https://www.forbes.

com/sites/brandonkochkodin/2024/01/10/how-auditor-deloitte-missed-a-
nigerian-companys-massive-fraud/?sh=cb398bc59f4d

How Auditor Deloitte Missed A

Nigerian Company’s Massive Fraud
The accountants certi ed that Tingo Group had
$462 million in the bank. The SEC says it was
just $50. Short sellers are rejoicing.
Brandon Kochkodin, Forbes Sta

Hindenburg Research, known for sni ng out corporate scams, took aim in
June at an obscure Nigeria-based out t named Tingo Group. Hindenburg
rolled out a report with a title that left little to the imagination: “Fake Farmers,
Phones, and Financials – The Nigerian Empire That Isn’t.” But Hindenburg
didn’t just call Tingo a clear-cut scam. The short-seller also threw a spotlight on
the auditor who green-lit Tingo’s nancials, challenging its competence, and
perhaps its willingness, to see the truth.

“The issues in Tingo’s nancials are glaring enough that we’d expect they could
have been spotted by any semi-conscious nance undergrad with severe vision
loss,” Hindenburg wrote. “These issues were apparently not glaring enough for
the company’s auditor, however.”

The auditor in question was Deloitte, the behemoth Big Four accounting rm
with annual revenue of $65 billion through a global network that stretches from
Amsterdam to Zhengzhou.

In November, after Tingo’s stock had already fallen about 80% wiping out more
than $700 million in market value, the Tingo saga took a sharp turn. The
Securities and Exchange Commission stepped into the fray, slamming the
brakes on Tingo’s stock trading. In December, the SEC slapped Tingo CEO
Dozy Mmobuosi with charges of “massive fraud.” Things only got worse this
month, when the regulator tacked criminal securities fraud charges onto the bill
of consequences. According to the SEC’s civil complaint, Tingo, whose audited
books boasted a $462 million treasure chest socked away in Nigerian banks,
actually had only $50.

“The issues in Tingo’s nancials are glaring enough that we’d expect they
could have been spotted by any semi-conscious nance undergrad with
severe vision loss.”

Auditors are supposed to be the nancial world’s most trusted sources of

information, armed with calculators and sworn to sni out scal misconduct. A
ip through history tells a di erent story: too often auditors, who are paid fees
by the clients they are examining, fail to dig below the surface, and essentially
rubber stamp seemingly obvious inconsistencies and problems in nancial
statements. Worse, some would even say they’re part of the problem, either by
not being sharp enough or by looking the other way at the outrageous claims of
their clients.

“As outsiders, we’d like to think that auditors are looking for fraud, but fraud
detection isn’t one of their mandates,” Matthias Breuer, an accounting
professor at Columbia University’s Graduate School of Business, told Forbes.
“Auditors don’t go into their work with an adversarial mindset. Their mandate
isn’t to be a whistleblower, and because of that it’s usually insiders and short-
sellers that uncover these issues.”

Need a few examples? Ernst & Young, after nodding approval at Wirecard’s
books, could only watch as the German rm imploded over a $2.08 billion
vanishing act. Remember Arthur Andersen? Once an auditing giant, it
crumbled under the weight of its involvement in Enron’s notorious collapse.
And let’s not forget the infamous 1MDB saga, which roped in the trifecta of
Ernst & Young, KPMG and Deloitte, as billions earmarked for development in
Malaysia were splurged on lavish parties, opulent real estate and a cache of
Monets and Van Goghs. That one cost Deloitte $80 million when it settled with
the country in 2021, a hefty sum, but nothing compared to the $150 million it
paid to the U.S. government in 2018 for its role in auditing failed mortgage
lender Taylor, Bean & Whitaker.

Routine Failures
Auditing failures, despite the cost in money and reputation to the auditors, are
practically routine. A 2020 study by the Association of Certi ed Fraud
Examiners showed that auditors uncover less than 4% of frauds. That’s a dismal
track record, for sure, but there are a couple of reasons why it actually makes a
bit of sense.

First o , auditing is pretty much a by-the-book routine, says Columbia’s Breuer,

which provides an opinion on whether companies’ nancial statements are
prepared in accordance with accounting standards, and whether companies
maintain sound nancial controls. It’s a straightforward, no-frills a air, and
that’s just how the auditing world prefers it.

“What’s happened in the audit industry is that they’ve lobbied to do check-the-

box exercises to limit their legal liability,” he told Forbes. “They’re just trying to
satisfy the auditing standards, they’re not necessarily trying to attest to the real
economic reality of the business.”

Secondly, despite their expertise, auditors are often outfoxed by companies

willing to lie to them. Firms can concoct a tangle of ctitious documents, hide
critical information, or devise schemes so elaborate they’re nearly impossible to
decipher without a whistleblower’s help.
 A 2020 study by the Association of Certi ed Fraud Examiners showed
that auditors uncover less than 4% of frauds

But Deloitte’s Tingo case isn’t one you can just brush o with the usual excuses.
It stands out because Hindenburg, along with a crew of independent internet
detectives, managed to cut through the smoke and mirrors without any insider
help.

