PwC to lose lucrative Fonterra audit contract
PwC will lose its most lucrative audit contract among NZX-listed issuers when Fonterra ends a 15-year relationship that's earned the auditor $94 million.
This week Fonterra recommended KPMG be appointed the new auditor for the financial year ending July 2020. The appointment is subject to shareholder approval at the November 2019 general meeting. PwC's appointment was challenged by farmer and former director Greg Gent at this year's annual meeting, who said the relationship had become too close.
Fonterra's current audit agreement with PwC concludes at the completion of the FY19 statements, it said. If approved, KPMG will also likely be auditor of the Fonterra Shareholders' Fund, said John Shewan, chairman of the fund's manager.
In the financial year to July 31, PwC was paid $7 million by Fonterra - $6 million to audit the financial statements and $1 million for other services, such as advisory services.
In that year Fonterra reported its first loss after writing down the value of its Beingmate investment by $405 million from the original $750 million paid and compensating former customer Danone with $183 million over the 2013 recall triggered by a botulism scare at one of its plants.
In the prior financial year, PwC was paid $6 million.
The contract represented around 25 percent of its total auditors' fees in 2017 when they reached $25 million, according to NZX data. PwC dominates listed issuer audits with 46 NZX-listed clients out of 127, including Fisher & Paykel Healthcare, the Warehouse and Trustpower. KPMG is the second biggest, with 28, including the $1.3 million Spark contract, while EY's 18 client list contains Fletcher Building at $4.3 million and Mainfreight at $2.6 million.
Fonterra's annual report consistently says the company "operates a rigorous selection process to appoint its auditors and has a policy of rotating its lead external audit partner in accordance with best practice,” yet it's only changed auditor once before, appointing PwC in 2004. A year before the appointment, former PwC veteran Roger France was appointed a Fonterra director, having retired from the accounting firm in 2001.
Other PwC alumni include current Fonterra directors Bruce Hassall and Brent Goldsack. PwC's 2018 audit report notes the board decided Hassall, who chairs the audit committee, wouldn't be involved in the auditor appointment or setting audit fees for three years. It also said Goldsack was never involved in providing audit services to Fonterra during his time as a PwC partner.
When asked why the cooperative is changing auditors, chief financial officer Marc Rivers told BusinessDesk: "It's good practice to have a change now and again and have a fresh pair of eyes to look at things."
He acknowledged Fonterra hasn't introduced new eyes regularly, and that PwC held the role for a “very long time, pretty much since inception.”
However, “I think across other companies, other cooperatives, it would be good practice to look at that," he said.
KPMG was Fonterra's first auditor, signing off on accounts for the 2002 and 2003 financial years, for which it was paid $8 million and $10 million respectively.
The auditor switch comes after a leadership shuffle with both the chair and the chief executive standing down at the same time. John Monaghan was appointed chairman and Miles Hurrell as interim chief executive.
The dairy giant is also in the process of carrying out a major strategic review in a bid to address the poor financial results.
Earlier this week Fonterra confirmed it will pull out of the joint venture with Beingmate and take back full ownership of the Darnum plant by the end of the year. It said ownership of ice cream maker Tip Top is under the microscope and that its under-performing Chinese farms are a source of "heightened focus".
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