The announcement of the exit of Deloitte and Touche Zimbabwean from local operations was welcomed by a mixed reaction of feelings in the market. Those in support of the management buyout often talk about how Zimbabwe has a unique operating environment that requires flexibility and agility, whilst those against the move talk about it being almost impossible for the new firm to maintain its standards and quality under a different brand.
Tinashe Mukogo, who usually writes about finance and strategy, in his thread analysis titled, Beyond the Headlines: The Untold Story Behind Deloitte's Zimbabwe Exit gave an illustration of audit reports being like white shirts, but the difference now coming from the brand that is carried by the T-shirt and justifying the price difference between a plain T-shirt and a Gucci T-shirt.
Well, in all fairness this article is not much concerned about what will happen in the future of the company’s operations, but instead trying to understand what could have happened to get to the point of departure.
Tinashe’s thread article also explained what could have pushed the exit from a top-down approach, looking at the risks encountered in the South African market and how that could have potentially resulted in Deloitte Zimbabwe being cornered into leaving the Deloitte Network. However, this article will focus more on the bottom-up analysis of the local factors that justified the exit or attracted management to push for a buyout.
In my opinion, full dollarisation in Zimbabwe officially ended in December 2016 when bond notes were introduced at par with the USD, but between the and February 2019 when the officials finally acknowledged the disparity, there was a grey moment. The end of full dollarisation was the beginning of several problems that might have eventually forced Deloitte out.
Since 2016 the portion of the formal economy has reduced significantly, albeit claims that the economy has grown since then to today. The shrinking formal sector means less business ordinarily for these consulting firms. Apart from Audit, these firms also engage in other consulting roles e.g. valuations, transactions & financial advisory etc. The corporate transactions i.e. mergers and acquisitions, listings etc haven’t also been great over the past years and have made it difficult for these firms to sustain. Most of the firms had to retrench and resize, and Delloite in December 2022 closed off its Bulawayo office, and looking at it in retrospect, this probably was a sign of what eventually happened.
To assess the market share of audit firms on the listed firms in Zimbabwe, we will use the top fifteen listed companies on ZSE as of 30 December 2016. Due to the introduction of the VFEX, we will maintain the 2016 list and compare which firms audited the companies in 2016 versus now, in 2024. We will assume that there is a strong positive correlation between audit fees and the size of the audited company, and for simplicity used a sample of the top fifteen companies by market capitalisation since they also contributed 81% towards the overall market share.
It is also important to highlight that companies rotate auditors after a maximum of ten years, but believe this does not negate the points since reappointment is allowed and any firm that is doing well can still maintain its market share under the circumstances.
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From the study it is quite apparent that the dynamics have changed, BDO which did not audit any of the blue chips has snatched some market share in the form of Econet, Innscor and Simbisa. It is also interesting to note that BDO is relatively smaller and not part of the traditional big four. Did being smaller, flexible and agile help, them gain part of the market share? Maybe another research might be needed.
What is also clear from the study is that Deloitte now audits two companies in the sample, and together with Ernest & Young, also audits Old Mutual Limited versus the five that it was auditing back when there was stability in the economy. One thing that is clear from the sample is that the share of Deloitte and EY has shrunk over time and if this sample capture correctly what happened in the entire market, this could have also pushed the exit.
In 2019, Zimbabwe was declared a hyperinflationary economy and according to the International Accounting Standards (IAS29) had to produce some inflation-adjusted numbers. Due to the wide disparity between the official exchange rate and the alternative and free market exchange rate, financial reporting has never been the same for companies that report in local currency and the same can be said for auditing as well.
A case that might be of interest was when Cassava Smartech, which Delloite audited got suspended from trading on the ZSE due to failure to produce its financial results on time. In its communication to shareholders, Cassava made it very clear that the delay in producing financials had nothing to do with financial misconduct or fraud, but with technical accounting matters. Could this technical accounting matter be related to the audit?
I don’t know, but a year later Cassava changed its auditors to BDO, and they had only served for four years. Interesting, isn’t it? It's also fascinating to know that Cassava (Ecocash Holdings) in its own capacity was not even part of the study since it only got unbundled in 2018.
I think what’s clear is that something had to change pertaining to how Deloitte was doing business, for it to compete and regain its share of the market. Will this management buyout be the change that was needed, we wait and see!
- Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.
