Deloitte Canada scored a hat trick of sorts on Oct. 16, but I doubt it was celebrated among the firm’s management.
The firm was censured and fined $350,000 by the Public Company Accounting Oversight Board on Tuesday for failing to maintain independence during its 2012, 2013, and 2014 audits of Canadian gold-mining company Banro Corp.
Deloitte Canada settled with the PCAOB without admitting or denying the audit watchdog’s findings.
The PCAOB states that the firm’s independence was impaired because of technical reports that were issued by a South African mine-consulting company, Venmyn Deloitte (Pty) Ltd., which was an affiliate of Deloitte Canada.
Formerly known as Venmyn Rand (Pty) Ltd., Venmyn Deloitte became an associated entity of Deloitte Canada once it was acquired by Deloitte & Touche in South Africa in 2012. Thus, Venmyn Deloitte was considered to be part of Deloitte Canada for purposes of the Securities and Exchange Commission’s auditor independence rules.
In 2012, prior to its acquisition by Deloitte South Africa, Venmyn Rand prepared a technical report for Banro on the company’s Namoya gold mine in the Democratic Republic of the Congo. The Namoya report contained certain gold mineral resource estimates and a related valuation of the Namoya mine based on a discounted cash flow analysis. Venmyn Rand estimated that the Namoya mine had a fair value of $366 million, according to the PCAOB order.
In connection with the Firm’s subsequent audit of Banro’s 2012 financial statements, and after Deloitte South Africa’s acquisition of Venmyn Rand, Venmyn Deloitte’s managing director confirmed for the Deloitte Canada engagement team that he was the “qualified person” responsible for the 2012 Namoya Report. The engagement team then relied on the report’s valuation as audit evidence supporting management’s representations regarding the carrying value of the Namoya mining assets reported in Banro’s financial statements, as well as Banro’s ability to continue as a going concern. The engagement team also evaluated certain key assumptions underlying the valuation.
In 2013 and 2014, Venmyn Deloitte prepared two additional technical reports for Banro—one for the Lugushwa gold mine in the Democratic Republic of the Congo and a new one for the Namoya gold mine—which contained certain gold mineral resource or reserve estimates that Banro had previously disclosed publicly in press releases.
Each press release stated that Venmyn Deloitte’s managing director had reviewed and approved the release, and that he was the “qualified person” responsible for the mineral resource or reserve estimates that were disclosed. He also was the “qualified person” responsible for both technical reports, including the disclosure of the mineral resource and reserve estimates, according to the order.
As a result, Deloitte Canada’s independence during the 2012, 2013, and 2014 Banro audits was impaired. Deloitte Canada’s independence was impaired during the 2012 audit because the engagement team relied on the valuation in the 2012 Namoya Report, for which Venmyn Deloitte and its managing director took responsibility, as audit evidence supporting Banro management’s representations, and subjected it to audit procedures. By auditing work for which its associated entity, Venmyn Deloitte, took responsibility, Deloitte Canada in effect audited its own work under relevant independence rules.
Deloitte Canada’s independence during the 2012, 2013, and 2014 Banro audits also was impaired because Venmyn Deloitte publicly took responsibility in the technical reports and related press releases for certain of Banro’s gold mineral resource and reserve estimates, thereby creating a mutual interest between Deloitte Canada and Banro in those estimates being correct.
In a statement emailed to Going Concern, Deloitte Canada said:
“Deloitte Canada and US Public Company Accounting Oversight Board (PCAOB) have agreed to settle a matter related to independence violations that occurred in connection with three audits of an issuer client. The matter had no impact on the client’s financial statements or the audit opinions on those financial statements. Deloitte Canada made judgments at the time on the application of the independence rules. The PCAOB has concluded that these judgments were not consistent with the independence rules. Deloitte Canada accepts that conclusion.
“Since the start of PCAOB’s inquiry and as part of our annual inspections with the PCAOB, the firm has taken extensive action to address this matter and independence generally. We take our professional responsibilities to deliver services of the highest quality and in conformity with all applicable professional rules and standards extremely seriously.”
Along with paying the $350,000 fine and sitting in the penalty box and feeling shame, Deloitte Canada has agreed to be censured and review its independence policies and procedures, as well as its independence training, according to the PCAOB order. Deloitte Canada must report to the PCAOB the results of its reviews and any changes made.