Get-togethers

Supervisory directors write in a two-line statement that they are 'trying to arrange a top tier audit on terms favorable to the company'. They want to announce the name of the audit firm 'at the latest' during the shareholders' meeting (AGM) to be held next month.

It is, to put it mildly, unusual that an accountant appointment is on the list, while investors do not know why the current accountant is retiring, nor which accountancy organization will take on the audit work.

On Monday 22 May, B&S shareholders will meet physically for the first time since 2019 in a Luxembourg hotel. Last Friday (April 21) the trading house sent out the invitation for the AGM. In addition to the accountant issue, shareholders can also have their say about the new CEO Peter van Mierlo. His appointment will be the subject of discussion. 

Uncertainty
B&S supervisory directors do not give the reason for looking for a new accountant. In fact, the company does not even explicitly state that Deloitte is actually leaving permanently. There is therefore a possibility that the firm will compete for the new audit assignment, although that seems highly unlikely. Then it would have been more logical if B&S had simply written that down in the general meeting agenda. In any case, it is strange that B&S does not mention the break with Deloitte anywhere. In the annual report published last week (April 21), nothing is said about it, and the general meeting agenda is also inconclusive.

It could be that Deloitte, for example, has reached its maximum number of audit years. In that case, according to the rotation rules for accountants, a new accountant must be sought. But this argument is not presented. It is not possible for outsiders to determine exactly how long the relationship between B&S and Deloitte has existed. B&S came to the Amsterdam stock exchange in 2018. The information document published on that occasion (prospectus) did state that Deloitte has audited the figures for the years 2015 to 2017 in the context of the IPO. This was a requirement to be able to include the historical data in the prospectus.

Due to the ambiguity that B&S creates, it seems very likely that the parties are going to separate. Then it doesn't take much imagination to see a connection here between the administrative problems at B&S and the role of majority shareholder Willem Blijdorp in this. These events may have played a role in Deloitte's decision to no longer wish to act as an accountant. Or B&S itself did not want to continue with Deloitte. That is also a possibility.

Based in Dordrecht, B&S is legally a Luxembourg company and listed on Euronext Amsterdam. Meetings with investors must therefore take place in the Grand Duchy. Incidentally, there was no question of a full-fledged AGM in the past three years. Shareholders could only submit questions by letter. The company did not want to facilitate a virtual meeting, which would allow investors to interactively participate in the AGM via a video or chat connection. The exclusion of investors was done by invoking local corona restrictions. It was possible to participate remotely in the AGM at almost all companies listed in the Netherlands.

New risk
Whatever the reasons for the upcoming auditor change, the fact is that Deloitte encountered a new risk during the just-completed audit for the 2022 financial year. The administrative conflicts at B&S were reason enough for Deloitte to designate 'corporate governance' as the core audit matter. This is evident from the annual report of the trading company, which was published last week.

Deloitte partner Jan van Delden writes in his audit report that founder and majority shareholder Blijdorp (67 percent), also vice-chairman of the supervisory board, 'had the power to control the decision-making within the supervisory board and the board because he controlled the majority of the voting rights and thus the composition of the Supervisory Board and the Board'. In other words, the way in which management and supervision are arranged at B&S is slightly different from most other listed companies.

In November last year, a difference of opinion between Blijdorp and two then B&S commissioners escalated. Those independent regulators refused to sign a takeover bid with which Blijdorp wanted to take B&S off the stock exchange. He then used his power to dismiss one of those obstinate supervisory directors, chairman of the supervisory board Jan Arie van Barneveld, in a general meeting enforced by Blijdorp himself.

It was this board dispute that prompted Deloitte to include a critical remark in the auditor's report. We therefore regard the changes in the composition of the Supervisory Board, in particular the dismissal of the former chairman of the Supervisory Board and the resulting change in the composition of the Audit and Risk Committee, as key points of our audit. report. The expelled Van Barneveld was one of the two members of this audit and risk committee. The other member is still Leendert Blijdorp, son of Willem Blijdorp. Blijdorp junior is now joined in that subcommittee by Van Barneveld's successor, former Ahold supervisory board member Derk Doijer.

To assess the change in governance at B&S, the Deloitte auditor has "added experienced people to his audit team," the auditor's statement says. He also stated that he had spoken in separate sessions with the members of the Supervisory Board and the Executive Board, the Director of Internal Audit, and read minutes of Supervisory Board and Executive Board meetings. The results of the governance study conducted by B&S were also 'assessed' by him, according to Van Delden.

Critical note
Key audit matters are matters that the auditor believes played the most significant role in his audit. More in accounting jargon: issues that pose a significant risk of material misstatement of the financial statements due to fraud or error. For investors, the texts in the depths of the annual report are highly recommended. They are a useful tool to dig into the figures in the annual accounts and to become aware of the risks that a relative insider such as the accountant observes. Often it is the valuation of goodwill, revenue recognition, tax assets or pension obligations that are designated as key points.

