Beware the Greeks Bearing Gifts…or A Little Trouble in Big China…

The company itself is relatively unimportant, and its name must now be seen in rather an ironic light, but the potential demise of Greek-listed jewellery and accessories chain, Folli Follie (the core of the FF Group) shows yet again that sometimes the numbers just do not add up.

In this case, it appears that the accounts of a key Asian subsidiary, supposedly generating sales in 2017 of EUR 1.1BN were largely a work of fiction, and it probably generated sales of 10% of that level according to a subsequent forensic accounting report prepared for management by Alvarez & Marsal. Similarly, accounts receivables booked at EUR 1BN, may actually amount to 10% of that level. However, it was the difference in actual vs. reported cash balances (EUR 6MM vs. EUR 297MM) that made us almost nostalgic for the epic fraud perpetrated in the Italian dairy company, Parmalat (which came to light in late 2003), when its auditors were duped by forged bank account acknowledgements. Parmalat, once restructured, survived; FF may not.

It is not yet clear whether, and to what extent, the various (small) Greek and Hong Kong audit firms appointed on behalf of the company were complicit, duped, or simply negligent. However, the reported scale, extent and location of the discrepancies would tend to indicate that, as a minimum, the audit process was seriously defective.

Interestingly, the investigation was triggered by a short-seller, Gabriel Grego of Quintessential Capital, pointing out that his investigations of the number of Chinese sales locations led him to believe that the actual number was far less than the company claimed. An example of what sounds like good, old-fashioned “leg work”.

The group’s founders, Dimitros and Ekaterini Koutsolioutos (the family controls 39% of the equity) appear as shocked as anyone else, although a statement including the words “it has not been possible to control the business of the Asian group of companies under my responsibility” begs many questions- particularly in respect of all that missing cash.

When the details are finally known as to how the debacle happened, close attention is likely to be paid to a seemingly unexplained rapid growth in sales and receivables in a key Asian subsidiary, and how accounts (which now seem likely to be demonstrated to be worthless) could be signed off on by management, Board and auditors. Who was relying upon whom? Not surprisingly, the Greek authorities are closely involved in trying to understand what happened, with hints made that reports have been, or shortly will be submitted to local prosecutors for action, while the company is also the subject of various court actions by creditors, and is seeking protection in an attempt to create a viable restructuring plan by mid-November.

One might ask why the Awbury Team should care about such a relatively obscure saga. The answer is simple. While there may seem to be little, if anything, new under the sun in terms of how such apparent frauds are perpetrated, one always learns something from understanding what actually happened and why. The events serve as a reminder that, as always, if something does not make sense or seems too good to be true, one should not just shrug one’s shoulders and accept a facile explanation, but ensure that one keeps searching until one understands the truth and reality of a situation.

The Awbury Team

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