Freedom Foods – significant control deficiencies cost $591.5m
The meaningless historical accounts signed off by Deloitte Touche Tohmatsu, came to a head on Monday 30 November when Freedom Foods Group Limited (ASX: FNP) released its Annual Report for the year to 30 June 2020.
After “identifying matters regarding the operation and administration of the Group’s equity incentive plan (EIP), the Board initiated an investigation with the assistance of external advisors.” PWC, Ashurst, Arnold Bloch Leibler and Moelis Australia identified a significant number of accounting matters.
A summary of the effect of these matters has cost the company $591.5 million, split $144.6 million in Fiscal 2020, $151.3 million in Fiscal 2019 and $295.6 million in and prior to Fiscal 2018.
A summary of the original and restated Balance Sheets as at 30 June 2018, 2019 and 2020 follows:
| Balance Sheet($m) | 30/6/18 | Restated 30/6/18 | 30/6/19 | Restated 30/6/19 | 30/6/20 |
| Current Assets | 245.2 | 220.2 | 266.8 | 208.2 | 146.5 |
| Non-Current Assets | 520.7 | 286.7 | 718.1 | 347.3 | 535.4 |
| Total Assets | 765.9 | 505.9 | 984.9 | 555.5 | 681.9 |
| Current Liabilities | 111.1 | 124.6 | 171.5 | 187.3 | 426.9 |
| Non-Current Liabilities | 124.9 | 131.0 | 142.5 | 133.5 | 194.0 |
| Shareholders’ Funds | 529.9 | 250.3 | 670.9 | 234.6 | 61.0 |
| Liabilities + Shareholders’ Funds | 765.9 | 505.9 | 984.9 | 555.5 | 681.9 |
At 30 June 2020, Freedom Foods had Shareholders’ Funds of $61.0 million, down from $670.9 million a year earlier. While net debt – categorised within current liabilities – stood at $275.2 million, this is expected to increase to around $335 million in the first six or seven months of Fiscal 2021, potentially wiping out Freedom Foods Shareholders’ Funds.
Major shareholder, the Perich family, “has guaranteed additional general-purpose funding in the form of a $45 million Subordinated Secured Facility, subject to various obligations including compliance with the terms of the standstill agreement.”
The company is currently in exclusivity with a counter-party on a significant recapitalisation by way of a listed secured subordinated convertible note, with the objective of allowing shareholders to participate. Details are expected to be released by mid-December 2020, with closing planned by the end of January 2021.
The subject of “Management override of controls” is found on page 122 of the Fiscal 2020 Annual Report and page 7 of the Independent Auditor’s Report. It reads “Australian Standards on Auditing 240 (ASA 240), The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements, highlights the risk of management override of controls as a presumed audit area. As a result of findings from the investigations and the significant control deficiencies identified during our work there was an increased risk of management override of controls and therefore a key audit matter.” Talk about backward looking!
After receiving aggregate remuneration of $2.85 million and share based payments of $4.72 million over the Fiscal 2019 and Fiscal 2020 period, three key executives – Managing Director, Rory Macleod, CEO of Commercial Operations Australasia, Amine Haddad, and CFO and Company Secretary, Campbell Nicholas – all left the Company in June 2020.
Michael Perich has taken over as Interim Chief Executive Officer and a massive rebuilding exercise will be required.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
