Losing confidence in Namaste Technologies' (TSXV: N) financials
Things just got worse for Namaste Technologies (TSXV: N). A lot worse. Because I am interested in educating investors, to me, Namaste is the gift that keeps on giving. It provides many opportunities to explain issues that don’t commonly arise.
For example, when Namaste announced it would throw an elegant party to any shareholder who would agree not to sell their shares for ninety days, I said, “….in over four decades of active investment analysis, this is the most ridiculous thing we have seen. Especially for a Toronto Stock Exchange listed company.” (Let’s Toke Business, May 18, 2018). At the same time, I said, “We have some advice for the management of Namaste (TSXV: N): If you manage your business properly, the stock price will look after itself.” If they had taken that advice, they would have ensured their audit was completed on time and we would have missed out on this educational opportunity.
I guess no one should be surprised that Namaste management announced that it will probably be unable to complete its audited financial statements by the March 31, 2019 deadline. After all it wasn’t able to get their financials ready on time for the previous two years either. I’m sure there is no historical supporting documentation but this has to be an all-time record for public company ineptitude. At almost the same time as they dropped this negative bombshell on its investors, Namaste announced their auditor PricewaterhouseCoopers (PwC) has resigned as its auditor, a position it accepted less than six months ago. Management said in the news release, “The resignation has not impacted management’s confidence in its financial results….” Well, I have to tell you it has impacted my confidence in their financial results.
PwC is not just any auditor. It is one of the “Big Four” auditors in the world with revenue of over $40 billion. You may recall, Namaste management was almost forced to engage PwC after they failed to publish their audited yearend financials on time for the past two years in a row. You have to understand with a small company like Namaste that has evolved into a sort of mini-conglomerate with interests in different parts of the world, there will be differences of opinion when it comes to financial reporting. The process in cases like this will be that PwC has one concept of value that is far below what Namaste would like to show. So when PwC resigns it often means they cannot in good accounting conscience accept what the client, in this case Namaste, is claiming. Given my experience, resignation means PwC does not want to attach its name and reputation to what Namaste is trying to say.
What this comes down to is both management and PwC have access to all the financial records of the company. When an auditor renders an unqualified or “clean” report, it is saying this is an independent, unbiased and objective report. It also says the internal recordkeeping system is adequate. To be a “clean” auditor’s report, it means the auditor believes there are no material misstatements and there is sufficient evidence that there are no material misstatements. A clean or unqualified Auditor’s Report is an assurance that:
The financial statements have been prepared using Generally Accepted Accounting Principles that have been used consistently;
The statements comply with any applicable regulatory or statutory requirements;
There is adequate disclosure of any issues relevant to proper presentation of financial information; and
Any change in the accounting principles or application from the previous reporting period have been properly disclosed.
The typical auditor’s report comes in three parts:
Paragraph one describes the audit work done and states the auditor’s and company’s responsibility.
Paragraph two provides more detail on the work done, procedures applied and a general disclaimer.
Paragraph three is the auditor’s opinion and normally includes wording such as “In the Auditor’s opinion, the financial statements referred to present fairly, in all material respects, the financial position of the Company as at [date].
The Auditor’s Report is important because it is the equivalent of a “A Good Housekeeping Seal of Approval” regarding the accuracy of the financial statements. The Auditor’s Report is also important because the statements are used by investors, shareholders, lenders, regulators, investment bankers, and many others in the course of their assessments of the Company.
Namaste’s case raises the issue of “auditor shopping” also known as “opinion shopping.” A company might conclude that just because, I assume, PwC is unwilling to provide a clean opinion, someone will. So they will go looking for an Auditor that will accept their “version of the facts” and provide a clean opinion. By the way, the U.S. Securities & Exchange Commission (SEC) specifically prohibits opinion shopping.
Here is what I can see in the future. Namaste did not go through the public humiliation of having PwC resign only to engage a new auditor that takes the same position as PwC. So I doubt they will hire Deloitte (#1), Ernst & Young (#3) or KPMG (#4) who are the other three of the “Big Four” auditing/accounting firms. In fact, I doubt any of these three would accept the assignment. So it is fair to assume that the firm that becomes the new auditor will not have the same issues as PwC. That is why I do not agree with management’s statement that “The resignation [of PwC] has not impacted management’s confidence in its financial results….” My guess is that Namaste’s new auditor will be much farther down the auditing food chain than PwC and are more likely to do as Namaste management obviously wants. I guess Sean Dollinger’s uncle, Sefi Dollinger and Kiran Sidhu weren’t impressed as both resigned as directors “to pursue other interests.”