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Restatement slashes Accentuate’s 2015 profit

Auction of fraudster’s assets: Some funds to be recovered.

Flooring and chemicals group Accentuate’s strong 2016 annual results are being overshadowed by the restatement of its 2015 results, that wiped out its reported R4.7 million profit and left it with a mere R59 000 in the black.

According to CEO Fred Platt, this became necessary as the full extent of the R70 million fraud perpetrated by a senior manager within its Floorworx subsidiary became apparent. The fraud was detected early in December last year and has led to reforms in internal controls that are currently being implemented.

Asked how such massive fraud – more than a fifth of its FY2016 annual turnover – could have gone undetected, Platt said while Accentuate’s management won’t abdicate its responsibility in this regard, it should be noted that the fraud took place over a period of ten years.

The fraudster, who has since been convicted and is awaiting sentence, is a professional criminal who ensured that he deceived at very step of the process, Platt said.

He said when Floorworx was bought from Marley Flooring in 2005, the group had to set up new systems and the fraud was built into the systems right from the beginning. The group used comparative reporting and, since the theft took place at a consistent pace, there were no unusual movements that could be picked up.

The numbers were further backed up by “reams and reams of supporting documents drawn up and based on real information” with the express object of covering up the wrongdoing. “He ran a parallel business for ten years,” Platt said.

Accentuate has reviewed all its systems and is building in safeguards. The board and audit committee have been strengthened and some discussions, such as whether the internal audit function should be outsourced to an independent party or done in-house, are on-going, Platt said.

The Asset Forfeiture Unit seized some assets, including original paintings, jewellery and Persian carpets bought from the proceeds of the crimes and has since handed them over to Accentuate. The company will have it auctioned in an effort to recover some of its losses.

Platt said there is however a substantial amount that cannot be accounted for yet.

He said Accentuate will launch an application to have the fraudster sequestrated and hopes to be able to have some properties liquidated as a result.

The company hopes to recover a seizable amount, but not nearly the full R70 million.

Platt said in a very difficult trading environment, Accentuate did substantially better in FY2016 than the previous year, even before the restatement.

The company recorded R322 million revenue, up from R318 million. Net profit improved from R59 000 (R4.7 million before the restatement) to R7.5 million.

Platt said Floorworx experienced a drop off in business from the public sector in the build-up to the local government elections, while one of its other major client sectors, the construction industry, is also under pressure. Floorworx contributes about 80% of the group’s revenue.

The chemical business Safic traditionally serves the mining and heavy industrial sectors, which are also facing headwinds. The subsidiary is according to Platt making progress in exploring new markets.

Against this background, the group focussed on cost and margins and succeeded in increasing profitability.

Although he does not see a major improvement in the local market in the next year or two, there are some signs that government spending has resumed, Platt said.

Floorworx is therefore exploring other markets and has spent the past year preparing to comply with technical requirements for increased exports.

African markets are flooded with cheap ceramic imports and commodity-based economies are experiencing a shortage of currency, he said.

The company is exploring the dollar-denominated North American and Australian markets. They are working with a potential partner in North America who is currently buying vinyl composite tiles (VCTs) from its competitors. Floorworx could supply VCTs from its East London factory in a deal that would see it selling the partner’s product in the local market.

Those markets require consistent quality and are price sensitive, Platt said. While the logistics cost is not prohibitive, the key is where to peg the exchange rate, he said.

Floorworx sees a growth opportunity in the commercial market and might consider an acquisition in this regard.

Accentuate’s Safic joint venture with Ion Exchange India sees a huge opportunity in an increasing move towards the efficient use of water as well as re-using and recycling water. Ion Exchange is a world leader in the field and an agreement recently concluded with construction group Stefanutti Stocks could go a long way to establish the joint venture in the local market.

Platt said the joint venture is uniquely positioned to deliver water treatment services to the planned nuclear power stations.

Accentuate’s share price was unchanged on Wednesday at R1.02.

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I realise the prevention and detection of fraud are responsibility of management, but just wondering who the external auditors were?

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