Sharemax: Auditor backtracks on opinion - Special investigation

Sharemax: Auditor backtracks on opinion - Special investigation

Complaint against ACT Solutions prompts a change of heart on clean audit.

ACT Solutions, auditor of the Sharemax syndication companies, has changed its mind on the clean audit it gave Flora Centre Holdings for the 2009 financial year.

It is doubtful whether any of the Flora Centre’s investors are aware of ACT Solutions’ change of heart.

Flora Centre is one of Sharemax’s older and larger so-called income syndications. In 2005 it took R118.5m from investors to buy the West Rand shopping centre.

In August 2010, Moneyweb asked whether the Flora Centre’s 2009 financial statements could be believed. A copy of the financial statements can be downloaded here.

The financial statements appeared suspicious because they had increased Flora Centre’s value by 89%, from R104m to R197m. There was little or no apparent reason for this huge increase.

At the time, ACT Solutions director Jacques van der Merwe told Moneyweb: “We have a detailed valuation report from a registered property valuator. These are the facts. We do not consider wild speculations in the preparation of our audit report."

After publication of the article, a complaint was laid against ACT Solutions with the Independent Regulatory Board for Auditors (IRBA). The complainant claimed that the firm should not have given Flora Centre’s financial statements a clean audit.

In order to respond to the complaint, Van der Merwe did some investigating. What he discovered is that the Flora Centre may not be worth the R197m, as claimed in the 2009 financial statements.

Van der Merwe now claims that the Flora Centre’s valuator, Waldemar Gustav Haese, lacked independence. He also says the Flora Centre’s directors were inaccurate when they wrote in the financial statements that the valuator was independent, and that a capitalisation-rate method of valuation was used.

In the financial statements, the Flora Centre’s directors wrote that Haese “is not connected to the group”. However, WG Haese is the father-in-law of Dominique Haese, the former financial director of Sharemax and current CEO of all syndication companies including Flora Centre.

Moneyweb has in its possession a letter sent by Van der Merwe to the Flora Centre directors (click here to download). It is dated 5 November 2010.

In the letter, Van der Merwe says that Flora had provided ACT Solutions with a valuation certificate which reflects a value of R197m.

“The method of valuation is not properly set out in the valuation certificate dated 25 August 2009 of Mr W.G. Haese which was made available to us for audit purposes,” wrote Van der Merwe.

“We have consulted with Mr W.G. Haese recently and he explained to us in consultation that he used a ‘brick and mortar’ alternatively a ‘replacement value’ method as basis of valuation.

“We have also consulted an independent valuator and he advised us that these methods are inappropriate for this type of immovable property where the income stream (rental income) determines the value and that a capitalisation rate method is the only acceptable basis of valuation.”

Van der Merwe claimed it had always been his impression that a capitalisation-rate method of valuation was used for the Sharemax syndication companies.

However, this excuse may be hard for IRBA to swallow.

A capitalisation rate (cap rate) is a method of valuation in which income is used to derive a property's worth. For example, a property with income of R1 000 a year, capitalised at 10%, is worth R10 000 (R10 000 X 10% = R1 000).

The Flora Centre’s financial statements reveal an operating profit of R5.1m. If this is capitalised at 10.5% (the rate supposedly used by Haese), it gives a valuation of R48.5m, which is less than a quarter of Haese’s valuation of R197m.

It is difficult to imagine that ACT Solutions, when auditing the financial statements, did not pick up this discrepancy.

Van der Merwe claims that Moneyweb’s calculation above is over-simplified. However, he declined to offer an alternative.

Van der Merwe says ACT Solutions has already dealt with its concerns “by following the appropriate audit guidelines followed by an auditor when addressing the type of concerns raised in our letter”.

Revealing e-mails

In his letter to the directors, Van der Merwe refers to an e-mail exchange which took place between Flora Centre’s Matthew Osterloh and valuator WG (Wally) Haese on 24 and 25 August 2009.

In the exchange, Osterloh informs Haese: “We always base our valuation on income”.

The e-mails suggest that Haese valued the Flora Centre without even visiting it. They also suggest a willingness on Haese’s part to adjust his valuation to suit the wishes of the Flora Centre’s directors.

It is also clear that Osterloh did not believe the Flora Centre to be worth anything close to R197m. Osterloh informed Haese: “In its current state I don’t believe that the property would be worth much more than about R75m.”

Moneyweb asked WG Haese to comment on his alleged lack of independence and use of the incorrect valuation model. He declined to comment, and referred questions to Sharemax successor Frontier Asset Management. Frontier CEO Dominique Haese did not respond to a request to comment.

The e-mails can be read below.

24 August 2009, 10:36am


1.What parking is provided (either as number of spots, or as sq. meter)?
From one of the photos, there seems to be some drive-up parking in the office block. If there are indeed parking spots within the office block, as also some covered parking spots, all (or at least some) of these should be income-generating, but I do not note any lettable floor area being allocated to parking in the schedule you have provided.

1.Covered parking
1.1 Within the building (i.e drive-up parking)

1.2 Externally, in the parking area

2.Open parking provided in the parking area.
2.Roof construction:
1.Over retail areas
2.Over office block
I can unfortunately not determine any of the above from the photos provided.

3.What is Sharemax’s own idea of the value of the property? I have the municipal valuation as R171 343 000.


25 August 2009, 8:51am

Wally – We always base our valuation on income. In its current state I don’t believe that the property would be worth much more than about R75 million.

25 August, 2009, 09:30am


Have a look at the attached concept valuations (municipal, insurance replacement and present market), and let me know if it meets your (i.e. Sharemax) requirements.



25 August, 2009, 09:51am


The valuation will not work for the purpose that we wanted it for.

I want to get a low value, much lower than the municipal valuation of R171 343 000.00

This is the local authority’s latest value of the property and our assessment rates payment has quadrupled in the past month.

There are a few changes to be made on your valuation:

1) ERF 35 has been sold

2) I would remove the word modern under the description of improvements

3) The entrances do not have automated doors


25 August, 2009, 11:20am

Matthew, O.K., attached docs refer, for scrutiny and comments:

I have valued Flora down to the lowest level I can realistically, using a balanced mix of present income generated, calculated replacement cost, depreciation / maintenance, etc.

It is not much below the municipal valuation however. The replacement value is just higher than the municipal value.

Bear in mind that my first draft valuations sent to you for comment reflected “true” valuations, as would still have been applicable at the beginning of this year.

If you really need to lower the valuation any further (for municipal reasons only: NOT for purposes of Sharemax share issue), I can do so, based on the purchase price escalated from 2005 to date, which will probably put the valuation at around R152 000 000 after depreciation, etc. Would this help at all?

Please advise.



25 August, 2009, 2:19PM

Thanks Wally. Leave the valuation as previously sent to me, that is at R196 700 180 and replacement value of R218 555 750

Can we get it signed off today?


Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!