Deloitte missed African Bank red flags – Irba
Publish date: 07 December 2018
Issue Number: 51
The Independent Regulatory Board for Auditors (Irba) says Deloitte ignored its own report that raised red flags about African Bank management’s aggressive cash-flow forecasts. According to a Business Day report, Irba 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 that African Bank’s forecasting model led to over-estimation 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 over-estimation, 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 his evidence to the disciplinary committee yesterday.
In March Irba charged two Deloitte partners, Jordan and Danie Crowther, with misconduct. The Business Day report notes Jordan is facing 10 charges, while one charge has been levelled against Crowther. Irba’s investigator 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 non-performing loan book and R218m in its book of partially written-off loans. But in its defence, Deloitte said that Burra’s report had concluded that the deviation between his model and African Bank’s was ‘marginal’ and it could therefore be accepted.