AYO TECHNOLOGY SOLUTIONS LIMITED - Censure imposed by the JSE on AYO Technology Solutions Limited

Censure imposed by the JSE on AYO Technology Solutions Limited

GEN – General – AYO Technology Solutions Limited

Censure imposed by the JSE on AYO Technology Solutions Limited (“Company” or “AYO”)



The JSE hereby informs stakeholders of the following findings in respect of the Company:



BACKGROUND

1.    On 8 April 2019, two former executives of AYO made statements under oath at the PIC Commission of Inquiry
      that executives of the Company were instructed to amend numbers contained in AYO’s unaudited interim results
      for the six months ended 28 February 2018 to reflect an inflated number to the market. In light of the uncertainty
      around AYO’s 2018 unaudited interim results and the accuracy of the financial information, in April 2019 the JSE
      instructed AYO through its auditor, BDO Cape Incorporated (“BDO”) to conduct an Agreed-Upon Procedures
      engagement and subsequently an audit of AYO’s previously published unaudited interim financial statements for
      the six months ended 28 February 2018 and 2019 (“unaudited interim results”).



2.    Because of the engagement, management identified apparent shortcomings in AYO, including not having a
      suitable amount of qualified staff in the finance team and inadequate financial controls in place to ensure the
      accuracy and completeness of financial information disseminated to the market.



3.    Subsequent to the aforementioned instructions by the JSE, AYO published the following financial information to
      the market:



        i.     the audited interim financial statements for the six months ended 28 February 2018 published on 27
               March 2020;

        ii.    the audited interim financial statements for the six months ended 28 February 2019 published on 8 April
               2020;

        iii.   the reviewed preliminary results for the year ended 31 August 2019 published on 20 December

               2019 (“2019 reviewed preliminary results”);

        iv.    the audited annual financial statements for the year ended 31 August 2019 (“2019 AFS”) and a change
               statement published on 31 January 2020; and

        v.     supplementary information to the audited annual financial statements for the year ended August 2019
               published on 11 March 2020.
4.    Each of the financial statements published by AYO as referred to above contained adjustments and corrections
      to the previously published results and were restated to correct numerous material errors and omissions therein
      in accordance with International Financial Reporting Standards (“IFRS”).


ADJUSTMENTS AND CORRECTIONS TO FINANCIAL STATEMENTS


2018 unaudited interim results

5.    The errors and misstatements in the 2018 unaudited interim results were quantitatively and qualitatively
      material, resulting in AYO having to restate its 2018 interim cost of sales, gross profit, operating expenses,
      investment revenue, profit after tax, inventories, deferred tax, provisions and other accounts of significance to
      AYO’s business and operations by as much as 50% in some instances, including a 4% decrease in gross profits.
      Whilst the 2018 interim profit after tax decreased by 19%, the 2018 interim earnings per share decreased by 13%
      as a result of the corrections. Further, in correcting these errors, goodwill decreased by 11%, inventories
      decreased by 69%, and provision liabilities increased by 61%.


6.    The errors arose as a result of AYO’s failure to subject the 2018 interim accounts and underlying documents to a
      critical and thorough review, resulting in numerous line items in the statements of financial position,
      comprehensive income and cash flows containing material errors. At the time, the Company did not have robust
      financial reporting procedures and processes to avoid these errors, resulting in the dissemination of financial
      information that did not comply with IFRS. Further, the Company did not appear to have sufficient staff in the
      finance team, as well as staff possessing sufficient historical and technical knowledge of the Company in order to
      produce financial information that would provide a fair presentation of AYO’s results to the market since its listing
      on the JSE in 2017.



7.    Furthermore, AYO notified the JSE of additional errors identified and omitted from the supplementary
      information note contained in the 2018 audited interim results published on 27 March 2020, although these
      omissions were not deemed material by AYO.


2019 unaudited interim results

8.    Similarly, deficiencies identified in AYO’s 2018 interim financial reporting processes and controls applied equally
      to the 2019 unaudited interim results, mainly as a result of incorrect application of judgement, IFRS errors,
      inadequate financial reporting controls and review processes contributed to misstatements in the interim
      financial statements disseminated to the market.
9.    The errors and misstatements in the 2019 unaudited interim results were quantitatively and qualitatively
      material, resulting in restatements to other operating gains, other operating expenses increasing by 23%, and
      the 2019 interim headline earnings per share decreased by 50%. Further, in correcting these errors and incorrect
      classifications, intangible assets decreased by 40%, inventories increased by 41%, receivables decreased by 24%
      and payables increased by 23%.


10.   Furthermore, AYO notified the JSE of additional errors identified and omitted from the supplementary
      information note disclosed in the audited 2019 interims published on 8 April 2020, although the omissions were
      not deemed material by AYO.


