Victoria PLC: Company Responses to Questions
We have obtained answers which we believe came from the company in regard to our questions. While addressing some questions, we feel some of the answers are inadequate....
Picture - Ezifloor factory, Units 1a-b Airedale Business Park. Source: Google Maps/Streetview
*Please Read the Disclaimers at the base of this report. Does not constitute investment advice or a recommendation to buy or sell. Author maintains a short position in the company at time of publication.
Several weeks ago, we wrote the following piece. We have added the companies answers in italics (or those we presume to be the company’s answers) and reflected on those answers in bold below.
On 14th September 2023 Victoria Plc received a qualified audit report for the year ending April 2nd 2023 from Grant Thornton (FT story here). This followed the auditor finding accounting deficiencies at its Hanover Flooring Subsidiary (HFL), run by Batash Karim (a former convicted criminal per the FT, whom the FT has written about in a previous piece, here), who Victoria PLC acquired the the business from in 2021. The auditor was stopped from completing its investigations into HFL by the board of Victoria via a “Limitation of Scope”, despite the auditor requesting to continue its work, apparently even subsequent to the limitation being imposed. While a qualified audit is serious enough, Grant Thornton in its qualified report failed to cover a number of additional concerns about Victoria’s accounting.
Subsequent to our earlier post, it appears that Grant Thornton have been reappointed as auditor. We assume, then, that they did not avail themselves of the opportunity to stand down. Our questions below have been furnished with what we believe are answers from the company. Where appropriate, we have appended our own thoughts below.
Did Grant Thornton (GT) also inspect and audit the accounts of fellow subsidiary, underfloor manufacturer Ezifloor, previously owned by another member of the Karim family, Saqib Karim? Which other subsidiaries did GT actually fully test in the 2023 audit work? How were GT able to sign of the 2023 accounts having only full scope audited approx 33% of the underlying profit before tax?
“Ezifloor has been subject to audit by Grant Thornton every year following the acquisition (October 2016). Grant Thornton undertook audit procedures on all of the Group’s material subsidiaries, of which there are 14, along with 11 additional subsidiaries which were considered non-material. This question [relating to GT signing off on full scope audit of 33% of PBT] is a clear misunderstanding of the audit process and terminology.”
GT performed audit work on subsidiaries representing 76% of underlying profit before tax as set out in their audit report on page 51 of the Annual Report. This percentage is in line with other large multinational groups.
Subsidiaries which are not subject to Full Scope audit by GT are still subject to a “specific scope” audit , which means that GT undertake full audit work on financial statement items where there are significant risks of material misstatement of the group financial statements (including Revenue, Trade debtors, Inventory, Trade payables, Cash/overdraft balances and Tax).
The subsidiaries which were subject to either a full scope audit or specific-audit scope procedures contributed 78% of the Group’s revenue and 76% of the Group’s absolute underlying profit before taxation
Well hold on. The low level of full scope audit is extremely unusual for a UK listed company. And the company’s reply failed to answer whether Ezifloor was included in the full scope parameter. I’m sure they would if it was. As for specific scope audit, its’ a bit like being half pregnant - either you audit a business or you don’t. Looking at bits of it doesn’t quite cut it. Here’s an excerpt from Headlam’s (a UK competitor in flooring) Audit Report for example:
Yes, 99% of consolidated operating profit under full-scope accounting. Quite a difference from Victoria. Within the AIM market, Asos for example has 99% of revenues under full scope audit, while Jet2 has 100% of both revenues and operating profit under full scope audit. Serica Energy has 99% of profit before tax and 100% of revenue subject to full scope acccounting. For Fevertree the figure is 88% and 102%. Victoria is clearly an outlier, both within AIM and in the context of the broader market.
Why did the auditor fail to mention the previous qualified audits of Ezifloor in 2021 and 2020 related to cash/inventory accounting? (see appendix 1)
The qualifications in both years were solely due to the fact that GT were unable to personally attend the physical stock count at Ezifloor as a result of Covid travel restrictions in place at the time. The qualification was not related to cash. These items were not material to the group as a whole and are not required to be mentioned in Group’s Annual Report.
This seems strange given the auditors were able to audit stock at other UK Victoria subsidiaries. Just Ezifloor, it seems, was an outlier. Interestingly, the comment above omitted GT’s other failed approach to audit the stock using other methods when it proved difficult to visit the site “owing to the nature of the companies records”. This happened two (!) years in a row. No mention of this in the Independent Auditors Report in the group accounts though.
