Globo – shares tank – it says nothing amiss – Evil Knievil says “add to your short”

Comments

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   Paul Scott

   8 March 2014, 21:00

   I think the explanation put out by Globo might sound superficially reassuring. However, whatever reasons are given, losing your auditor shortly after the year end is very damaging.

   I’ve been both an auditor (1990-93), and an FD (1993-2002), and know that you agree both the fees, and the scope with the auditor BEFORE they are appointed.

   So to my mind the only explanation as to why BDO wanted to extend the scope of the audit to doing the subsidiary company audits themselves, is that they must have reviewed the accounts and possibly the audit files of the existing auditors, and decided that more investigation was required.

   I have maintained for a year now that the figures at Globo don’t look right. They generate a lot of profit, but no cash. The Balance Sheet displays the telltale signs of artificially boosted profit, with unusually large debits piling up in various places. The de-consolidation of the Greek subsidiary into an Associate, was obviously done to get its large Debtor balances off the consolidated Balance Sheet, and in my view is an inherently suspicious transaction.

   I have also added to my short position here, as I think there are now multiple, and glaring warning signs both in the accounts, and the loss of the auditor. Plus an almost complete lack of third party evidence that their key product has sold very much at all.

   It will be fascinating to see how this pans out. I think there are enough warning signs to treat it with considerable suspicion, but that’s just one person’s opinion, which may turn out to be right or wrong.

   Also, we can’t just assume that Grant Thornton will just sign off their own subsidiary company audits. They will know by now that the spotlight is on this company, and that their own reputation is at stake. So I wouldn’t be surprised if GT require more audit evidence (especially over Debtors being real, and collectable).

   It also probably means the audited accounts will be late this year. It’s very easy to audit Debtor balances – you just wait until they are paid after the year-end, and tick them off as paid. Alternatively, a Debtors Circularisation is performed, where the auditor writes to each Debtor, and asks them to confirm the Debtor balance. Of course it’s easy to get that done, if the Debtor is a related party in some way. Hence why in this case if I was auditing it, I would insist on seeing the actual cash hitting the bank account for all large year end debtors, before signing off the accounts.

   Paul (disclosure: short)

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   Nathan Brooks

   18 March 2014, 23:25

   Agree with Paul that there are a lot of red flags here, but what I don’t understand is why hasn’t Costis sold any shares?
   He hasn’t sold any shares aside from exercising share options he was granted back in 2007 when Globo IPO’ed. Usually, when there’s something wrong with a company – including dodgy accounts, the insiders are heading for the exits.