Chief financial officers (CFOs) are responsible for ensuring that financial information complies with the regulatory requirements, even if they delegate the preparation of these statements to others.
This is one of the implications of a Financial Services Tribunal (FST) ruling that upheld the JSE’s decision to fine Tongaat Hulett’s former CFO, Murray Munro, R6 million and bar him from holding office as a director of a listed company for 10 years.
The JSE found that Munro’s actions and failure to comply with important provisions of the exchange’s Listings Requirements were one of the causes of the publication and dissemination of a substantial number of material misstatements in Tongaat’s consolidated financial statements for the periods 2011 to 2018.
Tongaat had to restate its financial results to correct the errors. The restatement of prior-period errors in the financial statements for the year to the end of 31 March 2018 saw Tongaat’s total assets decrease by about R10 billion, or 34%. Earnings per share of 618 cents decreased to a loss per share of 1054c, and headline earnings per share of 534.8c decreased to a headline loss per share of 861c. The opening balance of retained earnings decreased by about R10.2bn in respect of errors that occurred between 2011 and 2017.
The restatement of prior-period errors in the interim financial statements for the six months ended 30 September 2018 saw the loss per share increase from 94c to 356c, and the headline loss per share increased from 74c to 322c. Total assets decreased by about R12bn, or 34%.
In July 2020, the JSE said Tongaat’s financial information for the periods 2011 to 2018 did not comply with the International Financial Reporting Standards (IFRS) and was incorrect, false, and misleading in material aspects. The exchange found that Tongaat failed to comply with the Listings Requirements and fined the company R7.5m.
In April last year, the JSE said Munro, as Tongaat’s CFO during the periods in question, was the guardian and overseer of the company’s financial health and infrastructure, and key to his role and direct function was analysing and preparing Tongaat’s financial statements.
“Mr Munro was also the senior executive responsible for managing the financial actions of Tongaat and occupied the highest financial position in the company. The material prior period errors took place under the supervision of Mr Munro, and as the CFO at the time, Mr Munro was obliged to take the necessary actions to ensure that Tongaat’s financial information was, in all aspects, correct, and that it represents a fair and accurate exposition of the company’s financial information.”
It said Munro’s actions directly resulted and/or contributed to Tongaat’s breaching the Listings Requirements. As Tongaat’s CFO at the time, he was responsible for this, and in terms of the Listings Requirements, could not delegate this responsibility.
Grounds for reconsideration
In February last year, Munro applied to the FST for an order suspending the JSE’s decision, as well as for the reconsideration of the decision. In April 2023, the deputy chairperson of the Tribunal dismissed the suspension application, other than agreeing to suspend the payment of the fine.
The FST heard the reconsideration application on 3 July this year.
Munro challenged the JSE’s decision for the following reasons:
First, except for three land-sale transactions, the JSE had not presented him with factual evidence of the “suggested categories of errors” to which he was allegedly party, so he could respond thereto.
Second, the JSE’s case rested on the assumption that because Tongaat’s financial statements had to be materially restated, it followed that he was guilty of wrongdoing.
A distinction had to be made between the (possible) misstatements in Tongaat’s financial statements and the question of whether Munro had breached the Listings Requirements. The JSE’s argument was the mere fact of the restatements was sufficient to establish a prima facie case against Munro. This argument was legally unsustainable because it was based on strict liability.
Third, a penal prohibition must include a requirement of fault, whereas the JSE’s case was based on strict liability. Furthermore, section 76(5) of the Companies Act made it clear that a director may in certain circumstances rely on work done by others without breaching his or her statutory obligations as a director. It was therefore untenable to conclude that a director in respect of conduct that complied with his or her obligations under the Companies Act had on the same facts been in breach of his or her obligations under the Listings Requirements.
Fourth, Munro was entitled to rely on experts and accountants to ensure that Tongaat’s annual financial statements were properly prepared. It was reasonable for Munro to have accepted that the auditors’ interpretation in respect of the preparation of the relevant financial statements were indeed correct.
It can be inferred that the original financials were materially incorrect
The Tribunal rejected the reconsideration application and upheld the JSE’s sanction of Munro for several reasons.
Munro had been afforded multiple opportunities to respond to the allegations through correspondence and audi letters from the JSE. He had been given a reasonable chance to address the issues raised by the JSE.
