How Haco bosses cooked the books, earned big bonuses

Top executives of Haco Tiger Brands, a Kenyan subsidiary of South Africa’s Tiger Brands overstated the firm’s performance to show they were excellent performers deserving great rewards.

The trick that the Kenyan team used to earn more was laid bare at an investor briefing held last week in Johannesburg, South Africa.

In his presentation, the Tiger Brands’ chief executive officer, Mr Peter Matlare, said Haco top executives pre-invoiced sales and moved stock to third party warehouses to make it appear as if they had reached their performance targets.

According to Mr Matlare, the Kenyan subsidiary, led by sacked managing director, Mr Geoffrey Kiarie, were only focused on reaching their targets “in a number of ways that we would not ordinarily expect them to”.

Among the tricks used included altering financial statements and engaging in pre-invoicing to reach their performance targets. Stock that was yet to be sold was moved to third party warehouses to make it appear as if the set performance targets had been achieved.

As a consequence of their manipulation, Mr Kiarie and his team were rated to be among the best performing at the group level in a number of key products. The team also falsified operating profits by over Sh879 million.

BENDING THE RULES

“They have been judged to be one of the best performing in a number of key areas, by way of example, in our Bic business, two-and-half-years ago, they were globally in the top three and they got some fantastic awards,” Mr Matlare said.

To keep the awards pipe flowing, the team bent the rules to the breaking point.

“What I believe is that the team decided to ‘drive and drive and drive’ without sticking to the rules and it is a great disappointment. As a consequence, we got rid of all those who did wrong,” Mr Matlare added.

Billionaire businessman and disc jockey Chris Kirubi holds a 49 per cent stake in the joint venture.

“As the local shareholder of Haco Tiger Brands, I’m disappointed with the managers involved in manipulating figures,” Mr Kirubi said in messages sent out on social media after the story was broken by Business Daily on Wednesday.

“Their actions are unacceptable and I condemn them.”

Haco deals in BIC brand of pens, personal and household care products such as Ace, Jeyes, Miadi, Motions, TCB, Bloo and SoSoft.

Mr Kiarie was appointed managing director for the firm in 2012. He was replaced in December, last year, in an acting capacity by Mr Peter Kang’ethe.

The discovery of the falsified accounts and the need to rectify the position reduced the group’s earnings for the half-year results for the period ending March 2015.

“Because they sold forward, this impacted on the first quarter of this year,” Mr Matlare noted.

The volumes of the Haco Tiger Brands in Kenya declined by 60 per cent with turnover slumping by 58 per cent, contrary to figures presented by top executives.

The turnover in the South African operations rose 8 per cent with volumes growing marginally by 2 per cent.

CONFIDENTIALITY OBLIGATIONS

“Notwithstanding all the governance measures we had the top team went after reaching their target and they sold forward in ways that we would ordinarily not expect them to do,” Mr Matlare said.

Contacted, Tiger external auditors, Ernst & Young said they could not comment on what role, if any, the auditing firm had in unearthing the irregularities at the Tiger Brands Kenya subsidiary or what recommendations it may have made to Tiger Brands to avoid a repeat of such irregularities. 

“Due to confidentiality obligations, we are unfortunately unable to provide a response to the question(s),” the audit firm’s Africa media relations official Fathima Naidoo told Smart Company.

The South Africa team was also hard-pressed to explain to their investors and regulators in South Africa, where they are listed, how the crime went unnoticed.

Tiger noted that the irregularities were picked by neither the internal nor external auditors. The sacked managing director was identified as the mastermind of the scheme together with a number of senior executives, who are facing disciplinary action.

“It was very difficult for anybody to have been able to pick this up in the way they (top executives) manipulated this in the quarter of last year. We’ve not had that kind of irregularity in the last five years that we’ve been invested in that business,” Mr Matlare said of the Kenyan operation in which Tiger Brands holds a 51 per cent stake.

Haco Tiger Brands was born after the South African firm bought a 51 per cent stake in the then Haco Industries (K) Ltd from Mr Kirubi in 2008 for an undisclosed amount.

