Botswana’s top budget grocer, Choppies, has for the first time chronicled its strained relationship with local audit firms, which led to not just terminations but also the retailer being shunned by almost all the big auditors in the country.
Choppies, which is emerging from a two-year drama that has wiped shareholder value by more than half, has been ditched by two major audit firms who refused to sign off on the annual financial reports of some of Choppies’s subsidiaries, especially the loss making South African operations.
Though Choppies has in the past claimed that its relationship with its long-time auditors, KPMG Botswana, came to an end because of proper corporate governance to replace external auditors at least every ten years, new information from Choppies suggests otherwise. According to a company update report released on Thursday, Choppies offered an insider view of the strenuous relationship that led to KPMG terminating its service and refusing to sign off some financial statements.
The chain store giant notified shareholders that despite KPMG signing off the Auditor’s report for the company and consolidated group financial statements for 2017, audit reports for the annual financial statements of the group’s Botswana and South African subsidiary companies were not signed off by KPMG for 2017, and in some cases, the 2016 financial year.
“This situation came to light around November 2019 where after the Company engaged with KPMG to rectify the situation but without any success leading up to KPMG refusing to complete such audits and “terminating” all agreements with the Group and its subsidiaries in a letter dated 21 January 2020,” wrote the Choppies board in the latest update.
Interestingly, the termination of agreements letter comes nearly two years after KPMG was replaced by Choppies shareholders in February 2018. “The Company responded to the letter, with particular reference to the so called “termination” of agreements and reserved its position as against KPMG. However, the situation is that KPMG has refused to complete such audits,” said the board.
Shortly after PwC replaced KPMG as Choppies external auditors, the retailer announced that interim results for December 2017 and full year financials for June 2018 had to be delayed after PwC uncovered number of matters relating to the current and earlier financial periods, which required independent verification and expert legal analysis before disclosures can be made.
PwC had picked up certain transactions and business relationships which were not made fully apparent, therefore not sufficiently considered in preparation of historical annual financial statements. After a painstaking 20 months long audit process, PwC in September announced that it has dropped Choppies as a client after realising that the retailer is a risky client. The audit firm agreed to stay on until the pending audited results were released.
When Choppies’s June 2018 results were finally announced in December, more than a year and a half later, it was a bloodbath of losses: a P445 million loss in 2018, and another shocking loss of P170 million for 2017 which was initially reported as a P74.6 million profit when KPMG did Choppies’ books.
In a similar move to its predecessor, PwC signed off the audit report for the group and holding company annual financial statements for the year ended 30 June 2018 but did not sign off the audit reports of the Botswana and South African subsidiary companies for the same period.
Moreover, PwC refused to give an audit opinion over Choppies’s 2018 financials, explaining that there were several matters which prevented the PwC team from obtaining sufficient and appropriate audit evidence as required by International Standards on Auditing to form an opinion.
“On 16 March 2020 PwC gave notice of termination of their role as auditors of the Botswana Subsidiaries of the company, on the basis of regulations published by the Independent Ethics Standards Board for Accountants (IESBA) as adopted by the
Botswana Institute of Chartered Accountants (BICA) in respect of actual or threatened litigation by an audit client or shareholders or management of an audit client which may constitute a threat to independence,” the board said.
According to the report, PwC feared threats of litigation from Choppies founding shareholders, Ramachandran Ottapathu and Farouk Ismail, who threatened a lawsuit for damages on account of alleged failure by PwC to act on an actual or perceived threat to its independence.
The founders allege there was breach by PwC and Rudi Binedell, the firm’s audit partner, of rules of the relevant code of ethics in respect of independence. In addition, Ottapathu and Ismail threatened litigation over an unjustifiable delay in the completion of auditor’s report of the Company in respect of the financial year ended June 2018 which allegedly resulted in the prolonged period of suspension of the trading of Choppies shares on the Botswana Stock Exchange Limited (BSEL) and Johannesburg Stock Exchange (JSE).
The sudden resignation of PwC, Choppies board immediately approached BDO, Deloitte, Ernst & Young and KPMG to assume the vacant role. However, for various reasons, both firms declined the appointment. Choppies was saved by Mazars, an international audit firm with local operations here, which indicated its willingness to take on Choppies as a client.
Mazars has been appointed auditors for the period commencing July 2018 and ending 30 June 2019, and the financial results for the year ended June 2019 are expected in three months, late by almost a year. The new auditors have an old relationship with Ottapathu, whose first job in Botswana was at Mazars where he worked as an auditor, handling the Choppies account, which by then was a single struggling store in Lobatse called Wayside.
After proving his accounting wizardry by bringing the store to profitability, Ottapathu left Mazars to join Choppies, later becoming a major shareholder and he is widely praised for turning Choppies into a local power brand.