As legendary business columnist Pierpont would say, financial journalism owes a tremendous debt to Freedom Foods and business students.
Even legendary business columnist Pierpont would be shocked by the magnitude of the catastrophic $ 590 million losses caused by Freedom Foods’ accounting for « flaws ».
Pierpont, the nom de plume of Trevor Sykes, witnessed and wrote financial commentary on several outrageous accounting scandals in his 50 years, including about half that time for The Australian Financial Review.
Top of Pierpont’s list of the most misleading accounts were those published by Rothwells, the commercial banker controlled by Laurie Connell, who advised Warwick Fairfax on the purchase of John Fairfax & Sons, former editor of the Financial Review.
Young Warwick succeeded in that offer, but took on so much debt that the ANZ Banking Group bankrupt the company.
Pierpont pointed out that Rothwells issued accounts between 1984 and 1987 that showed profits were steadily increasing from $ 3. $ 1 million to $ 28. 7 million. A later reconstruction by Deloitte showed that the real results were losses increasing from $ 4. $ 6 million to $ 108 million.
Until 1987, shareholders’ funds were reported at $ 65. 6 million, but a $ 58 shortage according to Deloitte. 4 million.
Given the high watermark of the accounting, Freedom Foods’ case study is pretty impressive. The company adjusted its accounts for 2019 with a profit of $ 11. 6 million for a loss of $ 145. 8 million.
The company lost $ 174. 5 million in the year by June 2020. The total depreciation and amortization of net assets of 590 million. USD is supposed to cover 2020 and earlier years.
The largest contribution was a write-off of 372 million. USD after a review of the company’s capitalization practices. Freedom essentially generated costs for building the machines to handle new product lines, but did not run them through the income statement.
Shareholders will be pleased to know with Freedom Foods’ new corporate design that only directly attributable expenses are capitalized and assets are written off as salable products are regularly manufactured.
Even Pierpont would surely choke on his Bollinger looking at Freedom Foods’ accounts, especially the auditor’s 11-page report. For the past five years, the auditor’s report has been half a page.
Chanticleer is pretty sure Pierpont would admire the creativity and ingenuity of Freedom Foods executives, who were able to put ridiculously inaccurate reports right under the noses of the company’s board of directors and auditor, Deloitte.
Nobody names names when it comes to accounting misconduct, especially given the Australian Securities and Investments Commission is investigating what happened.
When chairman Perry Gunner pressed on Monday how the company was in its current situation, he said at a market briefing that CEO Rory Macleod will, as soon as the board announces issues related to capital investments, revenue recognition and inventory was resigned.
He left Freedom Foods less than a week after the departure of CFO Campbell Nicholas.
An unhappy and angry shareholder asked Gunner and Interim General Manager Michael Perich why he should support the proposed $ 280 million raise in capital.
Gunner said the company’s problems were due to its rapid growth rate and capital expansion program, and the board is keen to resolve these problems by simplifying the business.
The only mention of fraud is buried deep in the company’s annual report and in the report by its external auditor Deloitte.
« Australian Standards for Audit 240 (ASA 240), the auditor’s responsibility to address fraud in the audit of financial statements, highlight the risk that management overrides controls as a suspected audit risk area, » it says the Deloitte report.
« Based on the results of the investigations and the significant control deficiencies identified during our work, there was an increased risk that management would override controls and was therefore a key audit subject. «
The auditor stated that after examining the company’s financial reporting process and relevant controls, it « identified significant control deficiencies and determined that a substantive approach is appropriate ». .
The auditor has kindly indicated that it is the responsibility of the board of directors to ensure that the accounts provide a true and fair view, that the company has the internal controls necessary to create such accounts, and that they are free from material false information.
When Gunner was asked if he was confident the board is now getting its problems under control, Gunner said, « It was a very comprehensive process, which is why we’re going through the deadline. We turned every stone and we turned every pebble and we turned every grain of sand. «
The accounting alarm bells first rang at Freedom Foods in March when executives were discovered to be making payments that weren’t approved by the board.
Gunner said the company first became aware of the company’s accounting issues when it became aware of obligations to various executives related to stock awards.
« In the fiscal year ending on 30. On June 1st, 2020, the Board of Directors identified matters related to the operation and management of the Group’s Share Incentive Plan (EIP), « said the auditor.
« Matters included the granting of previously unmentioned employee stock options and / or the extension of the expiration date of stock options by management between September 2014 and September 2019.
« Certain of these granted employee stock options and / or renewals have not been approved by the Board of Directors (‘unauthorized employee stock options’). «
This revelation is intriguing in the context of a company with a track record in delivering a number of reports that Pierpont deserves to investigate, given that the distinguished columnist has always had a morbid fascination with personal greed.
It was only in May of this year that the board realized the extent of the problem it was facing. The unauthorized options prompted the company to dig deeper into the accounts.
Chanticleer believes that the appointment of two new non-executive directors this year was critical to the Board’s abandonment of its former position as CEO prisoner.
The appointment of former Goldman Sachs CEO Genevieve Gregor and consumer brands expert Jane McKellar sparked a profound change. Gregor chairs the Board’s Risk and Compliance Committee, and McKellar chairs the People and Culture Committee.
The accounts indicate that all of the previous profit margin statements were rubbish. The company made products at a loss by capitalizing expenses.
The profit segment published in the annual report raises doubts as to whether the dairy and snacks businesses can make money or not.
At least the Perich family supports the company with a subordinate secured facility in the amount of 45 million. USD.
Shareholders will have to add at least another $ 280 million if net worth drops from $ 670 million to $ 61 million.
As Pierpont would say, financial journalism owes a tremendous debt to Freedom Foods for expanding its nearly inexhaustible list of ways to publish meaningless historical reports.
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Freedom Foods, ASX: FNP, ASX, Finance, Accounting Scandals, Freedom Nutritional Products
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