Pcf Share Discussion Threads

[cc2014] 06/1/2022 14:11

Hidden away under AIM rule 26 !

Dear Shareholder,
In its letter of resignation as auditor of PCF Group plc (the “Company”;) dated 23 December 2021, Ernst & YoungLLP, detailed certain matters which it felt were matters connected with its ceasing to hold office that it consideredneeded to be brought to the attention of members or creditors of the Company in accordance with section 519of the Companies Act 2006.

This requirement was announced on the 23 December 2021 by the Company in its “Board Changes and Changeof Auditor” announcement, however, as we are required to also send that statement to you separately undersection 520 of the Companies Act 2006, these matters are set out in the schedule to this letter for yourconsideration.
I would ask that you consider these matters in conjunction with the contents of the Audit & RiskCommitteeReport in the Report and Financial Statements for the year ended 30 September 20201
.

Schedule - Ernst & Young LLP’s (EY) section 519 Companies Act 2006 statement of matters connected
with its ceasing to hold office that it considers need to be brought to the attention of members or
creditors of the company.
“On 2 March 2021, we verbally informed the Board of Directors of our intention to resign following the
completion of the 30 September 2020 audit.
At that time, we had concluded that we would be resigning due to our audit work identifying significant
deficiencies in internal control and corporate governance, which had led to material adjustments being
identified as a result of our audit procedures. These adjustments included material errors in the unauditedpreliminary results published on 9 December 2020. Furthermore, in our audit report dated 22 December 20212, we state that as a result of enquiries raised by us during our audit of the financial statements, the Group’s new Chief Financial Officer identified certain accounting errors and misstatements that led to the Company engaging a third-party accounting firm to undertake an independent forensic investigation into those errors and misstatements. Following this, the Group
Chief Financial Officer and Finance Function undertook its own further analysis and reconciliation procedures.
The independent forensic investigation identified certain manual adjustments made by the Group for internalmanagement, financial and regulatory reporting purposes. We concluded that certain of these matters wereindicators of fraud.
Given the potential wider consequences of this on our audit, we sought to extend our procedures and presenteda plan to the Audit Committee in July 2021. We were unable to complete our audit for the following reasons:
- Management was unable to provide sufficient and appropriate audit evidence in response to our extended testing requests.
- The Board of Directors resolved in July 2021 that management should only continue to provide us with the information necessary for us to issue a disclaimer of opinion on these financial statements.
For the same reasons as set out above, we were also unable to complete audit procedures over reclassificationsas described in note 1.9 to the financial statements3.”

[dandigirl] 06/1/2022 14:02

Can't find it on their website?

[che7win] 06/1/2022 13:52

RNSAs detailed in its announcement of 23 December 2021, PCF announces that it has now posted to its members the notice of certain matters that Ernst & Young LLP, as resigning auditors, considered need to be brought to the attention of members and such creditors as it is required to under the Companies Act 2006.

[hopespr1ngseternal] 06/1/2022 13:08

Cc: thank you for clarifying - I suppose my point is that by July relations between PCF and EY may well have reached such a nadir that PCF wanted nothing more to do with EY apart from the disclaimer and certainly not to have homework marked by them. Pure speculation of course.

[cc2014] 06/1/2022 09:49

Hope,

"There is no evidential basis for your suggestion that the July decision to opt for a disclaimer was designed to cover up the fraud."

This was not my point. My point is that where such a thing to be taking place then it should be investigated by the auditors. To not do so means the Board are marking their own homework.

I think shareholders deserve better.

[hopespr1ngseternal] 06/1/2022 09:36

CC: if you read the report of the Remuneration Committee you will see that action is being taken against unnamed individuals to recover remuneration and compensation for loss. After their exhaustive review I have no doubt that the company knows (and the auditors know) exactly what has gone down. There is no evidential basis for your suggestion that the July decision to opt for a disclaimer was designed to cover up the fraud.

[hopespr1ngseternal] 06/1/2022 09:25

Topvest: the Board including three CAs is comfortable with the Sept 2020 b/s so why should the new auditors not be? I assume all this has been discussed with the new auditors. It is obvious that there has been a complete breakdown in the relationship between PCF and EY.

[hopespr1ngseternal] 06/1/2022 09:20

Topvest: so Somers have used the suspension price.

[topvest] 05/1/2022 22:03

Somers valuation at Q4 was $37.5M for their c65%:

Somers’ total assets decreased over the quarter to $715.4 million (September 30, 2020: $508.6
million) due to the valuation decreases and currency movements outlined above. The
investment portfolio was $660.7 million as at September 30, 2021 (September 30, 2020:
$500.9 million) with equity investments ($652.0 million) accounting for 98.7% of this total. The
remaining portfolio investments consisted of other financial investments. Total assets included
a loan of $52.8 million to Provident Holdings relating to the sale of BCB. Within investments,
Resimac at $376.3 million, Waverton at $117.2 million, and PCF at $37.5 million together
represent 80.4% of total investments. Somers’ net asset value per share ended the quarter at
$27.70 (September 30, 2020: $19.78).

