Victoria plc: questions for the auditors
Questions for Grant Thornton or any successor auditor of the company
Picture - Ezifloor factory, Units 1a-b Airedale Business Park. Source: Google Maps/Aneta Glowgowska
*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.
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.
We would ask Grant Thorton (or any successor auditor, given the deadline for appointment is rapidly approaching) the following questions:
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?
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)
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.
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.
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)
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.
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? 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. The sum of revenues from UK, Irish and Dutch subsidiaries alone exceeds the stated segment Europe soft flooring revenues.
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.
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? Other discrepancies include rising cash and overdraft balances at the same business, despite the business ceasing to trade (See Companies House filings).
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)
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 -
DISCLAIMERS
The information contained above is not intended to constitute and should not be construed as investment advice and should not be construed as an offering or a solicitation of an offer to invest in any product or share. It is for personal use and information use only. It should not be relied on in the context of the investment objectives and financial situation of particular needs of any particular person or class of persons, and relevant advice should be obtained before taking any investment decision. The information above has been obtained from sources that we believe to be reliable and accurate at the time of publication, however, we give no warranty of accuracy as to the information or opinions offered above. Opinions given above are given at the time of posting and are subject to change without notice. The value of investments may fluctuate and you may not receive back the amount originally invested. Past performance is not a guarantee of future performance. At any time we may have a position long or short in a given company under discussion.