Tuesday, April 7, 2020

Choppies told to clean its messy financials

Botswana’s retail giant, Choppies Enterprises, has been discovered to lack the governance and financial hygiene standards expected from a listed public company, the retailer’s new audit and risk committee (ARC) said in a report.

The two-member committee, appointed last year September during a tumultuous Extraordinary General Meeting (EGM), had only three months to come to their own conclusions on the messy affairs of Choppies, which were unearthed by two reports – legal and forensic – which implicated the company board and management in a dysfunctional corporate governance that has resulted in an accounting scandal.

In June 2018, the budget grocer failed to publish its full year financial results after its newly appointed auditor, PricewaterhouseCoopers (PwC), found a financial system riddled with errors, made worse by byzantine transactions that obscured Choppies’ true financial health. When the public finally caught a glimpse of the results, which were more than a year late, they were shocked at the massive losses.

Choppies’ gross profit margin of P2 billon was decimated by spike in impairment losses which increased to P335 million due to various IFRS adjustments, leaving the budget grocer with a cumulative P2.4 billion in expenditure, causing a massive loss for the year after taxation of P445 million, compared to a loss of P170 million in 2017.

The results were accompanied by a disclaimer. PwC, which has since dropped Choppies as a client a year after it appointed, refused to express an opinion of the financials, explaining that there were several matters which prevented the PwC team from obtaining sufficient and appropriate audit evidence as required by International Standards on Auditing to form an opinion.

The ARC says it cannot fault PwC’s unfortunate conclusion, and therefore they also had to recommend the approval of the financial results to the board but bearing in mind the disclaimed audit opinion. The committee appears to have bee peeved the extent of prior year restatements.

Choppies net asset value (NAV) as on 30 June 2018 was P 576 million, which was a decrease of P458 million or 44 per cent from P1 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.

“The ARC only recently became aware of the statutory financial statements of subsidiaries still outstanding for prior periods, mainly 2017 but in some instances 2016 as well. The ARC was in contact with the predecessor auditor to speed up and finalize this process. The extent of prior year restatements are material,” said the committee in Choppies new annual report.

“These write-offs are indicative of extremely poor financial control and procedures as well as a general lack of knowledge of IFRS by financial staff. The ARC is acutely aware that a major overhaul of the financial hygiene and staff is needed to arrest the current situation before starting to rebuild,” they added.

The committee has identified Choppies’s Finance department to be chaotic, branding it leaderless most of the time. The company has had three different chief financial officers (CFOs) in a period of three years, while at the same time bleeding a large team of senior finance heads. The ARC explained that continuity was disrupted, and a search to appoint a seasoned CFO was underway.

“There is an urgent need for such a new CFO to critically assess and where necessary, make key appointments to bolster the finance department. A total overhaul of the accounting systems and procedures, including internal controls, also need to be done and documented. Knowledge of IFRS needs to be embedded into the company,” the ARC said.

In other disappointing findings, the committee discovered that internal audit at Choppies, for all practical purposes, does not exist. There are only three staff members for the group with more than 200 stores, and the head of the internal audit position has been vacant since September 2018.

“This is a major weakness in assisting the ARC, Board and shareholders with the necessarily comfort of checks and balances. There is simply no combined assurance model in the Group and relying on external audit to perform this function is insufficient. Much work lies ahead in rebuilding the necessary assurance framework,” part of report read.

The committee added that lack of proper, accurate and timeous management accounts will be a priority action point in 2020, with a new integrated financial system that should greatly assist.

According to the ARC’s recently released report, due to the late publication of 2018 financials, and consequently the 2019 financial performance, the board has decided to prioritize the preparation of the respective annual financial statements. Furthermore, committee has invited proposals from all the larger audit firms in Botswana for independent external audit services from the 2019 financial year. The company says it has yet to appoint a new auditor, but discussions are ongoing.

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