When little information is insufficient

  • Business
  • Saturday, 23 Nov 2019

UMW HOLDINGS BHD gets full marks for announcing an error in its results for the second quarter ended June this year. However, the announcement gives rise to more questions on the impact it will have on its results.

Which begs the question if the company should have disclosed more information when it announced the accounting error to the tune of RM27mil earlier this week.

In the announcement, UMW stated that it had inadvertently omitted an elimination “for the reversal of provision for a financial guarantee amounting to RM27mil” in the second quarter results.

As a consequence, the second quarter profit after tax and minority interest was adjusted to RM57.2mil from RM84.2mil stated on Aug 27.

The company also emphasised that the board viewed the incident seriously and had instructed the management to conduct an in-depth-review of processes to ensure that sufficient controls were in place to strengthen the group’s disclosure standards.

It is not stated when the error was discovered and what is the impact on the profit for the year as a whole.

Based on the information, it appears that the board decided to make an immediate announcement on the matter and not wait and lump it up together with UMW’s third quarter results, which is due to be released before end of the month.

The board also seems to send a clear message to the management that such errors are not to be repeated in future.

However, for investors, what they would be looking to is the impact on the profit for the year.

Based on the announcement, it seems to imply that a financial guarantee UMW provided has been called and hence the company had to provide for it in the income statement.

Generally, financial guarantees are off-balance sheet items and reflected in the accounts in a section classified as “contingent liability”. It does not impact the balance sheet of the company unless the guarantee is called upon and the company has to make good its obligations.

So what really was the financial guarantee about and was it called? More importantly, would the company be required to make impairments?

UMW is a big company with a market capitalisation of RM5.26bil. It generates a turnover of more than RM10bil and net profit of close to RM400mil per annum. The company has cash balances of RM944mil and another RM228mil worth of assets that is to be disposed.

It can easily afford to take a hit for a sum of RM27mil.

However, it would have been better if more details were provided in the announcement. Investors would not have to ponder and wait for the next quarterly results to examine the full extent of the financial guarantee.

Accounting errors have happened before and UMW is not the only company to have gone through it. There are many companies n Bursa Malaysia that have made amendments to their results.

Some have gone from making a profit to turning in a loss due to the amendments.

Fortunately for UMW, it enjoys strong support from local institutions that absorbed the selling pressure the stock came under after the disclosure on the stock exchange.

Outside Malaysia, investors tend to punish companies for accounting errors by selling down the stock.

For more serious cases, they clamour for the removal of key officials. For instance in the UK, the Metro Bank co-founder Vernon Hill was forced to leave the upstart financial institution after a serious accounting error.The miscalculation led to the bank being under-capitalised and it recorded losses. It had to raise new equity at the cost of shareholders seeing the value of their investments diminish by some 80% from its height.

UMW’s major shareholder is Permodalan Nasional Bhd (PNB) that has kept a tight rein on its investments after experiencing two serious problems with Sime Darby Bhd, which is another of its key investment companies.

Sime Darby Bhd lost billions in 1997 from venturing into the financial services sector and in 2009 from its ventures in the oil and gas industry.

Since then, PNB has always kept a tight rein on its investments by appointing people with strong industry knowledge and experience to the boards of its listed companies.

Previously, the boards of companies under PNB used to be filled up with civil servants. That no longer is the case.

Which is why the UMW audit committee, through the board, highlighted the accounting error in the company. However, it could come up with more information since it is a material development that has had an impact on the second quarter results.

The views expressed here are solely the writer’s own.

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