Deloitte resigned as Ferrexpo auditor over charity probe delays

Deloitte LLP said it resigned as Ferrexpo Plc’s auditor over delays by the Ukrainian iron-ore producer in investigating its own charitable donations.

While Deloitte said it called for a forensic investigation to start last November — after charitable foundation Blooming Land failed to cooperate fully with Ferrexpo requests — the probe only began in February. With the investigation incomplete, Deloitte said it could only express a qualified opinion on aspects of Ferrexpo’s annual report published last week.

“We consider that the company’s response to the situation, including its delay in conducting an independent forensic investigation,” is incompatible with us continuing as auditor, Deloitte said in a statement published by Ferrexpo on Monday.

A front loader scoops up freshly blasted rock containing iron ore at the Yeristovo and Poltava iron ore mine, operated by Ferrexpo Poltava Mining PJSC, in Poltava, Ukraine.
A front loader scoops up freshly blasted rock containing iron ore at the Yeristovo and Poltava iron ore mine, operated by Ferrexpo Poltava Mining PJSC, in Poltava, Ukraine, on Friday, May 5, 2017. China accounted for over 60% of global iron-ore demand in 2016, World Steel Association data show and was Ferrexpo's largest export-sales contributor by country. Photographer: Vincent Mundy/Bloomberg

Ferrexpo plunged the most in three years on Friday as its auditor and two directors resigned amid the money laundering investigation at Blooming Land. Last week, the company disclosed a disagreement between Deloitte and Ferrexpo’s board over the role of majority shareholder and Chief Executive Officer Kostyantin Zhevago at the charity.

Ferrexpo said it initiated the review of the charitable foundation at the “appropriate time.”

Independent Review

“We are naturally disappointed by Deloitte’s resignation and its reasons,” Ferrexpo Chairman Steve Lucas said Monday. “We are also committed to completing the independent review into Blooming Land as quickly as possible."

Ferrexpo shares climbed 8.4 percent by 9:11 a.m. in London. The stock fell 28 percent on Friday, wiping out more than $500 million in market value.

The iron ore company said on Monday that it continues to trade strongly, with realized prices for Ferrexpo pellets in 2019 staying at high levels. Ferrexpo said it remains a competitive producer in a favorable segment of the iron ore market, underpinning near-record margins for earnings before interest, taxes, depreciation and amortization and strong cash generation.

The company announced late on Friday that two directors, Mary Reilly and Bert Nacken, who had both been part of the audit committee, would resign from the board. On Monday, Ferrexpo said that both of the directors have decided to resign with immediate effect.

Opinions Differ

Ferrexpo reiterated on Monday that Blooming Land “is not considered a related party of the group.” The interim findings of its independent review committee established that neither the CEO nor the company’s executive management control or exercise significant influence over Blooming Land, Ferrexpo said.

That clashed with Deloitte’s assessment. The auditors have been "unable to conclude" whether the CEO has significant control, according to Ferrexpo.

The resignation of Deloitte also comes as the so-called big four accounting firms face increased scrutiny. Last week, the U.K.’s Competition and Markets Authority renewed its demand for the firms to split their operations into separate business units.

Stung into action by a series of high-profile corporate failures, the regulator said in its final report that a fragile auditing market could only be fixed with government action. The accounting industry has been under fire in the wake of corporate collapses such as those of building contractor Carillion Plc and bakery chain Patisserie Valerie Holdings Ltd.

For Ferrexpo, the investigation into the charity is fueling worries about governance and financial controls at the company. Ukrainian authorities are probing whether the charitable foundation was used to launder money and evade taxes. There are indications that some funds may have been “misappropriated,” Ferrexpo said again on Monday.