Shares in Harvey Norman are surging after ASIC closes its investigation

Businessmen John Singleton (L) and Gerry Harvey (R). Image: Patrick Riviere / Getty Images.

Listed retailer Harvey Norman has been notified by the Australian Securities & Investment Commission (ASIC) that the regulator has closed its inquiry into the company’s financial statements.

Aspects of Harvey Norman’s accounts — specifically its accounting treatment of franchisee stores — have been under more scrutiny amid speculation that some stores were under-performing.

The increased uncertainty saw Harvey Norman shares come under attack from short-sellers earlier this year. The shares were up 6.35% to $4.02 in early trade today, and may be getting a further boost from any squeeze on short positions.

ASIC’s inquiry was focused on whether Harvey Norman’s accounting treatment of franchisee stores was compliant with the Corporations Act and relevant Accounting Standards.

Here’s an excerpt from ASIC’s letter to Harvey Norman:

ASIC does not intend to make further enquiries with Harvey Norman in relation to the matters raised by ASIC regarding the Financial Report, in particular whether franchise stores should be consolidated by Harvey Norman.

In Harvey Norman’s financial statements for the 2017 financial year, the company removed loans to franchisees — used to cover costs such as inventory and rent — from its balance sheet.

The company added a note in the accounts that it had “no constructive obligation” to guarantee payments to franchisee suppliers.

Harvey Norman reported a record full-year profit in late August, but the company’s stock price fell in the wake of the result amid continued concerns about its underlying operations.

At the time, Harvey Norman’s 2017 accounts had yet to be signed off by EY, the company’s auditors. The company’s Annual Report was subsequently issued with an Independent Auditor’s Report dated 29 September 2017.

One of the Key Audit Matters in the Auditor’s report referred to the Director’s view that Harvey Norman’s franchisees were not controlled and therefore didn’t need to be consolidated.

In the Auditor’s Report, EY said they took a number of steps in assessing whether the view of the directors was in accordance with the relevant Accounting Standards.

Those steps included consulting with Harvey Norman’s external lawyers to determine the legal framework for the company’s franchise agreements.

The Auditors also met with a sample of franchisees to confirm their understanding “of how the current franchise agreements operate in practice”.

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