[topvest] 05/1/2022 21:50

The 2021 and 2022 accounts will also be qualified, so the issues will be around for a long while yet. The 2021 audit opinion is likely to include a disclaimer on the results for the year and a qualification on the closing balance sheet on the grounds of a lack of comparability versus the 2020 numbers which are effectively unaudited. The 2022 accounts will also be qualified.

The best case scenario for the 2021 audit in all likelihood is that the auditors get comfortable with the Sep 2021 balance sheet only.

The new auditors will not be able to sign off on the 2021 results (i.e. the income statement) unless they can get comfortable with the Sep 2020 opening balance sheet.

I am not a banking expert and so I am not sure what this means in relation to their ability to lend, take deposits and raise finance. However, it all looks a bit of a disaster. Maybe they can just sell their business (not the company) to another banking business to side-step the obvious issues? Whether there are any buyers is another question. I can't see any upside for any party other than Somers.

[georgelees] 05/1/2022 15:21

Presumably it is not clear whether the manual adjustment was justified/justifiable or not, stating it unjustifiable would involve accusing a named individual and start all manner of legal processes? Going further and stating it was fraud would require a high degree of proof, which presumably does not exist otherwise the police etc would be involved. So all we have is a manual adjustment, which as they say can be an indicator of fraud but is not necessarily, and in this case presumably not. I would imagine that it was a debatable entry and someone decided (wrongly) to override the system. But the accountants don't want to rule out fraud for liability purposes. So all in all its a fairly valueless report.

[cc2014] 05/1/2022 14:55

I see it like this.

The auditors have said in their report their are indicators of fraud. The Board decided in July not to provide further information to evidence whether fraud occurred or not. Without the evidence how do they assure themselves never mind the auditors. It's bizarre. This is a bank we are discussing.

[georgelees] 05/1/2022 14:47

Thanks Graham. The accounts seem to list all manner of things they wish to judge the accounts by, but say very little.............

As to 'fraud' it says......"The independent forensic investigation identified
certain manual adjustments made by the Group for internal management, financial and regulatory reporting purposes. We concluded that certain of these matters were indicators of fraud.".............. Which is not a finding of fraud - if that means theft - we know that no money left the company. Its somebody trying bodge the accounts for one reason or another. I remain hopeful that the wider problem is all a lawyer/accountant created issue, but the longer it goes on its creates more problems.

[hopespr1ngseternal] 05/1/2022 14:28

Graham: to describe manual alteration of accounting records to secure a particular objective as indicia of fraud is to all intents and purposes a tautology. We have known this since June and it is not being suggested that the fraud has been material..

[graham1ty] 05/1/2022 08:13

CC, I started going through the accounts, and, in the detail, there are 101 red flags. I did not print it off, to save my little printer (PS, could someone on here alert us when they see an actual hard copy).

Of the detail, it was unclear whether it is driven by backside covering lawyers, throwing absolutely everything into disclosure, or an attempt to blind us with the sheer complexity of the disclosures. Taken individually, some of the disclosures are absolutely awful (George, it does say fraud.....), yet in the covering statement from the Company (the RNS) it does not mention fraud.

Modern Accounts with 50 pages on Risks, 50 pages on Governance, 50 pages on ESG, etc etc, do nothing for shareholder protection and we end up with a document so unwieldy that it is next to useless and it is impossible to separate the red flags from unnecessary scare mongering. The prime example: they have produced a massive document, effectively 16 months out of date, and it still does not address: what value is there left for shareholders ? Fundamental questions such as: are you in rundown ? Has the PRA limited your activities ? Do you need more capital ? These all remain unanswered........quite an achievement after producing a 122 page document....

[dandigirl] 04/1/2022 12:35

CC: I agree with the broad point made in your 3763 regarding shrinkage.
However, IMV there is no point in getting exercised now about accounts that are over 15 months old - although the content may be worth a reference against 2021's figures, when available.
By the by, the 2020 accounts are still not showing as filed at Companies House.
Records at Companies House show that PCF's accounts are normally filed by the following Jan/Feb.
Issuing 2021 accounts must be vital part of any next step.
Suspect that we will be hit with the 2021 accounts and a prospectus of some sort simultaneously, hopefully later this month.
Wouldn't be surprised if the AGM is postponed, though.
SOMERS have a big role to play whatever.

