PwC report unlikely to be enough to satisfy market
12 August 2015
Business Times Singapore
AFTER an encouraging early bounce to S$0.645, Noble Group’s shares on Tuesday finished S$0.01 weaker at S$0.57, a disappointing outcome for those who might have been hoping that a positive assurance report by accountants PricewaterhouseCoopers (PwC) on Noble’s accounting practices would have been enough to answer Noble’s critics – namely, Iceberg Research, which issued its first critique in February, short-seller Muddy Waters, which emerged soon after, and former investment banker Michael Dee.It’s possible that Tuesday’s share price weakness was in line with a fall in the entire market – the Straits Times Index ended a dismal session down almost 1.4 per cent. Or it could be that the reason for the weakness was the second-quarter figures that Noble released together with the PwC report.
But it is just as possible that the share price fall was because the PwC report told the market nothing it did not already know. If so, it suggests that a market which had hoped for answers to questions posed by Noble’s critics but did not find them will continue to put pressure on the stock in the days ahead. There are good reasons to think this may be the case.
The first thing to note is that it would have been highly unlikely for PwC to reach any conclusion other than that Noble has complied with accepted accounting standards in valuing its mark-to-market contracts. This is because Noble’s regular auditor Ernst & Young has for years said that this was the case, so in effect, PwC’s findings essentially endorse E&Y’s earlier audit opinions.
Since it is reasonable to assume that E&Y has discharged its audit duties properly, PwC’s work tells the market nothing new. This point was also made by broker Maybank Kim Eng in its “hold” recommendation on Noble issued on Tuesday.
The crux of the accounting issue surrounding Noble is not whether it has or has not adhered to accepted accounting practices but whether the latitude, discretion, judgment and subjectivity allowed within the accounting guidelines have been stretched to their fullest and if so, whether this has jeopardised the company’s financial health.
This is the point that Noble’s critics have been hammering on and unfortunately, this was not addressed. In this connection, it’s worth noting a statement in PwC’s executive summary that “there is currently a high degree of reliance on key individuals who have a deep understanding of the contracts as well as the informal guidelines and practices that have developed outside the formal policy framework, and the steps that we recommend should reduce the company’s dependence on these key individuals”.
Second, one of the biggest issues that Iceberg, Muddy Waters and Mr Dee have been harping on – the accounting treatment and valuation of Australian subsidiary Yancoal – was not covered at all by PwC as it was not part of the original brief.
After the contents of the report have been digested, it’s very likely that the market will zero in on this omission – if it hasn’t already – and the question of how Noble can carry an asset on its books at a sum several hundred million dollars higher than its market value.
Third, it’s interesting to note that for whatever reason, PwC saw it fit to include this disclaimer in its notice to readers: “This report was prepared on our Client’s instructions and is intended solely for the management of the Client for its internal use and benefit and is not intended to, nor may it be relied upon, by any other party. Our work was not planned in contemplation of use by you.”
All told, the PwC report looks unlikely to address all the market’s concerns. The share price fall on Tuesday suggests that this is already the case.