Matbro findings open up some important issues

The findings of the long-awaited KPMG report into accounting irregularities at Powerscreen International's subsidiary, Matbro, are not particularly surprising. They merely confirm what was suspected all along. However, it is quite clear that the report now opens up a number of important issues that should ensure that the Powerscreen gruel will remain bubbling hot for some time to come. Of particular relevance is Powerscreen's refusal to comment on the findings by its auditors, KPMG.

Powerscreen says this stance is adopted because chartered accounting firm, Ernst & Young, which has been employed to "consider the Matbro accounting irregularities and KPMG's findings", has not yet completed its report. As independent accountants, the findings of Ernst & Young would be particularly relevant. The non-comment stance might be understandable if the contents of the Ernst & Young report were to be revealed. But Powerscreen says that this work is confidential to the company, and its legal advisers, Herbert Smith. That is a retrograde step by Powerscreen as it implies that Ernst & Young's views on Powersreen's auditors work will remain a secret. While those views will, hopefully, be acted on, the stance is hardly a confidence building step which Powerscreen so badly needs.

While most of the £46.6 million deficit in Powerscreen's net assets is attributed to bad business practices and an accounting breakdown after March 10th, 1997, some u £9 million was due to the previous year. These arose from the concealed use of complex financing instruments and long credit terms, which delayed the detection of the emerging problem, according to the KPMG report. That report also found that at the conclusion of its audit of the accounts of Matbro for the year ended March 31st, 1997, the bank accounts were reconciled, the primary books of account appeared to be complete and a trial balance had been prepared using various records available.

However, things appeared to have gone askew from mid1997. These are the grim summary findings in the KPMG report. "The cash books represented the only relatively complete accounting records available within Matbro. The sales records were confused by the pre-invoicing of sales that had taken place in March 1997, facilitated by the use of discounted bills of exchange and other financial instruments. As bills bounced later in 1997, debtors for proper delivery of machines were lost from the accounting system, whereas false sales and sales relating to goods not yet delivered remained as debtors." The September 30th management accounts showed a profit of £3 million. However, that profit was "not in any way supported" by a trial balance. Those management accounts "failed to take account of external financing liabilities and hid the large losses already incurred by that date", is KPMG's damning conclusion.

The use of bills of exchange was extraordinary. They were mainly 90 day bills, yet in some cases were established as 270 day bills. What the report had to say on this is illuminating: "If machines were not delivered, or a customer was unable to pay on maturing, bills were rolled over to a future date. The management accounts included no recognition of the potential liability arising from a bill which was dishonoured. The emerging problems would have been evident from a much earlier stage if this form of funding had not been concealed". All breathtaking stuff.

The problems were also blamed on a weak business environment, new production, time lags and weaknesses in the organisational structures which, surprisingly, had no internal audit function. However, investors, particularly those Irish institutions which subscribed for £18 million of new shares at £6 per share (considerably above Friday's closing price of 100p in London after a sharp recovery from 70.5p prior to Friday's announcement - this is being investigated by the Stock Exchange) last November will be particularly interested in the KPMG report which concluded that "certain members of the company's former executive directors became aware of the problems (at Matbro) in the final months of 1997".

While the report fails to state the date they became aware, the report implies that these unspecified directors may have known about the problems and yet raised funds without telling the participant these relevant facts. That could provide sufficient fodder to pursue these directors and/or the company for the losses suffered from the subsequent collapse in the share price.

The KPMG report is a serious indictment of the former executive directors. That and the investigations by Britain's Serious Fraud Office, Herbert Smith and Ernst & Young, will keep the fire burning bright at Powerscreen, despite its optimistic view of the future and the welcomed asset disposal programme.