On Thursday August 27, the JSE issued a Sens report informing that it has imposed a public censure and a R6.5 million fine on AYO for failing to comply with JSE listing requirements.
The bourse’s investigation into the conduct of current and former AYO directors, who were in charge during the periods in question and who are therefore bound by the listing requirements, is ongoing.
Two former AYO executives testified at the PIC Commission of Inquiry on 8 April 2019 that AYO’s unaudited interim results for the six months ended February 28, 2018 were amended to reflect a higher return.
This caused the JSE to mandate an audit of the previously-published unaudited interim financial statements for the six months ended February 28, 2018 and 2019.
Management then identified various shortcomings in Ayo, including a lack of suitably qualified staff and inadequate financial controls.
Subsequently Ayo published updated audited financial information in accordance with International Financial Reporting Standards (IFRS), correcting the numerous material errors and omissions:
|Audited interim financial statements||Feb 28, 2018||Feb 28, 2019|
|Reviewed preliminary results for y/e||Aug 31, 2019|
|Audited annual financial results y/e||Aug 31, 2019|
|Supplementary information||Aug 31, 2019|
Adjustments and corrections to financial statements
2018 Unaudited interim results
AYO had to restate its 2018 interim cost of sales, gross profit, operating expenses, investment revenue, profit after tax, inventories, deferred tax, provisions and other accounts of significance to its business and operations. The adjustments in some instances were as much as 50%, and gross profit decreased by 4%.
The corrections resulted in the interim profit after tax decreasing by 19%, the earnings per share by 13%, goodwill by 11%, inventories by 69%, and provisional liabilities by 61%.
The errors arose out of the lack of a critical and thorough review, insufficient financial reporting procedures and processes, and insufficient finance staff.
2019 unaudited interim results
The audited 2019 interim results necessitated restatements to other operating gains, other operating expenses increased by 23%, and headline earnings per share decreased by 50%. Intangible assets decreased by 40%, inventories increased by 41%, receivables decreased by 24%, and payables increased by 23%.
The deficiencies resulted from an incorrect application of judgement, IFRS errors, inadequate financial reporting controls and review processes.
2019 reviewed preliminary results
On January 31, 2020, Ayo gave notice that the previously-published reviewed preliminary results for the year ended August 31, 2019 had to be adjusted. The adjustments concerned financial instruments and complex acquisitions, incorrect classification of items, and the incorrect calculation of headline earnings per share as required by the South African Institute of Chartered Accountants circular. Furthermore, non-cash items were incorrectly included in the statement of cash flows.
After corrections, other operating gains and expenses increased by 133% and 23% respectively. This negatively impacted profits, earnings per share and headline earnings per share by 19% respectively.
Goodwill decreased by 29%, reserves by 43% and contingent consideration liabilities by 53%. Non-cash items had incorrectly been included in the cash flow statement, and corrections had to be made to the cash flows relating to operating, investing and financing activities.
Audited 2019 annual financial statements (AFS)
When AYO published its integrated annual report and audited 2019 AFS on January 31, 2020, numerous disclosure notes were omitted. The external auditor reissued its report to the AFS.
AYO published and distributed the revised results to shareholders inclusive of the updated disclosure notes on March 16, 2020, as supplementary information.
JSE’s findings and decision to censure AYO
The JSE has serious concerns about the reliability and integrity of AYO’s previously-published financial information.
This was supported by the events that unfolded from early 2019 to date, including, the BDO report on the agreed-upon-procedures, the outcome of the 2018 and 2019 interim audits, the subsequent amended financial statements and announcements published by AYO, the previously published financial information did not comply with IFRS, and which was incorrect, false and misleading in material aspects.
This incorrect information had been disseminated to shareholders, the JSE and the investing public.
The JSE found that AYO failed to comply with the following provisions of the JSE Listings:
- The previously-published unaudited 2018 and 2019 interim results did not comply with the requirements of IFRS and were restated due to numerous adjustments and material errors contained therein.
- The 2019 reviewed preliminary results did not comply with IFRS in terms of classification, measurement and presentation of specific items, and contained numerous material errors which had to be corrected.
- Ayo failed to exercise the highest standards of care when disseminating financial information to the market in that it:
- Published the unaudited 2018 and 2019 interim results to the market despite knowledge of deficient internal and financial controls, insufficient staff in the finance team as well as staff with insufficient historical and technical knowledge of the company which led to the numerous and material corrections to the 2018 and 2019 interim results.
- Additional errors in the company’s 2018 and 2019 audited interim results were identified post the audit and therefore not included in the audited 2018 and 2019 interim results published to the market.
- The company published the audited 2019 AFS and omitted therein several disclosure notes resulting in the company having to publish a supplement to the audited 2019 AFS and the auditor having to withdraw and re-issue the audit report in respect of the 2019 AFS.
AYO assisted the JSE in its investigation and admitted its failure to comply with these provisions of the listings requirements.
Read AYO’s response to the JSE’s censure here.
Ensuring a fair, efficient and transparent market
The JSE states that the accuracy and reliability of published financial information are of critical importance in ensuring a fair, efficient and transparent market.
The listings requirements, which impose obligations on listed companies in respect of the disclosure of financial information, contributes to the integrity of the market and promotes investor confidence.
The company and its directors are obligated to ensure accurate and correct financial information and reports that are published, which are relied on by the investing public to make important investment decisions.