Following the unearthing of what is billed as the biggest fraud in a listed company, the market is abuzz of a move to call for the resignation of its Board of Directors whilst the silence of the capital markets regulator as well as the effectiveness of external auditors have sparked concern as well.
Hayleys Group subsidiary Hayleys MGT Knitting Mills recently revealed a massive loss of Rs. 625 million for the third quarter of 2010/11 financial year and Rs. 599 million for the nine months. This was on account of provisioning made for what the company described as “discrepancies” between the value of physical balance of inventories and that of financial statements.
Corporate analysts alleged it was a long-drawn “fraud” carried out blinding the Board of Directors as well as external auditors KPMG Ford Rhodes and Thornton. The fraud is estimated to be worth Rs. 600 or Rs. 700 million, making it the biggest in recent corporate history.
Whilst there has been some degree of disclosure, Hayleys MGT hadn’t been fully transparent. The Securities and Exchange Commission (SEC) hasn’t yet issued a statement on whether or not it was conducting its own investigations. Employees Provident Fund (EPF) is the second biggest shareholder in Hayleys MGT with an 8% stake.
Some analysts point to the possibility that since the forensic audit is yet to be completed, a formal full disclosure from the company needs to be awaited.
Others said disclosure made in the third quarter interim results along with the massive US$ 3 million plus provisioning-led loss was adequate.
Hayleys is among the best known companies for its strict adherence to good corporate governance, but in the case of MGT, analysts said its credibility has been questionable.
Hayleys MGT specialises in the manufacture of knitted fabric.
The first disclosure on the alleged fraud from Hayleys MGT came in mid November last year, but prior to that in early November an unsuspecting disclosure came by way of a change in the directorate.
The latter simply said the Hayleys MGT Board accepted the resignation of Joint Managing Director D.B. Weerasinghe with effect from 7 November. He was a long standing employee, having first joined the company in 1993 after being employed by Hayleys Group as Maintenance Engineer in 1988.
Weerasinghe was appointed to the MGT Board in July 2003 followed by to the Hayleys Group Management Committee in January 2007. A structural engineer, Weerasinghe holds a BSc. and MBA from the University of Colombo and Post Graduate Diploma in Industrial Engineering from the National Institute of Business Management. The Daily FT learns that following a case filed with the CID, his passport has been impounded.
In its first disclosure on 23 November, the Hayleys MGT Board only stated that a physical stock verification and an inquiry into the debtors of Hayleys MGT Knitting Mills Plc was commenced on or around 1 November 2010 and were pending completion.
The said physical stock verification and inquiry into the debtors as at the date have revealed the possibility of the existence of a negative discrepancy between the actual inventories and the receivables and the information was disclosed in the latest Balance Sheet of Hayleys MGT Knitting Mills, in respect thereof which may affect the price of its securities.
In the second disclosure dated 8 December, the Hayleys MGT Board said the physical stock verification and the inquiry into the debtors commenced in early November had been completed. The Board said it was of the view that the findings, consequent to a physical verification of the inventory and a preliminary verification of the receivables indicating an additional requirement of provisioning in respect of the same, had warranted further investigations.
In the circumstances, the Board has required the commencement of a forensic audit to determine the further steps that the company may take with regard to the discrepancies, etc., and comprehensive verification of the receivables by external auditors.
The Board also said additional provisioning if required would be made in the third quarter financial statements of the company and such provisioning may result in a loss for the third quarter and for the financial year 2010/11. The Board also assured that all necessary measures had been taken to ensure sustainability and growth of the company.
When interim results were announced, the massive loss was confirmed. In the notes to accounts, the company said a special audit verification carried out by B.R. De Silva, Chartered Accountants, and SJMS Charted Accountants on trade receivables and inventories respectively revealed the following:
i. There were discrepancies between the value of physical balance of inventories and that of financial statements.
ii. Net realisable value of certain categories of inventories could be lower than that of weighted average cost.
iii. Trade receivables were over stated as some credit notes due have not been recorded.
iv. The total impact of the above on the financial statements for the period ended 31 December 2010 is an additional provision of US$ 1,187,889 for Trade Receivables and of US$ 2,090,463 for inventories, which has been made in the financial statements.
This disclosure refers only to “additional” provisioning but didn’t make public the full disclosure or the amount involved in the original provisioning.
In the company’s cash flow statement accompanying the first nine months of 2010/11 financial year accounts, a US$ 2.6 million provisioning has been made for bad and doubtful debts, up from $ 0.4 million a year earlier and US$ 3.1 million as provision for unrealised profit and write-down of inventories, up from $ 0.1 million a year earlier.
The cash flow statement also reveals a $ 4.6 million increase in trade and other receivables and a $ 1.64 million increase in trade and other payables up from $ 0.9 million and $ 0.7 million respectively a year earlier.
Hayleys MGT share price closed the calendar year 2010 at Rs. 32 whilst its 52-week highest was Rs. 57 and the lowest was Rs. 28.60. Last week the share price closed at Rs. 35.40, down by 60 cents from the previous week. As at 31 December 2010, the net asset per share was Rs. 42.42, down from Rs. 57.04 as at 31 March 2010.
Though hit by provision-led loss, the top line at Hayleys MGT has remained healthy. Its gross turnover in the third quarter was up 10% to Rs. 1.5 billion and by 21% to Rs. 5.2 billion in the nine months. Gross profit, however, was down by 20% to Rs. 731.5 million in the first nine months and by 69% to Rs. 80.5 million in the third quarter. Most analysts expect loss at Hayleys MGT to increase in FY2011.
In 2009/10 Hayleys MGT auditors, KPMG Ford, Rhodes, Thornton & Co., was paid US$ 8,922 (up from US$ 7,772 in the previous year) as audit fees by the company. In addition they were paid US$ 1,023 by the company for non-audit related work, which consisted mainly of tax consultancy services.
Hayleys owns a 57% stake in the subsidiary whilst EPF holds an 8% stake followed by MAS Holdings 6%.
The Hayleys MGT Board comprises A.M. Pandithage (Chairman), S.C. Ganegoda (Deputy Chairman), S. Spezza (Managing Director), Mahesh Amalean, H.R. Peries, R. Seevaratnam and K.D.D. Perera. Independent Non Executive Director Seevaratnam also heads of the Board’s audit committee as well whilst Spezza has been the Joint Managing Director of the company since its inception whilst he also holds a minor shareholding. Spezza is the founder of MGT Samoor (Pvt) Ltd., Melbourne, Australia and has over 46 years experience in the textile industry in the areas of knitting, finishing and dyeing.
In his review in the 2009/10 Annual Report the then Joint Managing Director Weerasinghe said that foreseeing the challenges that would be posed by both local and global competitors, the company focused on improving its core strengths.
Hayleys MGT offers the widest range of products to its customers and is second to none in the region, with polyester fabric being the strongest range, hence enjoys the edge in the polyester fabric market in the region.
In 2009/10 the company invested in increasing polyester based fabric manufacturing capacity, which he said would further strengthen MGT’s position. Fabric printing commenced in September 2009 and following high demand, capacity was further increased. Now the MGT plant is equipped to handle over 800,000 metres of printed fabric per month, making it the largest plant in the country.
To minimise dependence on the EU market, the company in 2009/10 endeavoured to optimise customer portfolio by working with US based customers. Victoria’s Secret is one such new buyer. In 2009/10, the company posted a US$ 4.7 million operating profit, up by 3.2% and earnings before interest, tax, depreciation and amortisation rose by 3.4% to $ 6.6 million. After tax profit was $ 3.2 million, almost same as in 2008/9 financial year.