External auditor shake up at Hayleys

Hot on the heels of suffering a Rs. 700 million hit on its accounts over fraud in a subsidiary, top diversified blue chip Hayleys Plc is shaking up the slot of its external auditors.

Long-standing external auditor KPMG Ford, Rhodes and Thornton and Company has been shown the door whilst the Board has proposed to shareholders that Ernst & Young be appointed for the new financial year 2011/12 at the upcoming AGM.

In the 2010/11 Annual Report of Hayleys the Company had attributed the proposal for a new auditor to good corporate governance practices but analysts pinned the change as a direct fallout from the discovery of what is dubbed as the “biggest fraud” worth over Rs. 700 million in a listed manufacturing entity in Hayleys MGT, a subsidiary of Hayleys.

The proposed change of external auditors is following the Audit Committee chaired by Trevine Jayasekara, who incidentally won’t be standing in for re-election at the upcoming AGM, recommending that the Board of Directors consider proposing a change of external auditor for the financial year ending 31 March, 2012 in accordance with accepted Corporate Governance practices.

In the notice of the AGM, scheduled for 29 June, shareholders of Hayleys have been given notice of the resolution proposing Ernst & Young to be appointed as auditors of the Company for FY 2011/12 and authorise the directors to determine their remuneration.

Company analysts said that the change of external auditors doesn’t happen regularly in highly respected and well managed conglomerates. In Sri Lanka companies don’t regularly change auditors either; but as part of best practices rotate only the nominated partner/s from the audit firm.

In recent history premier blue chip JKH a few years ago as part of its own best practices called for Request for Proposals from audit firms to undertake its external audit role and after a competitive process picked E&Y which previously handled main JKH account as well and made changes in subsidiaries where necessary.

For its external auditor role in 2010/11, KPMG was paid Rs. 0.8 million and Rs. 18.4 million as audit fees by Hayleys Plc and subsidiaries respectively. In the previous year the figures were Rs. 0.7 million and Rs. 17.5 million. In addition KPMG was also paid Rs. 0.1 million and Rs. 9 million for non-audit related work which consisted mainly of tax consultancy services.  Hayleys Group companies both local and foreign engage other audit firms as well and audit fees and payments relating to non audit work in respect of these firms amounted to Rs. 10.4 million and Rs. 6.7 million respectively in 2010/11 as against Rs. 9.5 million and Rs. 2.3 million in the previous year.

For its work on Hayleys MGT KPMG was paid USD 10,105 (USD 8,922) as audit fees by the Company. In addition, they were paid USD 1,408 (USD 346) by the Company for non-audit related work, which consisted mainly of tax consultancy services.

Now famous as the biggest fraud in a listed manufacturing entity, Hayleys MGT Knitting Mills Plc (whose external auditor was also KPMG) suffered its first ever loss in 2010/11 financial year following an estimated over Rs. 700 million provisioning.

Hayleys MGT Knitting Mills reported an over Rs. 800 million in comparison to a re-stated profit figure of Rs. 367 million in 2009/10. In US Dollar terms the profit after tax in 2009/10 was $ 3.21 million whilst it has been now-re-stated as $ 3.16 million. It was the first loss for the company at least in the past decade. In 2007/8 financial year Hayleys MGT posted its highest ever profit of $ 5.8 million.

The loss in 2010/11 is owing to an estimated $ 6.52 million (over Rs. 717 million) provisioning in the 3Q and 4Q accounts for fraud involving inventories and trade receivables.

In its audit report in Hayleys MGT Annual Report, KPMG has made the standard comment considered as a rider with regard to management’s responsibility for the financial statements. It said: “Management is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.”

For Hayleys Plc in FY 2011 profit for the year was Rs. 2.1 billion before tax, as against Rs. 3.3 billion last year. Profit after tax was Rs. 1.2 billion as against Rs. 2.6 billion last year. Similarly, profit attributable to equity holders was Rs. 725 million as against the record figure of Rs. 1.8 billion in 2009-10.

The decline in profits was largely due to the losses sustained by our businesses in the Global Markets and Manufacturing sector, namely the Textiles and Fibre businesses which posted pre-tax losses of Rs. 817 million and Rs. 150 million respectively during the year under review.

Chairman Mohan Pandithage in his review in 2011 FY Annual Report said that in the Textile sector the prudent intervention by the present management enabled the detection of certain irregularities/discrepancies which appear to have accumulated over a period of time. The situation warranted a criminal investigation which is currently proceeding and also necessitated a writing down of current assets to reflect the net realisable values of those assets.

“I am pleased to inform you that corrective action has since been taken and the management team strengthened and revamped through the recruitment of personnel for key positions. The Company has upgraded its machinery to lend impetus to achieving an improved performance,” Pandithage added.

The audit committee of Hayleys MGT Board comprised Chairman R. Seevaratnam Independent Non- Executive Director H. R. Peries and Dhammika Perera.