Saturday, July 4, 2020

Choppies appointed SA advocates say Ram is too big to fail

Choppies Enterprises co-founder and chief executive officer, Ramachandran Ottapathu, is likely not to face any disciplinary action despite revelations of shady operations and shoddy accounting practices that sunk the retailer in massive losses, while eroding shareholder value, suggests preliminary findings by lawyers appointed by the company.

This week, three South African advocates appointed by Choppies board two months ago to conduct a holistic review of all reports and evidence used by the retailer’s old board to suspend Ottapathu, say though they were several failures of corporate governance, they cannot recommend to the new board to proceed with disciplinary hearing against Ottapathu who was heavily implicated in much of the two reports that were being reviewed.

The trouble for Choppies unravelled in January 2018 after the company parted ways with long time auditors KPMG and appointed their across town rival PricewaterhouseCoopers (PwC). Shortly after, PwC raised audit concerns and queries pertaining to the retailer’s compliance with International Financial Reporting Results (IFRS). Consequently, Choppies failed to publish its audited financial results for the year ended June 2018. This opened a can of worms for the budget grocer and led to the company being suspended on the Botswana Stock Exchange (BSE) and Johannesburg Stock Exchange (JSE).

PwC had been reassessing several past accounting practices and policies which uncovered numerous issues relating to current and earlier financial periods which required independent verification and expert legal advice before disclosures could be made. These included transactions with entities related to Choppies where such relationship have not been fully disclosed or considered in preparation of annual financial statements for past financial years.

An independent forensic investigation led by Ernst & Young (EY) was set up to investigate certain transactions, while the Desai Law Group (DLG) was appointed to provide legal analysis and advice on the company’s corporate governance. The law firm later submitted a damning report on the raised matters before the company’s board, which resulted in the suspension of Ottapathu from the company.

The fallout between Ottapathu and the board was immediate, with the suspended CEO mobilising support from other shareholders to call an extraordinary general meeting in September, in which he prevailed to replace some board members who were trying to get him dismissed from the company. Ottapathu was later reinstated as CEO by the board which is seen as sympathetic to him.

After reviewing the reports from EY and DLG, advocates Mark Meyerowitz, Andrew Redding and Guy Hoffman are of the view that the circumstantial evidence of suspicious conduct currently available does not amount to a conclusive case of serious misconduct sufficient to substantiate the charge of accounting irregularities against Ottapathu, and it is unlikely, based on current evidence, that a finding of fraud or breach of fiduciary duty can be made, and it would be unwise to proceed with that charge based on current evidence.

“As regards of the charges proffered against Ottapathu, Counsel are of the view that the EY Report, whilst listing a plethora of accounting irregularities, reaches no firm and positive conclusion,” said the three lawyers in their assessment report.

“The EY Report does however provide circumstantial evidence that stock losses in South Africa and Zimbabwe were disguised and linked to other transactions including the purchase of four stores in South Africa, and Counsel recommend the issue be fully investigated.”

Still, Meyerowitz, Redding and Hoffman do not believe that the alleged use of company funds for the acquisition by Ottapathu of shares in Payless Supermarkets could be established. The trio conclude that on the evidence there is no actionable malfeasance by Ottapathu in respect of the Fours Buying Group, contrary to allegation that he acquired beneficial ownership in the shares of the Fours Buying Group and misappropriated a corporate opportunity, thus it is unlikely that the charge in this regard could be established.

The lawyers have also cleared Ottapathu from the charge that he has mislead shareholders, resulting in his earlier suspension. After clearing the hurdles for Ottapathu by absolving him from the serious charges levelled against him amid the impending disciplinary hearing, the three-member counsel says it recommends an investigation which follows fair procedure according to established principles. The catch is, Choppies will have to prove these allegations beyond reasonable doubt.

“An investigation in which any employee involved in the issue being investigated is given an opportunity to explain and defend him/herself, which investigation could lead to the sanctioning of an employee including dismissal. It is for the company to prove the conduct which is so serious as to warrant sanction or dismissal,” said the SA lawyers.

In response to the new report that seemingly clears Ottapathu from any wrong doing, the new board which is seen as largely sympathetic to the CEO has also stacked the proof of the burden on the company, with the board announcing that it has resolved to follow the recommendation of counsel and “cause a focused investigation by independent counsel to establish the sufficiency and cogency of evidence prior to taking a final decision whether to proceed with a disciplinary enquiry.”

Meanwhile the report from the advocates comes within a week after Choppies finally released its June 2018 audited results that were delayed for more than a year. The financials not only revealed massive losses but confirmed the findings from EY report that Choppies had engaged in shoddy accounting practices. The 2017 full year profit which was reported as P74.6 million has now been restated to P169.8 million losses, while 2018’s loss was a shocking P444.5 million caused by impairment losses that were disguised by the shady accounting processes.

The impairment losses for 2018 included P77 million for reassessing useful lives of plant and equipment, P126 million goodwill written off on business acquisitions and P132 million impairment of trade and other receivables. Choppies net asset value (NAV) as on 30 June 2018 was P 576 million, which is a decrease of P 458 million or 44 per cent from P 1 billion in previous year. The 2017 NAV was also a reduction from P1.5 billion, a 32 percent reduction mainly due to restatements of 2016 results.

While the release of the results might bring relief to the shareholders and market participants, PwC which has since dropped Choppies after classifying it as a risky client, says there were a number of matters which prevented them from obtaining sufficient and appropriate audit evidence as required by International Standards on Auditing, thus distanced themselves from the reported financial results.

“We do not express an opinion on the consolidated and separate financial statements of Choppies Enterprises Limited (the “Company”) and its subsidiaries (together the “Group”). Because of the significance of the matters described in the Basis for disclaimer of opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these consolidated and separate financial statements,” said PwC in an audit report.

Choppies remains suspended on the BSE and JSE for non-compliance with the listing requirements, mainly due to non-publication of the 2018 audited annual financial statements. Moreover, the suspension will remain in place until the retailer publishes the 2019 financials, which industry insiders have warned shareholders to expect more losses. Choppies’ share price had plunged by over 70 percent in both exchanges before trading was halted in November 2018.

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Sunday Standard June 28 – 4 July

Digital copy of Sunday Standard issue of June 28 - 4 July, 2020.