The South African business has since then invested over Sh50 billion in the country, mostly in capacity expansion at its Kasarani-based factory, which employs over 400 people.

Tiger Brands has in its past annual reports praised the Kenyan business, terming it a sound investment given its good performance since they bought a majority stake seven years ago.

Mr Matlare, however, said that apart from the new management the firm had put in place, the company now has closer oversight over its Kenya subsidiary.

OVER-VALUATION

“From governance point of view both at the board level and the audit level, there is increased scrutiny. We are quite satisfied now, both from a people and systems perspective, that they would not be able to do this again,” he said, adding that it had begun instituting legal proceedings against Mr Kiarie to recover the bonuses paid.

Aside from the irregularities, Kenya is said to be a critical contributor to South African business with management having previously contemplated making multi-billion-shilling acquisitions in the country.

However, only last year, Tiger Brands abandoned its plan to acquire Kenyan firms, Rafiki Mills and Magic Oven Bakeries for Sh2.1 billion over what analysts said was over-valuation of the local enterprises.

In South Africa, the firm deals in fast moving consumer goods such as cereals, peanut butter, baked beans, bread as well as personal and homecare products.

The firm has subsidiaries in Kenya, Ethiopia, Nigeria, Cameroon and Zimbabwe.

THE NUMBERS 

60pc 

The decline in Haco Tiger Brands  volumes in Kenya in the half-year results for the period ending March 2015. This led to the turnover slumping by 58 per cent.

2008

When Haco Tiger Brands was born after South African firm bought a 51 per cent stake in the then Haco Industries (K) Ltd from Chris Kirubi.

49pc 

Stake that Chris Kirubi holds in Haco Tiger Brands.

Sh50bn 

Amount that the South African business has invested  in Kenya since 2008, mostly in its Kasarani-based factory which employees over 400 people.

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Inside top managers’ bag of tricks

•    Managers pre-invoiced sales and moved stock to third party warehouses to make it appear as if they had reached their performance targets.

•  They altered financial statements to look impressive.

•  The team also falsified operating profits by more than Sh879 million.

• As a result of the manipulation:

•  The managers  were praised for sterling performance and consequently earned huge bonuses.

•   Executive officer Mr Goeffrey Kiarie who is said  to have masterminded the  manipulation has been sacked.

•   Discovery of the falsified accounts and the need to rectify the position reduced the group’s earnings for the half-year results for the period ending March 2015. 

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CEO’s take on company’s mess

In an interview with Moneyweb shortly after releasing the half year results, the Tiger Brands’ chief executive officer, Peter Matlare, gave a more specific description of what went wrong at Haco Tiger Brands.

“We realised they were chasing their numbers… and got it horribly wrong. (They) ended up effectively selling forward, moving product off site because the customers had not collected (it) because they had not paid, although they’d sent the invoices out. So it was quite a messy bit,” he said.

Erroneous provisions

“The second (issue) is that they put up a whole load of erroneous provisions and we have had to reverse all of those. The third is there has been excess product in the market. We’ve seen sales in our first quarter dip quite badly because we’re trying to get the market to pick up all that extra volume. So that’s taken a little while to get fixed… It will take us, I suspect, till the end of this financial year to make sure we’ve cleaned it out.”

There are several ways in which companies can falsify accounts and various reasons why they do so.

The first one is where a company’s management, at times in collaboration with its auditors, inflate revenues or artificially decrease expenses.

These alterations paint a healthy image of the company, which in turn keeps investors happy and could also be used to justify hefty increases in salaries and bonuses for top managers.

Profit alterations also work in the reverse. Accountants deflate a company’s income or exaggerate the expenses, making a company come off as performing poorly than it actually is.

Bad performance

This approach is used when a company wants to dissuade potential acquirers or lump all bad performance to one period and explain it using prevailing negative macro-economic factors. In the subsequent period, the company will then seem to have bounced back to a healthy position.

— Business Daily