It is a generally accepted proposition of law that penal statutes must be strictly construed to require fault as an element of a statutory offence. However, the sanctions imposed by the JSE serve a regulatory rather than a penal purpose; therefore, the element of fault should not be imported or implied.
The Tribunal rejected Munro’s argument that it was required to engage with the impugned transactions to determine whether the initial financial statements were correct.
The FST said its decision in Markus Jooste v JSE (2022) was relevant to this matter. Two sets of financial statements for the same periods had been released: the original information and the restated information. Both versions of the same set of financial statements could not be correct. The JSE was not required to revisit and re-audit the financials. It was entitled to rely on “probabilities”.
In other words, the need to restate and acknowledge significant errors in the original statements was sufficient for the JSE – and the Tribunal – to infer that the original financials were materially incorrect.
In Jooste, the Tribunal agreed with the JSE’s submission that:
“Issuers of securities listed on the JSE are only able to comply with the Listings Requirements if their directors take the appropriate actions (or refrain from taking unlawful actions) to ensure that such issuers comply in all aspects with its provisions and to ensure that the financial information of listed companies are, in all aspects, accurate, and correct and that it represents a fair and accurate exposition of the company’s financial information.”
The FST also noted that every director of a listed company must complete a Schedule 13 declaration that reads:
“[I agree] … to be bound by and to comply with the JSE’s Listings Requirements, as amended from time to time, and, in my capacity as a director I undertake and agree to discharge my duties in ensuring such compliance whilst I am a director. The delegation of any my duties to any sub-committee or anyone else will not absolve me of my duties and responsibilities in terms of the Listings Requirements.”
That Munro was “a central figure” in the how Tongaat’s financial records were prepared and reflected, and that the financial statements were intended to reflect accurately the nature of the company’s financial transactions in accordance with international accounting standards, “cannot possibly be rebutted”, the FST said.
‘Unduly harsh fine’
Turning the JSE’s sanction, Munro said he could not afford to pay the R6m fine, which was unduly harsh, considering he was a first-time offender.
In assessing these arguments, the Tribunal referred to its decision in Renault Otto Kay v Financial Sector Conduct Authority (2023):
“The ordinary rule is that a higher body is not entitled to interfere with the exercise by a lower body of its discretion unless it failed to bring an unbiased judgment to bear on the issue, did not act for substantial reasons, exercised its discretion capriciously, or exercised its discretion upon a wrong principle.”
FST panel chairman Judge Dennis Davis said: “The fact is that the three transactions to which the respondent focused its attention justified an inference that the applicant had clearly breached IFRS requirements in his capacity as the CFO of a listed entity, I might add to the considerable detriment of innocent investors in Tongaat and other stakeholders of the company. The consequences of a breach of his responsibilities were egregious and had a most significant effect on members of the public who had chosen to invest their hard-earned savings in Tongaat.”
Implications for company directors
The Tribunal’s decision in this case has several important implications for directors of companies, particularly CFOs:
- Directors, particularly CFOs, are held to a high standard of accountability for the accuracy and compliance of financial statements. The decision underscores that CFOs are responsible for ensuring that financial information complies with regulatory requirements.
- The ruling highlights the necessity for strict compliance with the Listings Requirements and the IFRS. It demonstrates that breaches of these requirements, even without proven intent or negligence, can result in severe sanctions.
- The Listings Requirements are to be interpreted objectively. This means that fault (intent or negligence) is not required to establish a breach. Directors must ensure that their company’s financial statements are accurate and compliant, because breaches will be assessed on the outcome rather than the intent.
- The JSE’s sanctions serve a regulatory purpose aimed at maintaining market integrity and investor confidence. It clarifies that the JSE has the authority to impose significant penalties and disqualifications to enforce compliance with its Listings Requirements.
- Directors and officers can face personal consequences for corporate misconduct. Munro’s disqualification from holding office and the substantial fine imposed highlight the personal risks directors face if their companies fail to comply with regulatory standards.
- Although directors may rely on experts and accountants, they cannot absolve themselves of their duties and responsibilities. The ruling indicates that even if directors delegate tasks, they must still ensure that the work meets regulatory standards and that financial statements are accurate.
- The decision emphasises the critical importance of accurate financial reporting for maintaining investor trust and the proper functioning of the market. Directors must ensure their company’s financial information is a true and fair representation of its financial position.
Disclaimer: The information in this article does not constitute legal advice and should not be construed as such.
