The MOL blame game

  • Property
  • Saturday, 29 Nov 2014

NASDAQ market-listed MOL Global Inc has set tongues wagging with the deferment of its earnings results and the resignation of its chief financial officer, triggering a blame game within the company.

The online payment company, which was listed on Oct 9, had its stock suspended by the exchange pending “additional information requested” from the company at a last price of US$4.09 (about RM13.70).

“Trading will remain halted until MOL Global Inc has fully satisfied Nasdaq’s request for additional information,” said Nasdaq said in a statement on Monday.

On Nov 21, MOL shares fell 53.84% to US$4.09 after Deutsche Bank issued a note cautioning investors that the delay of the results was “potentially ominous”. The stock opened at US$4.50 and went as high as US$4.60 on Nov 21.

It is believed that the company had allegedly delayed the release of its results due to some disclosure requirements that apparently were left out, which led to former chief financial officer Allan Wong being let go.

MOL claims that the delay was not due to fraudulent activities as speculated by law firms, which have begun investigations into the company.

The company had initially scheduled to release its third quarter earnings results on Nov 21, but then deferred it to Dec 3 without providing any explanation for the delay. It later rescheduled the release of its results to Monday.

According to Nasdaq requirements, a company has to submit its quarterly financial results within 40 to 45 days.

MOL also announced on Nov 20 that Wong’s post would be replaced by the current chief financial officer of MOL’s operating unit MOL AccessPortal Sdn Bhd Jonathan Chong.

It is probable that the delay in earnings results was caused by a disclosure requirement due to the nature of accounting treatment under the US Generally Accepted Accounting Principles (GAAP) versus the International Financial Reporting Standards (IFRS).

GAAP standards are rule-based compared with IFRS, which is principle-based. “If a company is going to move to GAAP, there will be a difference in terms of accounting treatment,” says an accountant representing one of the Big Four accounting firms.

He adds that while it is usual for companies to release year-end financials later than anticipated, this is not usually the case when it comes to quarterly results.

“This is because there are stringent rules and the company wouldn’t want a very large reconciliation difference between the unaudited and the audited accounts. Companies typically do not miss quarterly announcements,” he says.

The possible reason the company decided to defer its results could either be because it did not have its final numbers, or the management felt the numbers presented were not reflective of the company’s performance during the quarter.

“For the CFO to be away immediately after, is an indication of either one. It could be that the CFO was not conversant with the requirements and therefore held the board meeting late, which then led to the decision to defer the release of its earnings,” says the accountant.

However, he adds that if in fact the company was not ready to announce its results due to accounting issues, it is better to sort it out first rather than to do something wrong.

“I would have advised my client to do the same,” he says.

Implication on future listings overseas

Malaysian companies that intend to float overseas could be perceived negatively due to MOL. Nevertheless, if MOL is able to resolve the issue and explains why deferring its results was the right thing to do, it could be forgiven.

“However, if there is really something wrong behind the matter, then it will put Malaysian companies that intend to list abroad in a bad light,” she says.

She adds that if it is indeed an accounting issue as speculated, it should not take too long to rectify. “If it is just disclosure they are dealing with, perhaps the issue can be wrapped up in three to five days. The longer it takes, the worse it gets,” she says.

The IFRS is issued by the International Accounting Standards Board (IASB) while US GAAP is by the US standard setter, the Financial Accounting Standards Board (FASB).

Baker Tilly Monteiro Heng audit and assurance co-leader and partner Lock Peng Kuan says that therefore, it is unfair to determine the extent of the divergence impact without referring to a specific issue in hand.

“Even just one differing treatment may have big impact on an industry and a company specific from small different principles in the two sets of accounting standards,” says Lock.

IFRS is adopted globally in about 110 countries except in the United States, China, India and Japan. Lock adds that United States is the only country that has no plan for full convergence of its GAAP with IFRS.

While the basic principles of the two frameworks are similar, the application, the advance principles and the standards itself are different.

The GAAP framework produces many industry specific guidance that further diverge the two sets of standards.

However, there have been recent efforts to converge the two frameworks with the release of IFRS 15 – Revenue from Contracts with Customers in May 2014, which was jointly issued by IASB and FASB.

“In a nutshell, it’s not easy to summarise on the differences as they are technically complex and the impact can be industry specific,” he says.

Accountants contacted by StarBizWeek say it is the company’s responsibility, rather than the auditor’s to identify the requirements in the market it is listed on.

“Auditors only come into the picture when they are required to perform the audit. However, if they came across a requirement that was missed out, the auditors should highlight it to the company,” an accountant says.

Change of tune

Deutsche Bank, which helped the company in its listing exercise along with Citigroup and UBS, initiated coverage on the company with a “buy” recommendation on Nov 20, in expectation that MOL would enjoy strong secular growth in many developing markets it is in. “We view new product lines as paving the way for the company to accommodate South-East Asia’s eventual move from O2O (offline-to-online) to fully online payments.

“We, moreover, expect potential relationships with names such as Google, Visa, Mastercard and others to provide powerful shorter-term catalysts, enabling a re-rating of the shares,” it said.

Just a day later, Deutsche Bank issued another report following MOL’s announcements, cautioning investors trading in the stock, until further details were disclosed on the matter.

The research house labelled the sudden announcement “potentially ominous” and expressed concerns about factors that might have driven the recent developments in the company.

“We would only add that MOL, as a relatively small company which spans more than 13 markets, could suffer from poor internal reporting systems, rendering a representation of the business challenging until the actual closing of books at the end of reporting periods,” it said.

Deutsche Bank added that MOL might face increased risk of delayed or erroneous reporting from affiliates and subsidiaries, unforeseen and adverse actions taken by local authorities in other jurisdictions, as a result of its aggressive investment programme.

In its initiation report earlier, Deutsche Bank said it expected MOL’s gross margins to gradually drop to about 50% by the financial year ending Dec 31, 2016, due to its expansion into markets and new products with higher distribution costs.

It did, however, expect non-GAAP operating margins to improve to 26% in 2016 from 17% in 2013.

Prior to its bookbuilding exercise, MOL was said to be looking to raise US$300mil in its initial public offering (IPO) of American Depository Shares (ADS).

However, MOL later slashed the number of shares offered, pricing its US IPO at the bottom of expectations to raise US$169mil.

The Nasdaq-listed company offered 13.5 million ADSs consisting of 7.49 million ADSs offered by the company and 6.01 million ADSs offered by certain selling shareholders of the company for US$12.50 a share.

Since the IPO, MOL shares had fallen close to 50% at Friday’s close from US$8.14 (about RM27.30) on listing day.

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