Given that Victoria management availed itself of audit exemption rights for Ezifloor the year after GT published a qualified audit (despite declaring their intention to reappoint GT in that report), why was this topic not covered in the auditors Key Audit Risk Matters segment of the 2023 audit report, or indeed previous audit reports at the plc level? We note that Ezifloor and Hanover combined (given the brothers’ Karim overlapping business interests) are highly material to the group in terms of net working capital and intercompany liabilities). See Appendix 2.
Section 479 of the Companies Act 2006 entitles UK groups to exempt their UK subsidiaries from statutory audit by providing a parent company guarantee to settle any liabilities of the subsidiary. However, these subsidiaries remain subject to audit for the purposes of the Group audit and have been included in the scope of GT’s work in each financial year. Victoria has acted in line with other UK Groups in taking this exemption.
[Regarding intercompany liabilities in Ezifloor and Hanover] These balances were audited as part of GT’s audit of the Group.
It seems unusual, following 2 years of successive qualified audits at Ezifloor that Victoria would exempt the Karim subsidiaries from statutory audit irrespective of the guarantee offered. Wouldn’t management want the auditors to finally given Ezifloor and its stock levels a clean bill of health at long last? Regarding the intercompany balances in Ezifloor/Hanover it is still not clear from the comments above whether full scope audit procedures have been applied over both sets of accounts in the most recent auditing period. It is also noticeable that for the 2022 accounts many group subsidiaries were exempted from audit in the UK. Surprisingly so, given that the prior year accounts often stated the intention to propose reappointment of the auditor at the AGM. Even more surprisingly given the audit exemption announcement for many of these companies came only weeks or a month or two before the publication of 2022 results (ie in Jan or Feb 2023 vs publication in March/April 2023). It would be logical to assume that GT had been working on auditing these accounts prior to this announcement given. Take Victoria Midco: on publication of its 2021 report on 6th April 2022 (4 days after its 2022 year end date), it states “The auditor, Grant Thornton UK LLP, will be proposed for re-appointment in accordance with section 485 of the Companies Act 2016”. So thats after the 2022 year end close. And yet the audit exemption announcement for Victoria Midco only comes on the 9th Feb 2023, only 15 days prior to publication of the 2022 results. Why the last minute change? After all - according to S485 of the Companies Act, GT would presumably have been appointed at the latest on the 5th of May 2022 for Victoria’s UK subcos. Presumably they worked on the 2022 subco accounts that were ultimately exempted from audit?
Bluntly, how can GT continue as auditor of Victoria PLC accounts after the company chose to exempt itself from the requirement to audit most of its subsidiaries in 2022? For example, Victoria Carpets Ltd, Westex Carpets, G-Tuft, and Alliance Flooring were all audit exempted in 2022, along with the main holding company Victoria Midco, as well as the Karim entities Ezifloor and Hanover Flooring, when they were subjected to full audit in 2021.
Section 479 of the Companies Act 2006 entitles UK groups to exempt their UK subsidiaries from statutory audit by providing a parent company guarantee to settle any liabilities of the subsidiary. These subsidiaries are still subject to an audit for the purposes of the Group audit and have been included in the scope of GT’s work in each financial year, which involved them being subject to substantive audit testing procedures in accordance with GT;s audit testing criteria. The exemption referred to is simply in relation to having a separate audit opinion prepared for the filing of the subsidiaries’ standalone statutory accounts.
Its not clear what “substantive audit procedures in accordance with GT’s audit testing criteria” actually means. Is it a full scope audit? Seems unlikely given the woolliness of the language. And if for example Victoria Midco is reliably accounted for even if exempted from statutory audit how do you explain Victoria Midco not including Hanover Flooring on its list of immediate subsidiaries despite the comments in 5) below - instead in its exempt accounts (excerpt below) Hanover is listed as an “indirect” holding.
Can GT explain the reason for multiple historic switches in subsidiaries’ parent ownership structure, covering the apparent change of parent of Alliance Flooring (formerly Abingdon Flooring Ltd), and the ownership structure of Hanover Flooring. Does the auditor know who the immediate parent of these businesses currently is? If the parent of Alliance Flooring changed, why was a change in investments not booked in Abingdon’s accounts? (see Appendix 3)
Alliance Flooring, the Group’s logistics business, was 100% owned by Abingdon Flooring at time of acquisition and this continues to be the case.
…….
The immediate parent of Alliance Flooring is Abingdon Flooring Ltd (100% ownership) – this has not changed from time of acquisition.
