Deloitte resigns Ferrexpo audit over ‘misappropriation’ concerns

Deloitte has resigned as auditor of FTSE 250 Swiss mining group Ferrexpo with immediate effect, citing concerns about possible ‘discrepancies’ in bank statements relating to the company’s charitable donations under its corporate social responsibility (CSR) scheme and its delays in setting up an independent forensic investigation

Last week Deloitte issued a qualified opinion on Ferrexpo’s annual accounts relating to possible ‘misappropriation’ of CSR funds donated to a charity called Blooming Land, which operates in Ukraine, one of the iron ore company’s key markets.

Subsequently on Friday the firm resigned as the company’s auditor with immediate effect.

In its resignation letter, Deloitte said in August 2018 it identified discrepancies in relation to copy bank statements provided by Blooming Land to the auditor and asked Ferrexpo to provide the originals.

Two months later, Deloitte told Ferrexpo that if Blooming Land failed to provide the original bank statements by the end of October, it expected the company to conduct an independent forensic investigation into the discrepancies and Blooming Land.

In the event, neither the original bank statements nor an independent forensic investigation were provided within Deloitte’s timeframe. The resignation letter also states that although there was ‘apparent acceptance’ that a forensic investigation would be conducted, at a subsequent full board meeting in January 2019, this proposal was rejected. 

Deloitte’s letter stated: ‘We repeated our request that such an investigation be conducted on several occasions thereafter, which culminated in us stating on 31 January 2019 that unless the investigation were to be conducted, we would be obliged to consider our position as the company's auditor.’

Ferrexpo went on to announce in early February that it would conduct a ‘comprehensive independent review.’ However, the annual report for the year ended 31 December 2018 was published on 23 April 2019, before this independent review was completed.

Deloitte’s letter stated: ‘As a consequence, we were unable to obtain satisfactory audit evidence or explanations in respect of two key audit matters.

‘Whilst we recognise that the company is conducting the independent review (which remains ongoing), and that is welcome, in the circumstances we consider that the company's response to the situation, including its delay in conducting an independent forensic investigation, with the consequences described above, are incompatible with our continuing in the role of statutory auditor beyond the 2018 financial year.’

Ferrexpo response

Responding to news of Deloitte’s resignation, and the claims of delays in launching an investigation, Ferrexpo said it had ‘formed its own considered view and believes it initiated the formal independent review at the appropriate time, given the other steps it was taking and all the surrounding circumstances.’

The company then made a number of specific points. These included the fact that Deloitte were asked by Ferrexpo in June 2018 to review Blooming Land’s 2017 audited financial accounts and report to the directors on, amongst other things, the reliance that could be placed on those accounts.

Ferrexpo's half year results were published on 1 August 2018, following a review by Deloitte.  The company said Deloitte's review did not flag any matters which caused Deloitte to believe that the half year results had not been prepared, in all material respects, in accordance with the relevant accounting standards and the FCA's Disclosure Guidance and Transparency Rules.

When informed of the discrepancies in the copy bank statements in August, Ferrexpo did attempt to obtain the originals from Blooming Land, but said the charity failed to provide them citing its opinion that it was unable to comply with the request due to local legislation.

In November, Ferrexpo commissioned law firm Herbert Smith Freehills to start work on preparing a draft scope for an independent review, but said it held back from starting such a review immediately on the grounds ‘the company would likely achieve better results through a cooperative route taking into account the third party nature of Blooming Land.’

 Ferrexpo said this decision was considered again, but it was not until February that there was unanimous board decision to formally commence the independent review and set up an independent review committee (IRC) comprised solely of independent non-executive directors to oversee the process and review its findings.

The IRC is being advised by Herbert Smith Freehills, as its UK legal adviser, and BDO as independent forensic accountants, together with Ukrainian legal advisers and data collection specialists.

On the question of whether publication of its annual report could have been delayed to take account of the IRC’s findings, the company pointed out that having already delayed publication on two occasions to allow more time for progress with the independent review,’ it was neither possible nor realistic to delay further.’

Ferrexpo also took issue with concerns Deloitte raised that Blooming Land could be considered a related party of the group, because of connections with the company’s CEO, saying the IRC had . 

‘unanimously concluded’ this was not the case.

The company said its search for a new auditor is underway and it plans to make an announcement as soon as appropriate.

Ferrexpo has also announced the resignation of two directors: Mary Reilly, chair of the audit committee, and Bert Nacken, chair of the remuneration committee.  Both have left their position with immediate effect.

Reilly, who became a non executive director of Ferrexpo in 2015, is a former audit partner at Deloitte and also served as its head of charities.

Steve Lucas, chairman of Ferrexpo, said: ‘The board of Ferrexpo is committed to the highest levels of corporate governance and transparency.

‘We are naturally disappointed by Deloitte’s resignation and its reasons, as well as the resignation of Ms Reilly and Mr Nacken. We have commenced a process to appoint new auditors and additional independent non-executive directors. We are also committed to completing the independent review into Blooming Land as quickly as possible and will update shareholders on the outcome in due course.

‘As reported in the group’s 2018 full year results announcement, at this stage we cannot conclude as to the ultimate use of all of the funds by the charity. 

‘While there are indications that some funds could have been misappropriated, further work is required before any final conclusions can be drawn and the board would like to make clear that to date no conclusive evidence of misappropriation of funds has come to light.’

Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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