Are these companies misleading investors?

Are ASX-listed companies getting away with too many ‘one-off’ adjustments and non-audited underlying profit results?

Could they actually be deceiving investors into thinking their results are much better than they actually are?

It seems they are according to one well-known investor.

Former fund manager Peter Morgan is warning that investors need to be wary of companies artificially boosting profits and bonuses and hiding write-downs and other one-off expenses, says the Australian Financial Review (AFR).

If you are going to use those figures there have to be some boundaries around it and it can’t just be a free-for-all because these figures are not audited or signed off and it is open to skulduggery, particularly when times get tough,” Mr Morgan told The AFR.

In the latest financial results, more than $26 billion was written off their assets by several companies including BHP Billiton Limited (ASX: BHP), South32 Ltd (ASX: S32), Woolworths Limited (ASX: WOW), Wesfarmers Ltd (ASX: WES) and Santos Ltd (ASX: STO).

Company Last Price Market Cap ($m) Underlying profit Statutory profit One offs
BHP Billiton Limited $20.09 $101,762.4 US$1,215m -US$6,385m US$7.7bn
South32 Ltd $2.28 $12,138.2 US$138m -US$1,615m US$1.8bn
Santos Ltd $3.48 $6,176.4 -US$5m -US$1,104m US$1.05bn
Wesfarmers Ltd $43.06 $48,491.2 $2,251m $407m $2,172m
Woolworths Limited $22.52 $28,797.7 $1,558m -$1,235m $1,873m

Source: Company reports

It’s not the first year that billions have been written off by companies, but according to accounting firm KPMG, the write-downs are twice the amount of those reported in 2015, and the highest since the global financial crisis.

While many companies claim the costs are non-cash, at some stage the assets were purchased using real cash, so some management teams are getting away with making dud acquisitions and not being held accountable.

The regulator, Australian Securities and Investments Commission (ASIC) is also reported to have become involved, after research by Ownership Matters of 253 companies in the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) showed that more than 60% of the top 300 companies inflated their profits this year – and the gap between audited, statutory profit results and underlying/adjusted profits exploded. 22.5% matched their audited profits – or in other words had no adjustments to their net profit.

But Mr Morgan has criticised ASIC saying the regulator is not as tough as the United States’ Securities and Exchange Commission (SEC). And KPMG audit partner Kin Heng has also told the AFR, “our survey has revealed that ASX200 companies are not fully complying with those [ASIC] guidelines.”

And Ownership Matters equities analyst James Samson warned that the accounting treatment was often used as the basis for executive bonuses and could be distorting shareholder votes during the upcoming AGM season.

We often see new CEOs take big write-downs in their first year, which allows them to set a low hurdle to improve performance and earn big bonuses over the following years.

Foolish takeaway

Beware of companies consistently using write-offs and one-off expenses to adjust their ‘underlying’ profits higher. In many cases, those one-off expenses actually happen on a fairly frequent basis and investors might be better off using statutory or reported profits as the ‘true’ profit.


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Motley Fool writer/analyst Mike King owns shares in Wesfarmers Ltd and Woolworths Limited. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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