2019 reviewed preliminary results

11.   AYO published a change statement on 31 January 2020, highlighting to the market significant changes made to
      its previously published reviewed preliminary results for the year ended 31 August 2019. The numerous changes
      from the 2019 reviewed preliminary results to the audited 2019 AFS were caused by adjustments centered
      around financial instruments and complex acquisitions, incorrect classification of items as well as the incorrect
      calculation of headline earnings per share as required by the SAICA circular. Furthermore, AYO incorrectly
      included non-cash items in the statement of cash flows, which had to be removed and adjusted for.


12.   In correcting these errors, AYO’s other operating gains and expenses drastically increased by 133% and 23%
      respectively, thereby affecting profits and decreasing the initially published reviewed earnings per share and
      headline earnings per share by 19% respectively. The balance sheet position underwent significant changes
      between the review and audit, reflecting a decrease in goodwill of 29%, reserves of 43% and contingent
      consideration liabilities of 53%, amongst other items. The Company incorrectly included non -cash items in the
      cash flow statement and had to correct the cash flows relating to operating, investing and financing activities.


Audited 2019 AFS

13.   On 31 January 2020, AYO published its integrated annual report, audited 2019 AFS and notice of annual general
      meeting. However, the Company omitted numerous disclosure notes when publishing these audited 2019 AFS.
      The audit report on which these 2019 AFS was based was withdrawn, and the auditor reissued their report related
      thereto. AYO published and distributed revised results to shareholders inclusive of the updated disclosure notes
      on 16 March 2020 as supplementary information.
JSE’S FINDINGS AND DECISION TO CENSURE AYO


14.   The events that unfolded from early 2019 to date, the contents of BDO’s report on the Agreed-Upon Procedures
      conducted in 2019, the outcome of subsequent 2018 and 2019 interim audits as instructed by the JSE and
      subsequent financial statements and announcements published by AYO to the market supported the JSE’s serious
      concerns about the reliability and integrity of AYO’s financial information previously disseminated to the market.


15.   AYO’s previously published financial information did not comply with IFRS and was incorrect, false and misleading
      in material aspects and this incorrect information was disseminated to shareholders, the JSE and the investing
      public.


16.   Accordingly, the JSE found that AYO failed to comply with the following provisions of the JSE Listings
      Requirements:
       i.       section 8.57(a) as previously published unaudited 2018 and 2019 interim results did not comply with the
                requirements of IFRS and were restated due to numerous adjustments and material errors contained
                therein;

       ii.      section 8.57(b) as the 2019 reviewed preliminary results did not comply with IFRS in terms of classification,
                measurement and presentation of specific items, and contained numerous material errors which had to
                be corrected; and
       iii.     General Principle (v) for failing to exercise the highest standards of care when disseminating financial
                information to the market in that:

                 •     the Company published the unaudited 2018 and 2019 interim results to the market despite
                       knowledge of deficient internal and financial controls, insufficient staff in the finance team as well
                       as staff with insufficient historical and technical knowledge of the Company which led to the
                       numerous and material corrections to the 2018 and 2019 interim results;

                 •     additional errors in the Company’s 2018 and 2019 audited interim results were identified post the
                       audit and therefore not included in the audited 2018 and 2019 interim results published to the
                       market; and

                 •     the Company published the audited 2019 AFS and omitted therein several disclosure notes
                       resulting in the Company having to publish a supplement to the audited 2019 AFS and the auditor
                       having to withdraw and re-issue the audit report in respect of the 2019 AFS.
      AYO assisted the JSE in its investigation and admitted its failure to comply with these pro visions of the Listings
      Requirements.
17.   The accuracy and reliability of financial information published by companies are of critical importance in ensuring
      a fair, efficient and transparent market. The provisions of the Listings Requirements, which impose various
      important obligations on listed companies in respect of the disclosure of financial information, contributes to the
      integrity of the market and promotes investor confidence. The Company and its directors are therefore obliged
      to ensure that all financial information and reports that are published are, in all material aspects, accurate and
      correct. In addition, the investing public relies on a company’s published financial information to make important
      investment decisions.


18.   For these reasons and with reference to the JSE’s findings of breach, the JSE has decided to impose a public
      censure and a fine of R6 500 000 (six million five hundred thousand) on AYO as a result of its failure to comply
      with important provisions of the Listings Requirements.


19.   The fine imposed against AYO will be appropriated in settlement of any future costs incurred by the JSE which
      may arise through the enforcement of the provisions of the Listings Requirements as contemplated in section
      11(4) of the Financial Markets Act, 19 of 2012 read with section 1.25 of the Listings Requirements.



OTHER PARTIES REGULATED BY THE JSE


20.   It is important to note the provisions of section 11(5) of the Financial Markets Act, which stipulates that the
      Listings Requirements are binding on companies and their directors. The JSE is therefore duty bound to properly
      investigate all potential breaches of the Listings Requirements by companies and their directors and to take the
      necessary and appropriate action if the Company and/or its directors failed to comply with the provisions of the
      Listings Requirements.


21.   This concludes the JSE’s process in respect of the Company as a juristic person. An investigation into the conduct
      of current and former directors that presided at the Company during the periods in question and who are bound
      by the Listings Requirements is ongoing.




27 August 2020

Date: 27-08-2020 07:05:00
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