The High Court of Botswana this week handed down a damning judgment against PwC and auditor Rudi Binedell over delays in releasing group audit results that have severely affected the price of Choppies stock.
The judge slammed Binedell who turned out to have delayed the Choppies Enterprises audit report because a job offered to him at Choppies did not materialize.
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Choppies, a Botswana-based supermarket chain with stores throughout the region, is listed on both the Botswana and Johannesburg stock exchanges.
Its two main shareholders – Ram Ottapathu and Farouk Ismail – are suing PwC and Binedell for a combined sum of R 621.8 million for losses on the Botswana Stock Exchange due to the delayed publication of Choppies’ financial results on that exchange, as well as another 416 rand. 680 for the same delay at the Johannesburg Stock Exchange (JSE).
They allege that PwC’s actions caused the loss of more than 75% of the market value of Choppies.
Trading in Choppies shares was suspended on both exchanges in November 2018 due to the late publication of its financial results.
Trading on the JSE resumed in November 2020 after a two-year suspension.
The shares are currently trading at around 80c, a fraction of the all-time high of 730c reached in 2015.
The Botswana court ruling says the Choppies audit was tainted with a job offer – with stock options – which had been extended to head of the audit, Rudi Binedell.
Lead “a problem”
The judgment handed down by Judge Boipuso Tshweneyagae at the High Court of Botswana this week said of Binedell: ââ¦[his] alleged conduct is also a problem â.
âThe allegation is that he was dealing at arm’s length in his audit of the Choppies books because he was offered a job with a large stake as an incentive.
âWhen this did not materialize, he used his position as Key Lead Auditor to compromise the release of the audit report beyond the September 30, 2018 release deadline.
” At first glanceâ¦ [his] independence as an impartial and professional auditor was compromised once he engaged in potential employment discussions with Choppies. He should have recused himself from leading the audit.
The judgment sets out PwC’s defense in this case: the audit contract with Choppies never stipulated an absolute deadline of September 30, 2018 for the audit report. PwC and Binedell argued that the deadline depended on Choppies providing draft annual financial statements for audit purposes, which did not happen, and that there was insufficient supporting information to complete the task at hand. time.
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Ottapathu and Ismail took the case to the Botswana court, seeking “further and better clarification” on the nature and background of the audit conducted by Binedell and PwC.
This was to remove the element of surprise and ambush in litigation, allowing the other party to better prepare their arguments.
âFrom the audit agreement, the parties had reciprocal obligations,â reads the judgment.
âChoppies had a duty to provide the information. The defendants had an obligation to finalize the audit report within a reasonable time. We could also add that [PwC and Binedell] knowing that Choppies was a listed entity, were aware of the maturities of the Botswana Stock Exchange.
“The complainants [Ottapathu and Ismail] have the right to ask what information has not been provided by them in order to facilitate the audit. This is due to the fact [PwC and Binedell] themselves have asked the question of this failure.
The judge ruled that PwC and Binedell provide the two shareholders with additional details about their defense, saying: âThe information requested from the defendants is necessary to enable the plaintiffs to plead and the court to equally assess the issues in dispute. ”
PwC was ordered to pay costs, including lead counsel’s costs.
Test date set
The judge ruled that the case will be tried from May 9 to 20, 2022 and said there will be no relaxation of the specified deadlines for providing the information.
In a written response to the decision, Ottapathu told Moneyweb that the damage to Choppies went beyond the delay in the audit.
âThere was no independent spirit behind this audit. Mr. Binedell was engaged in discussions with independent members of the Board of Directors regarding his employment.
âWhen I didn’t support this, because of the conflict of interest, his behavior changed and all kinds of problems were created,â says Ottapathu.
âThe judge felt that he should have recused himself and that ‘When [the job] did not materialize, he used his position as key lead auditor to compromise the publication of the audit report beyond the publication deadline of September 30, 2018 â.
âThe suspension of the Choppies shares resulting from the non-publication of the financial statements damaged the reputation of Choppies as well as my own reputation and that of my co-shareholder, Mr. Farouk Ismail. We estimate that this caused the loss of over 75% of the market value of Choppies. ”
Choppies appointed PwC as auditor in 2018, with Binedell as lead auditor. âHowever, he was in discussions with independent members of the board about his possible job as CFO of Choppies with a significant financial incentive in stocks if he joined. It was a conflict of interest that I did not support, âsays Ottapathu.
PwC issued the following response to the judgment: âPwC Botswana confirms that it received a court order asking it to produce information relating to its defense at the start of the legal proceedings. The Order only requests PwC Botswana to produce information and does not constitute a judgment or decision on the merits of the claim.
âPwC Botswana will comply with the order and produce the information at this stage of the proceedings.
âPwC Botswana is confident that the tribunal will eventually find that the delay in finalizing the audit was due to accounting and governance issues within Choppies that came to light during the audit, causing – among others – two independent surveys commissioned by the Board of Directors of Choppies.
âPwC Botswana supports the work it has done and will continue to defend the claim. ”