My wife, family and friends — all Vodacom investors — have recently questioned why I insist the company must pay Nkosana Makate billions of rand in compensation for his “Please Call Me” (PCM) innovation.
I’ve maintained that R9.4bn is fair compensation for the PCM invention, as claimed by Makate.
For 25 years, Vodacom has fought Makate in court.
Yet its auditors, Ernst & Young (E&Y), insist the possible liability related to the PCM compensation is “immaterial” as reflected in audited financial statements. Vodacom’s audited reports state: “Vodacom is continuing to challenge the level of compensation payable to Makate and a provision immaterial to the financial statements has been recorded.”
To explain to my loved ones, I needed to dig deeper into the matter to understand why E&Y advised Vodacom that the provision for the PCM case was “immaterial”, implying that the amount would not impact its financial statement.
Having perused E&Y’s rationale, I believe this isn’t just spin, it appears to be a dangerous misrepresentation. By downplaying the PCM liability, the auditors may be enabling Vodacom to inflate earnings and mislead shareholders, mirroring the path of once US stock market darling Enron before its catastrophic collapse.
I hope am wrong.
Vodacom’s parent company, Vodafone, has stated in court papers that the potential payout to Makate could range between R29bn and R63bn, based on their models.
In its 2024 financials, Vodafone also stated: “The CEO’s determination in 2019 amounted to R47m (€2m). The minority judgment of SCA raised Makate’s compensation to about R186m (€9m), while the SCA majority judgment would entitle Makate to a minimum compensation amount of R29bn (€1.4bn).”
Vodafone also stated that paying Makate as ordered by the SCA would have “devastating consequences” for Vodacom, its employees and investors. Yet E&Y dismiss this as “immaterial”. How can a liability that Vodafone warns could impact financial stability be deemed insignificant?
The SCA has already provided a clear model for compensation, removing ambiguity. Vodacom has not disputed this model, yet its auditors seem to rely on a minority judgment suggesting a far lower compensation figure (R186m), which could be construed as reckless disregard for legal reality.
Under IAS 37, companies must disclose contingent liabilities when a court judgment exists and the obligation is probable. Vodacom has lost nine consecutive cases regarding the PCM compensation, meaning the liability is certain, not speculative.
By failing to record any material provision for the PCM compensation, E&Y may be misleading Vodacom investors, including my lovely wife, friends and millions of pensioners invested through the Public Investment Corporation (PIC).
One wonders if this omission means Vodacom earnings are artificially inflated, creating a false sense of financial health.
If Vodacom is forced to pay Makate billions of rand, the financial shock at Vodacom will not be Makate’s fault. The blame will lie with the auditors who failed to account for the liability properly
Is this failure to make a full provision for Makate's compensation risking a sudden financial shock that could devastate shareholders, just as Enron’s hidden debts did all those years ago?
Enron’s collapse was fuelled by accounting fraud, which involved hiding liabilities in off-balance-sheet entities while auditors (Arthur Andersen) turned a blind eye. When the truth emerged, shareholders lost everything.
One wonders whether Vodacom’s auditors are doing the same thing Enron’s bookkeepers did before implosion, creating a false financial picture?
Vodacom's auditors seem oblivious to court rulings that confirm a multibillion-rand liability. By doing so, are they downplaying risks to investors?
If Vodacom is forced to pay Makate billions of rand, the financial shock at Vodacom will not be Makate’s fault. The blame will lie with the auditors who failed to account for the liability properly.
This isn’t just about one case in the US: it’s about corporate accountability. In South Africa, the JSE has seen this type of anomaly before. Tongaat Hulett collapsed after inflated earnings were exposed and African Bank failed due to hidden bad debts.
If Vodacom’s financials collapse under the weight of an unaccounted liability, E&Y must be held responsible.
In the US, Enron culprits were arrested under the Sarbanes-Oxley Act (2002), created for such disregard of financial irregularities.
Investors, including my loved ones and PIC pensioners, have a right to accurate financial disclosures.
The question isn’t if Vodacom will pay Makat — it’s when. And when that day finally comes, the auditors must answer for possible negligence — if any.
The real threat to shareholder earnings lies not in Makate's payout, but in Vodacom's auditors — both E&Y and potentially their predecessors — for steering the company towards an Enron-scale catastrophe.
• Lourie is editor and founder of TechFinancials
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