The immediate parent of Hanover Flooring is Victoria Midco Holdings Ltd (100% ownership).
As above, that is not what the accounts of either entity state. Abingdon Flooring (audited) does not list Alliance Flooring as an immediate subsidiary in its accounts (in fact it is not mentioned at all) from 2019 onwards and Victoria Midco (exempted) only lists Hanover Flooring as an “indirect” holding rather than “direct”. So if what management are saying here is true the accounts in those years are not accurate and require amending; see graphic below of historic Abingdon accounts:
And see below an excerpt from Victoria Midco’s accounts (the main Victoria holding company):
Has GT been able to establish the reason for the rising level of inter-company balances (amounts owed from group to and from subsidiaries and parent), particularly in considering the rapidly rising inter-company creditor balance (now approx GBP 25m) at Ezifloor and Hanover flooring vis a vis the rest of the group (note the offsetting rising inter-company debtor balance at Interfloor ltd). See Appendix - 2, lower table.
Both Hanover and Ezi Floor were asset purchases. As such, the liabilities for deferred and contingent consideration at time of acquisition were held on the acquiring subsidiary’s balance sheet. Victoria Plc subsequently paid these liabilities resulting in increasing intercompany positions.
The Interfloor Ltd increase in inter-company debtor is offset by a corresponding increase in inter-company creditor in Interfloor Group Ltd (the indirect parent of Interfloor Ltd).
Yes, as far as it goes. But did the quantum of amounts injected into both Ezifloor and Hanover exceed the deferred and contingent consideration owing to the Karims? How was it that Saqib Karim acquired 2.2m Victoria shares sometime between July 2020 and May 2021, at a time when the company share price went up from under £3 to over £10 a share, in other words an outlay of between £7m and £24m. Where did this money come from? Was this part of the deferred or contingent consideration? Did he really invest most of his income from the sale of Ezifloor into Victoria stock? The intercompany balances owing to Victoria from both subsidiaries was approximately £25m in the 2022 accounts. The deferred and contingent consideration for Ezifloor combined was £13m (£6.5 of which was contingent on performance targets - we don’t know if these were met), while Ezifloor appears to have generated over £17m of Ebitda over that time period, despite requiring over £15m of intercompany credit. For Hanover Flooring the combined deferred and contingent consideration was £24m (£12.5 of which was contingent consideration) about a quarter of which could have been paid in the 2022 accounts, or £6m approx. It certainly makes one question the original valuation of the businesses given how much capital they are consuming.
Given the high (and rising) level of inter-company balances in UK subsidiaries, has GT considered why there is an absence of documentation eliminations and inter-company sales in the group accounts?
This is a clear misunderstanding of consolidated group accounts.
As per the Group’s significant accounting policies on page 69 of the Annual Report “All intra-group transactions, balances, income and expenses are eliminated on consolidation.” Otherwise, the group numbers would obviously be overstated.
The point is that it would be helpful to know the quantum of these eliminated sales and balances. If anything the level of assumed eliminations looks lower than it should be given the presumed high level of inter-company trading (see for example G-Tuft below)
It is clear, for example, from the accounts of G-Tuft, that it sells most of its product to other Victoria entities for further sale.
Correct. G-Tuft is one of two broadloom carpet manufacturing sites in the UK owned by the Group. Its primary function is to manufacture carpet for the UK brands owned by the Group, who buy the finished product from G-Tuft for on-sale to customers. It also manufactures and sells carpets to arms-length third-party customers (Victoria’s competitors).
The sum of revenues from UK, Irish and Dutch subsidiaries alone exceeds the stated segment Europe soft flooring revenues.
Another clear misunderstanding of accounting standards.
The revenue of the UK & Europe Soft Flooring Division solely comprises sales to third parties; intercompany sales are, as required by accounting standards, eliminated.
The individual subsidiary accounts show all sales that they make whether to Victoria subsidiaries or third parties, as required by accounting standards
The point is rather the inverse - that if we add in the Dutch and Irish revenues to the UK revenues the “excess” balance isn’t that great given the presumed high level of elimination from intercompany sales (estimting around £480m-490m vs stated European soft flooring sales of £423m). Is only £60-70m of revenue eliminated on consolidation?