Hindenburg’s exposé on Tingo, echoed by the SEC allegations, hints at a more

unsettling issue. Auditors get their paychecks from the companies they’re
supposed to keep honest. (Tingo paid $1.6 million in audit fees in 2022.) This
setup can lead to auditors playing it safe, avoiding the hard-hitting questions
that could upset a paying customer.

How did Deloitte, the auditing heavyweight watching over Tingo’s books, miss
a scam that Hindenburg, an outsider, called out as painfully obvious?

Maybe the answer lies in who was holding Deloitte’s magnifying glass. Tingo,
balancing its act between Nigeria and the Nasdaq in New York, wasn’t checked
by Deloitte’s team in Nigeria. Instead, it was Deloitte’s Israeli branch,
Brightman Almagor Zohar & Co., that certi ed the books. That’s a head-
scratcher, especially since, as Hindenburg highlighted, Tingo didn’t really do
much business in Israel. Why not use auditors who operate where the action is?
It almost seems like a move to keep the auditors just far enough away so they
wouldn’t stumble upon anything they shouldn’t.

In response to questions from Forbes, a spokesperson for Deloitte Israel declined

to comment, saying “professional standards prohibit our commenting on client
matters.” Tingo didn’t respond to a request for comment.

Astonishing Gap
The discrepancy between what Deloitte certi ed — $461.7 million — and
Tingo’s actual cash balance of $50 was “astonishing,” Ed Ketz, an accounting
professor at Penn State’s Smeal College of Business, told Forbes in an email.
“The cash account is the most important balance sheet account and one of the
easiest to audit,” he said. “One wonders how Deloitte Israel could have missed
that.”

Verifying a company’s cash is a foundational part of the auditing process and

one of the boxes auditors are supposed to check, said Stephani Mason, an
accounting professor at the Driehaus College of Business at DePaul University.

“In the process of an audit there are some pretty basic things that should be
done,” Mason told Forbes. “One of those is con rming cash balances by sending
a form that goes directly to the client’s bank. The standard essentially says that
the auditor has to verify the bank account independently.”

You’d think the obvious move would be to tighten standards on checking

companies’ bank balance claims. But just cranking up the standards might not
stop the deceit. In fact, academics argue that squeezing the fraud balloon
doesn’t de ate it, it just pushes the hot air somewhere else.

A 2021 paper from folks at the University of Minnesota and Indiana University,
titled “Everlasting Fraud,” lays it out. Fraud, they say, shifts shapes, constantly
morphing as crafty companies stay one step ahead of regulators in a relentless
game of cat and mouse. While regulators are busy learning from old scams like
Enron’s o -the-books creativity, companies like Wirecard, and allegedly Tingo,
are out there boldly cooking up fake bank balances. It’s a gutsy move, a bet that
it’s so obvious that auditors might gure no company would even try it, and not
even check.

Not Their Job

“If the auditors were really after fraud, I think they could nd it,” Columbia’s
Breuer told Forbes. “But that’s not the nature of their business. It’s not great for
an auditor’s career to claim fraud with a client. They’re very cautious to not be
too alarmist too often. That’s why they may look the other way or never get
started on these things.”

An added impediment to accountability is the way auditing rms are set up,
with o ces in di erent countries acting more like independent franchises than
branches of a central tree. That means Deloitte’s main o ce may never have to
pay for this ridiculous oversight. Each o ce is its own island, so the fallout tends
to stay local.

Where you might spot some consequences for auditors, however, is in the stock
market. In the short term, Deloitte’s other client companies could feel a bit of a
chill. There’s precedent for this. Consider what happened with
PricewaterhouseCoopers’ clients after the “OscarGate” asco.

Rewind to 2017. PwC had the seemingly simple job of tallying votes for the
Academy Awards. In the world of auditing tasks, this was so easy it was a bit
dull, but with a hefty upside of a mountain of free publicity. Still, PwC screwed
the pooch. Its accountants handed over the wrong envelope for the best picture
award (La La Land instead of Moonlight) and what should have been a
seamlessly glamorous a air turned into a comedy of errors, swapping the
auditor’s PR triumph for a dose of public embarrassment.

Researchers Lawrence Abbott and William Buslepp decided to investigate how

PwC’s blunder — witnessed by millions of TV viewers around the world —
might ripple out to its clients. They dug into the data and, lo and behold, it was
PwC’s roster of clients who ended up feeling the pinch.

“We nd that abnormal returns in the days following the error are signi cantly
lower for PwC clients,” the researchers wrote, “suggesting an impaired
reputation for audit quality.”
Basically, for a brief spell — the study pegs it at a month — the market was
giving PwC’s clients the side-eye. Investors discounted the companies’ nancial
statements, all because they started wondering if they could really trust what
was in them.

“In my expectation, this isn’t likely to a ect the Deloitte U.S. rm,” DePaul’s
Mason told Forbes. “The SEC can ne Deloitte Israel, disgorge pro ts, or even
give them the death knell, so to speak, by barring them from auditing companies
in this jurisdiction. But what I’m interested in is what other companies have
they done work for? If I was an investor long on a client Deloitte Israel audited,
I’d be very concerned.”

If you’re interested, you can see their other U.S. clients here.

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