Auditors in the spotlight for construction corruption

Posted On Monday, 05 August 2013 15:42 Published by Commercial Property News
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The spotlight has fallen on auditors who signed off financial statements of JSE-listed construction companies that paid millions to bribe competitors to submit losing bids for tenders.

Bernard AgulhasThese external auditors assured shareholders that there was sufficient evidence to support the financial statements prepared by the firms throughout the years covered by the Competition Commission’s investigations.

Among the crimes uncovered by the anti-trust watchdog, for which the firms were collectively fined R1.46bn, were payment of fees to competitors as compensation for submitting dummy bids. These bids allowed a predetermined winner to make the cheapest bid for construction projects.

Although the consent agreements ratified by the Competition Tribunal last week did not disclose the amount of fees paid in all cases, those that were disclosed ranged from R500,000 to R1.5m. The commission says these were mostly disguised as “plant hire” in the financial statements.

Yet auditing giants like Ernst & Young, Deloitte and Mazars conducted audits on those companies guilty of paying or receiving losers fees.

It is not clear if these amounts — and the presumably fake documents used to support them in those firms that hid them under “plant hire” — were not picked up by the auditors or were wilfully ignored.

Grinaker-LTA, a subsidiary of listed firm Aveng, was implicated in six cases of paying or receiving loser’s fees. Those disclosed were a R750,000 payment to a consortium led by WBHO, Group Five and Stefanutti Stocks for the Durban International Convention Centre project, and a total payment of R1.5m to Concor, Murray & Roberts, and Civilcon for a water project in Hartebeesfontein, North West.

Grinaker was closely followed by Group Five, another listed giant, with four cases ranging from R750,000 to R1m. Group Five was one of three firms that did not sign any consent agreements as they found the commission’s terms hard to accept, but it was implicated by other firms that confessed to the commission.

Eduard Jardim, group communications officer at Murray & Roberts, said the company and Concor, which it merged with recently, was implicated only through submissions by competitors.

“We decided to also include — and settle — these transgressions based on the admissions of other construction companies,” he said. “(We) could not find any evidence dating back to 2001 and 2004, respectively, of losers fees being paid, or monies hidden from auditors or any other party for that matter.”

Esorfranki paid R1m to Stefanutti Stocks and Bressan to bow out of another project.

“Invoices were raised by Stefanutti, which we paid as contract expenses,” said Bernie Krone, Esorfranki CEO. “So nothing was ‘hidden’ from auditors.”

Aveng did not respond by Friday afternoon.

Asked to explain what happened, auditors for Aveng and Murray & Roberts declined to comment, citing client confidentiality. Mark Snow, Stefanutti’s auditor during the time investigated by the commission, is now working for the company as its “group risk officer”.

But the disguising of the loser’s fees has raised red flags for the Independent Regulatory Board for Auditors.

“We have discussed the issue internally, and identified the industry as a potential risk area in respect of audits,” said Bernard Agulhas, the regulator’s CEO.

The taxman is also circling around the construction industry. The South African Revenue Service (SARS) has flagged the industry as the least tax-compliant sector in the economy, according to an April update on its compliance programme, launched last year by Finance Minister Pravin Gordhan.

SARS said in a statement that despite efforts to improve compliance, the industry collectively owed it more than R4bn in outstanding taxes. “There are 129,759 outstanding returns, of which over half are VAT-related,” it said.

“The analysis and profiling of companies and individuals that received government tenders resulted in 172 profiled cases, with 88 companies being selected for full audits.”

It has been suggested the industry might have overstated expenses in hiding loser’s fees, which would have reduced their fair share of tax.

Patrice Rassou, head of equities at Sanlam Investment Management — 8.59% shareholder in Group Five — said if fraudulent documents were used to disguise loser’s fees, auditors could not be held responsible.

“Someone at the company must be held accountable,” said Mr Rassou. “Auditors will only be held responsible if they knowingly missed something.”

Source: The Times

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