In the Key Audit Matters or elsewhere in the audit report, why is the subject of related parties owning Victoria’s warehouses/factories not covered? For example the ownership of Hanover Flooring’s Birmingham unit (the Mak Flooring unit) being owned by Saqib Karim, and the Ezifloor unit in Keighley (managed by Saqib Karim) being owned by brothers Batash and Asif Karim? A further Hanover unit in Keighley is owned by Hanover Properties Ltd, co-owned by Batash Karim and Asif Karim, and with debt owing to another related party owned entity. Also notable is the historic ownership of View Logistics unit in Hartlepool owned by a vehicle (SBS Property) co-owned in the past by Stephen Byrne, a former Victoria executive and director of numerous Victoria subsidiaries. See Appendix 3.
There has been a number of instances when Victoria’s board, contemplating a potential acquisition, decided that the purchase of the real estate being used by the business being acquired was not an efficient use of capital. In these instances, Victoria purchased the trade assets of the business (plant & machinery, working capital, and trademarks) and entered into arms-length leases (based on specialist independent advice) with the sellers at the point of the transaction.
As none of the individuals named are or were directors of Victoria plc they are not considered, under accounting standards, to be related parties of the Group.
This “under accounting standards” qualification may or may not be correct, however, the nature of the Karim brothers’ role in the business must by any reasonable person’s standards be deemed to be a related party of the Group and indeed render the Group potentially prone to conflicts of interests in relation to its business dealings with them as both senior managers, significant shareholders (in Saqib’s case) and landlords of several properties containing group subsidiary businesses that are run by them as agents of the group.
Could GT opine on the strange repetition of identical account balances in non consecutive years eg at Venture Floorcoverings, an Abingdon subsidiary that was set up in FY 2019 and owed a figure of GBP 1,018,235 to its parent in 2019, and in 2021 but not in 2020, where it owed approx. GBP 700k to its parent?
The £1,018,235 was a startup loan from Abingdon in the first year of trading. There were trading loans in the year of 2020 which were offset against this balance. The trading loans were settled in 2021 when trading was halted, so the balance reverted back to the base startup loan. The loan has since been settled.
Ok…
Other discrepancies include rising cash and overdraft balances at the same business, despite the business ceasing to trade (See Companies House filings).
The detail was fully set out in the Directors’ Report of the FY21 financial statements “Throughout the year, stockholdings in Venture were predominantly sell offs to 3rd parties and other Victoria plc companies and the Directors discontinued the brand completely from September 2020. This is reflected in no stock being held at 03 April 2021.” Receipts from the sale of this inventory would have been received in the bank account and expenses paid from the bank account for costs related to those sales.
Ok…
Are GT comfortable having signed off years of accounts of Abingdon Flooring with year on year apparent inconsistencies between amounts owed to group and amounts owed to parent in the subsidiary balance sheet? A similar discrepancy occurs in Whitestone Carpet Holdings accounts between the 2020 and 2021 accounts. (see Companies House filings)
It is not clear what inconsistency is being referenced.
Extracted below the inter-company creditor notes from 2021 and 2020 accounts, and descriptions are entirely consistent. The balances referred to as owing to parent undertaking are in all cases just the balance due to ultimate parent Victoria Plc. The balances to fellow group undertakings will represent balances with owned by Abingdon (Alliance, Distinctive, Venture, Abingdon Flooring (Ireland), and all other balances with the remainder of Victoria Group. The description of the intercompany creditor balance owing from Whitestone Carpet Holdings changed from ‘Amounts owed to group undertakings’ in 2020 accounts to ‘Amounts owed to parent undertaking’. In both periods the relevant entity in question is the ultimate parent company Victoria Plc. In 2021, the auditors decided the wording describing this balance was more appropriate to refer to parent rather than group undertakings given the full inter-company balance related to the parent.
Ok - and for Abingdon, amounts due to group in 2018 became amounts due to parent in 2019, presumably under the same logic.
Based on all the above, we struggle to understand, how, without a thorough full scope audit and historic review, any leading audit firm would be happy being appointed auditors to the company.
Appendices
Ezifloor Qualified 2021 accounts (following similar question raised in 2020)
2. Intercompany Balances: Ezifloor and Hanover the largest consumers of inter-company capital, with material levels of net working capital:
3. Abingdon Flooring - Investments (2018, 2019 accounts)
Freehold ownership of Victoria plc buildings:
Hanover Flooring (Mak Flooring).
Victoria signed a new lease with Saqib in 2021:
Hanover Flooring - Keighley
As with the Nechells, Birmingham property owned by Saqib Karim, the Karim brothers signed a new 15 year lease with Victoria/HFL at roughly the same time in 2021:
Hanover Properties Ltd:
Ezifloor plant -
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