in value, according to Prakke, “saved the Flora Centre from factual insolvency. If the building’s value had not increased by that 89% in that year, then its liabilities would have exceeded its assets by R42 million”.

She said Prakke had also started to probe in an article that was published by Moneyweb in August 2010 how it was that Flora Centre’s auditors had not interrogated this matter over the course of the year.

Hofmeyr said one of the key questions before the disciplinary committee in the next three weeks will be what the auditors were doing when Sharemax was conducting its property syndication business in breach of the Banks Act and in circumstances of questionable valuations, “too good to believe” interest payments to investors and inadequate disclosures of the schemes.

She said the charges fall into five categories:

• Forecast-related charges
• Charges related to pro forma financial information in the prospectuses
• Annual financial statement-related charges
• Reportable irregularities, and
• Quality control issues.

The alleged forecast-related charges have several sub-categories, including the alleged failure to detect contradictory information, incomplete cash flow forecasts/projections, abrogation of responsibility, failure to review previous forecasts against actual value, and work that was not done.

Detection failure

The alleged pro forma financial information-related charges include the failure to detect missing disclosures, failure to detect incorrect adjusted financial information of the issuer, the failure to detect a missing pro forma income statement, misleading information in the pro forma financial information and non-compliance with historical information supplied.

The alleged annual financial statement-related charges involved going concern assessments, the reliance on flawed valuations, and the failure to document.

Hofmeyr said the quality control charge is only brought against Van der Merwe and the reportable irregularities charges only against Dreyer, with each of the directors facing various charges in respect of the other charges.