On the 11th of July the Deloitte offices (statutory auditor) and BEAS (substitute) submitted their resignations, despite their recent appointment in September 2013. The other two auditors have not asked for their mandate to be renewed.
We note that the simultaneous resignation of the statutory and substitute auditors emphasizes the merits of ECGS and Proxinvest’s voting policy, which advocates the election of substitute auditors independent from statutory ones. Indeed, it is precisely when the statutory auditor defects that the substitute should be required to take office.
The association of firms and their common defection therefore does not meet the spirit of the laws that had as an objective to protect shareholders and the company against the hypothesis of a vacancy or a revocation of the statutory auditor.
The origin of the rupture between EuropaCorp and its auditors was a serious disagreement over the company and consolidated group accounts.
In their report on the consolidated financial statements, the auditors stated (Proxinvest translation):
“ The year’s turnover includes € 29.7 million corresponding to the sale of rights to future revenue from Fox Studios’ Taken and Taken 2 films. The sale is subject to collateral guarantees on royalties to possibly be generated through future contracts listed in the agreement with Fox, including the contract on the Taken 3 movie currently being filmed and theVOD contract. The conditions for recognition in terms of the amount of revenue prescribed by the IAS 18 norm are not met on March 31, 2014.
Indeed, this amount can not be considered in relation to the two films Taken and Taken 2 exclusively but to a set of contracts mentioned in the agreement for which the deliverables are not all available at this date and of which future products would complement the revenues of the two films Taken and Taken 2 if they were insufficient to reach the amount stated in the $ 45 million contract, at the horizon of 31 March 2024.
On the basis of the contract and IAS 18, revenues should be recognized on receipt of corresponding revenue accounts and, when appropriate, after the balancing adjustments in 2024. An accounting compliant with IAS 18 would have resulted in:
– A decrease in turnover of € 29.7 million, in operating margin of € 13 million due to charges generated by the recognition of this revenue (film amortization and provision for beneficiaries), in corporate income taxes of€ 4.5 million and in net profits of € 8.5 million.
– An increase in net intangible assets of € 7.7 million, a decrease in trade receivables and other receivables of € 29.7 million, a decrease in other liabilities of € 4.8 million and a decrease in accounts payable of € 8.7 million.
– Consolidated equity would have decreased from € 156.2 million to € 147.7 million.”
This major reserve from auditors significantly alters the vision of the group’s annual accounts. Indeed, retaining the changes proposed by the auditors, the consolidated revenues were down 14% to € 182.12 million and the group posted a net loss of € 8.3 million. On the other hand, the reduction in consolidated equity would consequently bring the gearing of the group at 0.74 against 0.21 a year earlier.
In the announcement of the annual results on the 26th of June 2014, the group stated “The statutory Auditors have stated that they will issue a qualified opinion due to a divergence between their technical analysis and that of the Company over the recognition timing for the $ 45 million of revenue related to a buy-out agreement with Fox. “
However, the concerns of the auditors is clear on the fact that the accounting for the Fox contract over the year does not meet the IAS 18 accounting principles in force, and it does not consist in a “technical analysis divergence” . The fact that the two statutory auditors terminate their relationship with EuropaCorp after the general meeting reinforces the feeling of a major disagreement with the group, which defended itself by stating having requested an independent expert (who’s name is unknown) which approved its position.
This did not prevent the share from collapsing by 21.81% on the day of the announcement of the results.
At the general meeting, on September 26, Proxinvest recommends that shareholders oppose the approval of the statutory and consolidated financial statements in order to challenge the questionable governance of a group which, nonetheless, also has beautiful assets. Complying with accounting principles is a key dimension of investor and market confidence.
Non-compliance with IFRS rules and auditors opinion are not acceptable practices for the French stock market and it deserves to be heavily punished.
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