[georgelees] 04/1/2022 12:20

I don't think we know very much:
................................................................................
1. We don't know (unless I missed it) that the PRA is investigating or has imposed restrictions on lending - that might be inferred but would that not have to be disclosed.
...................................................................................
2. We don't know there is fraud, in fact they said no money has left the company. Misstatements on accounts but not 'fraud' as I would understand it.
..................................................................................
3. We don't know they are running down their lending due to a lack of deposits. They may have had more than they could cope with? It may be a capital ratios issue on the type of funding?
................................................................................
4. We don't know they need more capital - that is speculation, they were meeting their ratios in the admittedly old accounts.
..................................................................................
We do know they are not good at communicating, but hopefully that is because there is little to communicate and they want to get it all done and move on? Admittedly that involves a lot of hope....

[cc2014] 04/1/2022 11:01

Agreed Hope. It's a strange world but I agree the accounts are audited.

I took another look at the Independent Auditor's Report on page 65 onwards. For me also this is the first time I've ever seen an audit report with no opinion. I'm struggling a bit with the whole concept tbh. Perhaps what I struggle with most is that it appears the audit opinion given it's seriousness is not promoted to page 1 one of the annual report.

I've read it several times and there are a few things I've drawn from it below.
1. The auditors say it was a result of their enquiries which led the FD to identify errors and mistatements.
2. The independent forensic investigation identified manual adjustments for internal, financial and regulatory reporting purposes. The auditors see these as indicators of fraud.
3. The auditors inform us that that Board in July 2021 decided only to provide information to provide a disclaimer. I'm really struggling with this one. The market was not informed and this took 5 months to do. That seems a very long time.
4. The auditors were unable to determine whether certain disclosures around directors remuneration were not made. I am actually banging my head against the table on this one. To me this means the whole Board should go apart from the two new appointments. The fact they haven't resigned suggests to me Somers will vote them back in.

Edit: This is a bit flippant but the only way you guys are ever going to get fair treatment over this whole mess by removing the whole Board apart from Caroline Richardson and Garry Stran. I do not know if that is possible as Somers hold more than 50%.

[hopespr1ngseternal] 04/1/2022 10:52

Under AIM rules PCF must submit audited financial statements for y/e sept 2021 by end May 2022 - six months plus 2 month Covid extension.

[hopespr1ngseternal] 04/1/2022 09:25

CC: not being pedantic because it is important. The accounts have been audited but the auditors have issued a disclaimer. These are still audited accounts. I am no accountant and have not come across this situation before so may be wrong but do not think these are unaudited accounts.

[cc2014] 04/1/2022 09:04

Happy New Year to you all.

Some great posts recently.

My view, much of which I have said before. The directors have been constrained from lending by the PRA for some time, albeit no official enforcement action has taken place. PCF is a regulated bank which has failed to file a set of audited accounts on time and everything flows from there. How for example is the PRA to make decisions on PCF's capital ratios if PCF cannot provide sufficient evidence to the auditors to get them signed off as a going concern?

Every month for the last three months, savers fixed rate bonds are maturing and their cash is being returned to them. Indeed the rates were so low before September that it's been happenning for many months before that. In addition PCF are locked out of the wholesale market and the accounts show that the BOE may be requiring some of it's money back early as PCF may not be able to provide sufficient collateral to support the BOE loan.

Effectively PCF is being slowly wound up and I believe this will continue until there is audited set of figures for Sept 2021. So, it's a race against time. Every month that PCF is constrained from lending, PCF is losing gross margin to support the overheads and underlying profit becomes pressurised.

[hopespr1ngseternal] 03/1/2022 23:27

Graham: rereading your post 7349 the regulatory breaches did not involve any adjustments to the accounts. One was temporary and self correcting and the other involved regulatory capital disclosures

[hopespr1ngseternal] 03/1/2022 22:48

Topvest: if I have read note 29 to the accounts correctly I very much doubt that they have a cash flow problem. And last time I looked PCF represented around 4% of the Somers portfolio and has since been written down. It is not a huge deal for them financially. That said a good business doesn’t turn into a bad business overnight and I would expect Somers to share the view that this is a good business which has grown too fast and has hit a spot of turbulence as a result - which it will get through via an injection of funds from Somers and other supportive shareholders, including myself, who see value in the business. I also wish to take the opportunity to endorse in full the remarks by 123davidgwylim about Scott and Robert.

[seasidehippo] 03/1/2022 21:35

Another Uropygium?

[topvest] 03/1/2022 20:22

If it needs a rescue equity fundraise that will likely involve an issue at a highly dilutive price, which will wipe-out all existing equity value in my view. I do think the only party to salvage value is likely to be Somers, or existing shareholders taking a hit and investing big in any equity raise. Of course, getting a rights issue away with qualified accounts may not actually be possible. The disclaimer of audit opinion does cause a major problem.

Somers may end up taking it private if they cannot raise external funding. The qualification is less of a problem for them as they don't consolidate the results but treat all subsidiaries as investments.

It will certainly be interesting. I suspect a solution will be found with Somers holding most of the equity, but there is some risk of total collapse. Its 10% of Somers investment portfolio in the 2019 accounts.