The fact that 'corporate governance' was given much emphasis for the first time during the annual audit at B&S has additional information value for outsiders. Although the attentive follower of the company may also think that this critical note from the accountant is a bit late. To be precise, after the shards were already on the floor at B&S.

Last year, the accountant did not yet point to the dominant position of Willem Blijdorp and the consequences that this could have. At that time there had not yet been a takeover attempt and no directors and supervisory directors had yet (forced) to leave, but the dominant role of Blijdorp is not something of today or yesterday. Investors probably expected a more signaling and warning role from the accountant. In that case, Deloitte would in any case have shown more critical attitude and thoroughness.

Last year saw an exodus of various officials. Top man Tako de Haan left after it was revealed that he had taken out a very advantageous mortgage with Blijdorp. At the same time, Blijdorp resigned as Vice-Chairman of the Supervisory Board. Previously, financial director Peter Kruithof had also resigned. At the end of last year, it was Van Barneveld and a fellow supervisory director who left at the hands of Blijdorp.

It is the second time that an auditor has included 'corporate governance' as a critical note at a company listed on the Dutch stock exchange. Previously, this only happened with Altice, which has since disappeared from the Amsterdam stock exchange. That was in the audit reports accompanying the annual accounts of the telecom company for the years 2018 and 2019. It is only a coincidence, but Deloitte was also the accountant at Altice.

Seven trades
The failed takeover attempt by Blijdorp in the summer months of last year set off musical chairs in the supervisory board. At the end of December, two new supervisors took office. Not long after, Blijdorp himself left as a supervisory director, after an internal investigation in mid-February revealed that there are "certain matters about the company's governance that force the company to provide more openness in the 2022 financial statements".

The internal investigation found that several senior officials of the trading house received additional payments or financing directly or indirectly from Blijdorp, beyond their regular remuneration. Researchers came across a total of seven transactions in which Blijdorp passed extra money or financing to various B&S managers. These transactions were in violation of its own policy of preventing conflicts of interest. Interim CEO Bas Schreuders said last week that these transactions were "unfortunate" and "even inappropriate". These issues should have been covered in the B&S annual reports in previous years.

In any case, these conclusions are painful for Deloitte. The acknowledgment that the transactions should have been included in previous B&S annual reports can also be blamed on the accountant. It irrevocably raises the question of why Deloitte was not aware of these internal issues earlier. Has the control been tight enough; have the right people been questioned and has Deloitte asked for and received the right documents? It is not inconceivable that this affair has put pressure on the relationship of trust between the company and the accountant.

Related parties
Another special point of attention for the auditor, as in the two previous years, was 'transactions with related parties'. In the past year, B&S again frequently did business with other Willem Blijdorp companies. In this type of trading, there is a risk that transactions will not be concluded on arm's length terms and that B&S will be disadvantaged. Last year, B&S bought 25 million euros worth of products and services from companies affiliated with Blijdorp, according to the latest annual report. In 2021, this was significantly less at 12 million euros. For an amount of 32 million euros, goods, and services went the other way and other Blijdorp companies were the customers. In addition, B&S annually transfers millions of euros in rent for buildings it rents from Blijdorp, more than 5.5 million euros last year.

It is this kind of small print, in jargon transactions with related parties, that minority shareholders should be aware of. They can lead to a conflict of interest, for example, because Blijdorp benefits from high rents in its role as landlord, while the company prefers low accommodation costs.

Bad debt settlement
The recently published annual report also provides a new perspective on a loss item previously reported by B&S. The company is now providing some additional information about the provision made at the time.

An important reason for the drop in profitability (EBITDA) was provisions made. These amounted to approximately 16 million euros. Investors were shocked at the half-year figures because of an unexpected cost item of 7.5 million euros due to a 'doubtful debtor' in the Middle East.

In the call with analysts, there was actually only one question at the time, which was fired in various variants at CEO Tako de Haan, who has since left. How could this go so wrong? Meaningful answers were not forthcoming. Former financial director Peter Kruithof then swore that there was a one-off loss and that B&S is normally covered against this type of payment risk.

In mid-February, when B&S postponed the publication of its 2022 annual report and announced an internal investigation into strange transactions, it turned out that the poison cup was not yet empty. The straw pot was supplemented with a further 6 million euros, the entire remaining amount that was still outstanding with the doubtful debtor.

The annual report now indicates that it concerns an 'intended business collaboration that has not worked as expected'. Also new is that a settlement agreement was concluded last March, which means that the former business partner will still pay 5 million euros of the outstanding invoices of 12.6 million euros in total. B&S, therefore, expects that part of the provisions can be reversed, although it does assume that this collection process will take several years (see the annual report, page 170). customer relationship'. It would be 'an isolated and one-off event that has no reflection on the group's customer portfolio'.

The explanation does raise new questions about B&S's motives for this 'business cooperation', which ended in a million-dollar noose. A loss item of approximately 13 million is substantial for a company that made a profit of 36 million euros last year (profit including provisions made). In the annual report, B&S continues to emphasize that it has a 'strict internal risk management policy'. All transactions should be secured by credit insurance, prepayment, or letter of credit.

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