The accountant should provide investors with the confidence that the numbers in the financial statements are reliable. In many cases the reports are skewed at the limit of what is possible – accounting, although it is hard to believe is a flexible profession and accountants have become financial engineers in recent decades. They can take bad numbers and make them less bad and even reasonable under the auspices of accounting rules and accounting standards. But there is a limit to the accounting stretch and then the accountants can no longer “help” the company, the management is left alone and in order to serve the stock, it may cross the line. We have seen this in the past, this is not a new phenomenon, but in the last year we see that the gatekeepers – the accountants (with all their limitations and those of the accounting profession, including the possibility of stretching the numbers) simply make a big mistake and pass under their signature numbers that do not come close to the economic reality of the company they are critics-surveys.
The largest firm in the field is Ernst & Young E&Y – a large international body in Israel connected with the firm Kost Forer Gabai and Cassirer managed by Doron Cohen. This office is the largest in the country, it is the largest among the auditors in the audit of the public companies and that is why it is so scary, every time a mistake is discovered there that expresses the laxity of the inspection and the danger that the numbers are not correct.
The accountant is supposed to protect us from the management of the companies, he is not an employee of the companies, his goal is that the numbers faithfully reflect the state of the company, and the feeling now is that at EY they have forgotten their basic work – audit and review. This time, a serious fault was discovered in Univo, the stock exchange, after faults had already been discovered in Younet Credit, Amir Marketing, BOL, and possibly also Maleran on the way.
The cannabis company
Univo
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reported a material error in the company’s financial statements for the first quarter of 2022 where a going concern note was “omitted”. How was such a comment omitted? This is a test that the accountant has to do and it shows if the company has enough resources to service the short-term obligations.
A going concern note is a note that an accountant adds to a company’s financial statements when he gets the impression that there is doubt about the continued existence of the company for a period of one year or more. The auditors of course would not want to make such a comment, the company’s management of course fights to prevent such a comment, but if there are doubts, they check and if they find that there is doubt that the company will stand on its feet independently in the coming year, they write it down in black and white in the auditors’ opinion ( review-review).
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The auditors remind us to audit the annual reports and review the quarterly reports. The quarterly review is fast, agile, relatively from above. The responsibility of accountants in the preliminary review is limited and accordingly his investment in time is limited. In annual reports it’s a different story. There the responsibility of the accountants is great and accordingly his investment is great. In the annual report he is no longer a “reviewer” he is a critic. Checks all sections, prepares a sample of feasibility, contacts customers, suppliers, inquires about balance approvals, conducts inventory counts and many other audit moves. His responsibility in the review is very large, but also in the review he is responsible for the numbers.
Kost Forer’s office collected Cassirer, Univo’s accountants argued with the Securities Authority and Host then Univo issued the following report – “In recent months, the Securities Authority staff informed the company that in its position, at the time of publication of the company’s quarterly financial report for the first quarter, there were significant doubts As for the company’s ability to meet its existing and expected obligations (going concern note) in the foreseeable future, it will be mentioned that the quarterly report did not include a going concern note, but a disclosure in the notes to the financial statements regarding the deterioration in the company’s financial situation and in accordance with the attention of the company’s auditor regarding The ongoing losses of the company, the significant decrease in sales of medical cannabis products in relation to its original work plans… as well as to the plans of the management and the board of directors in connection with the aforementioned cash flow forecast.
According to the authority’s staff, the company should have included in the quarterly report a full disclosure of the going concern note and the detail of the significant doubts regarding the company’s ability to meet its existing and expected obligations. The Authority’s staff explains that there is a cash flow gap in its ability to pay off the bonds on time, which requires disclosure.
The Securities Authority comments to the auditors and claims – “…there were real and negative circumstances and indications that did not allow reliance on various mitigating factors that the company detailed to bridge the cash flow gap. In addition, Solo’s balance sheet contained a cash balance of only approximately NIS 3 million. The projected cash balance at the time The repayment of the bonds, in the amount of 17.2 million shekels after the repayment of credit in the amount of approximately 7 million shekels, was based on forecasts of a significant and exceptional increase in the profitability and current cash flows of the company and its subsidiary, UNV Medicine, including dividend distributions from the subsidiary, in a manner that is not consistent with The historical performance of the company and the subsidiary, which was characterized by continuous operating and net losses and negative flows from current activities.”
What the Authority is actually saying is that the future cash report backed up by the accountants was a kind of unsupported, illogical, not close to reality fiction. It is the role of the accountants to check this.
The Securities Authority puts forward more arguments and more numbers that the accountants should have taken into account, and in general – those who follow Univo and its announcements that are also expressed here on the website, discover that this is a company that has historically failed to meet its goals, and this is not a one-time occurrence but is a matter of routine. This is a company that manages to survive through recruitments, a bit puzzling (for example – recruitment of the high-tech investor Nir Tsuk who lost the entire investment. I wonder if he will come forward with claims to the accountants). This is a company that reports on litigation with the large Tellieri, the latter claims that it sent goods and did not receive payment, and Univo claims that no goods arrived at all and what arrived was damaged. That is, only for this a certain accounting provision must be made. This is a company that no longer has a chance to survive, and its bondholders will only receive a portion of the total debt owed to them.
Accountants who do not properly check and audit a company like Univo are at worst negligent and at best lazy. And in general, this is neither the first nor the second time that the accounting firm EY makes a big mistake. Mistakes that may have caused huge losses to the investing public.
The last case is of Unit Credit. This is a phenomenon that the capital market has not seen for years. In January, the public company – Unit Credit allocated shares to the private company Unit Credit owned by the controlling owners of the company – Shai Panso, Shlomo Isaac and Yitzhak Azer – this for 50 million shekels that were supposedly intended to help the company. The shares were given at a handsome premium over the market price. However, it turned out that apparently at the same time a transfer of the same amount was made to the private company Unit Credit under the guise of loan transactions to third parties, which apparently were not approved as required by law and were not reported to the public.
It’s not all. Unit Credit turned out to be a big flop. The numbers in the reports were wishful thinking, not really what was in practice. The amazing thing about the story is that Moshe Kahlon managed to get mixed up and become the chairman of the public company. A company that collapsed due to accounting scandals. A company whose auditor – EY continued to provide a clean opinion every quarter while the real situation is completely different.
Following the affair, the EY company withdrew its signature from all of Unit Credit’s reports in order to remove responsibility from them and actually blamed Unit Credit when they replied: “The gatekeepers failed – the company considers the unusual withdrawal request of the former auditor’s office an escape from responsibility, while attempting to obscure evidence and cover up clear mistakes and omissions committed by him, as the gatekeeper of the company.”
As in the case of Unit, a class action was filed against EY. We are here to discuss this huge problem and the duty of accountants to provide protection to investors. That’s their job. They are the gatekeepers.