Iqbal Surve. Image c/o the World Economic Forum

The JSE has publicly censured Iqbal Survé’s Ayo Technology Solutions and imposed a R6.5-million fine on the controversial technology group for being in breach of the listing requirements after publishing a series of “false and misleading” financial statements.

The fine will be used in settlement of any future costs the JSE may incur through the enforcement of the listing requirements, the bourse said in a statement published on the stock exchange news service on Thursday.

Though the fine concludes the JSE’s investigation into the company itself, current and former directors who served on the board during the period of the infringements are also under investigation.

The fine and public censure come after Ayo made serious errors in its financial reports. According to the JSE, various events led up to this week’s announcement of the public censure and fine:

On 8 April 2019, two former executives of Ayo made statements under oath at a Public Investment Corp commission of inquiry that executives of the company were instructed to inflate its unaudited interim results for the six months ended 28 February 2018.
In light of the uncertainty around Ayo’s 2018 unaudited interim results and the accuracy of the financial information, in April 2019 the JSE instructed Ayo, through its auditor BDO Cape Incorporated, to conduct an “agreed-upon procedures” engagement and subsequently an audit of Ayo’s previously published unaudited interim financial statements for the six months ended 28 February 2018 and 2019.
Because of the engagement, management identified apparent shortcomings in Ayo, including not having a suitable amount of qualified staff in the finance team and inadequate financial controls in place to ensure the accuracy and completeness of financial information disseminated to the market.
Subsequent to the JSE’s instruction, Ayo published amended and corrected financial results going back to the 2018 interim financial period. Each of the financial statements published by Ayo contained adjustments and corrections to the previously published results and were restated to correct numerous material errors and omissions.

“The errors and misstatements in the 2018 unaudited interim results were quantitatively and qualitatively material, resulting in Ayo having to restate its 2018 interim cost of sales, gross profit, operating expenses, investment revenue, profit after tax, inventories, deferred tax, provisions and other accounts of significance to its business and operations by as much as 50% in some instances, including a 4% decrease in gross profits,” the JSE said.

“While the 2018 interim profit after tax decreased by 19%, the 2018 interim earnings per share decreased by 13% as a result of the corrections. Further, in correcting these errors, goodwill decreased by 11%, inventories decreased by 69% and provision liabilities increased by 61%.”

Damning

In a particularly damning section of its statement, the JSE said Ayo failed to subject the 2018 interim accounts and underlying documents to a “critical and thorough review, resulting in numerous line items in the statements of financial position, comprehensive income and cash flows containing material errors”.

“At the time, the company did not have robust financial reporting procedures and processes to avoid these errors, resulting in the dissemination of financial information that did not comply with IFRS (accounting standards). Further, the company did not appear to have sufficient staff in the finance team, as well as staff possessing sufficient historical and technical knowledge of the company, to produce financial information that would provide a fair presentation of Ayo’s results to the market since its listing on the JSE in 2017.”

Similar deficiencies were found in the group’s 2019 unaudited interim results, “mainly as a result of incorrect application of judgment, IFRS errors, inadequate financial reporting controls and review processes that contributed to misstatements in the interim financial statements”. These errors and misstatements were “quantitatively and qualitatively material, resulting in restatements to other operating gains, other operating expenses increasing by 23%, and the 2019 interim headline earnings per share decreased by 50%.”

Then, for the 2019 reviewed full-year results, Ayo published a change statement on 31 January 2020, highlighting significant changes to its previously published numbers. The adjustments centred on financial instruments and complex acquisitions, incorrect classification of items and the incorrect calculation of headline earnings per share, the JSE said.

Furthermore, Ayo incorrectly included non-cash items in the statement of cash flows, which had to be removed and adjusted for. In correcting these errors, Ayo’s other operating gains and expenses increased by 133% and 23% respectively, thereby affecting profits and decreasing the initially published reviewed earnings per share and headline earnings per share by 19%. The balance sheet position underwent significant changes between the review and audit, reflecting a decrease in goodwill of 29%, reserves of 43% and contingent consideration liabilities of 53%. The company also incorrectly included non-cash items in the cash flow statement and had to correct the cash flows relating to operating, investing and financing activities.

Furthermore, on 31 January 2020, Ayo published its annual report, audited 2019 annual financial statements in which it “omitted numerous disclosure notes”.

“Ayo’s previously published financial information did not comply with IFRS and was incorrect, false and misleading in material aspects and this incorrect information was disseminated to shareholders, the JSE and the investing public.

In response to the JSE’s statement, Ayo issued a statement of its own, also via the stock exchange news service, in which it said it accepts the findings of the investigation that it “failed to observe the highest standards of care in the dissemination of the financial information into the marketplace”.

‘Not fraudulent’

“These aforementioned items have in fact been remedied and Ayo has fully co-operated with both the auditors and the JSE throughout this process,” it said.

“Ayo’s board of directors understands that there is much room for improvement and remains committed to putting additional procedures and processes in place going forward in order to disseminate financial information which is accurate and complete.”