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62 COMMERCIAL MOTOR May 11 1973

MORE TROUBLE TO COME OVER HILTON?

By James Millen, deputy editor. Accountancy

klournal of the lnstitute of Charmed Accountants it, England and Wales)

THOUGH Ralph Hilton Transport Services has seen more trouble in the two and a half years since its flotation than most public companies experience in a lifetime, it seems certain that the company will be the subject of further strenuous attack — and possibly litigation — in the very near future.

Without a doubt new chairman James McNaughton will have a major job on his hands in answering questions that will be put to him by angry shareholders at the company's annual general meeting on May 22 at the St Ermin's Hotel, Caxton Street, London SW I.

Some of these questions will have been prepared by accountants and lawyers who will have spent many hours scrutinizing relevant documents, most particularly the company's accounts for both 1971 and 1972, the Offer for Sale document and the offer documents relating to the purchase of J & H Transport, East Midlands Export Packers Ltd and Poltock (Musselburgh) Ltd.

Aggrieved?

Former shareholders in the above three companies may well feel aggrieved that in the middle of 1971 they accepted Hilton shares in exchange for their own on the basis of a Hilton share price which, it now appears, was inflated by overstated profit figures.

The offer document for J & H, for instance, contained the statement:—

"On 20 April 1971 Hilton issued an interim statement which is set out in Appendix 11 and which showed that the unaudited profit before taxation for the six months to 31 January 1971 was £244,000. It included a forecast that the profit before taxation of Hilton for the year ending 31 July 1971 would be not less than £575,000, and that of East Midlands for the four months ending on that date would be £13,000."

But the 1971 accounts showed that excluding the contribution of the newly acquired companies HTS registered a pre-tax profit of only £500,740 for the year; with their contribution the total was £621,707.

Overstated As is now well known, the HTS pre-tax profits for 1971 were overstated by £218,000 (more than one-third) and, in addition, there has been a reduction of £42,000 in respect of pre-tax profit for prior years.

Not only was the profit forecast for 1971 not met and the actual profit figures eventually substantially overstated, but it would appear from the rather cryptic wording of item 4 of the "background information" statements, set out in the chairman's statement in the 1972 Report & Accounts, that there was cause given during the course of 1971 to question not only the accuracy of the full year's reported profits to 31 July 1971, but also the accuracy of the half year's reported profits to 31 January 1971.

Further, "Cause was also given to question the validity of the full year's revised profit forecast to 31 July 1971. It is to be regretted that insufficient action was taken to establish the true position."

But there is no indication of what the "causes given" were. And that could be vital information.

The "background information" appears to damn the previous board of the company. When you finish reading it, you no longer have to ask why only one member of the seven-man board of last June remains in office and why former chairman Ralph Hilton — who holds 37 per cent of the equity — recently resigned. The institutions from whom HTS has borrowed money have obviously made their voices heard. As James McNaughton told me when 1 interviewed him at his home last weekend: "Financial support would not be forthcoming from the present finance houses if they were dissatisfied with the structure of the board."

The other six items of "background information" are: 1. It is now apparent that certain aspects of the financial controls were unsatisfactory during the accounting years ended 31 July, 1970 and 1971 and proved to be inadequate from August, 1971, when the business of J. & H. Transport Group Ltd was merged with that of the parent company.

2. The board does not appear to have taken any effective steps to ensure that it was supplied with detailed financial and management information on a regular basis during these years. This was in spite of the fact that the company had set up a management accounting system which provided estimated monthly results from October 1970 onwards.

3. The accounts for the year ended 31 July 1971 were materially incorrect for the group and the adjustments now made result in the reported profits being reduced from £625,894 to £407,709. The interim unaudited figures as published for the six months to 31 January 1971, together with the revised forecast for the year to 31 July 1971 announced in April 1971 and confirmed in May 1971, were based on incomplete information. Also, the final audited figures as reported are now known to be inaccurate and were based on incomplete and sometimes false information. The accounts for the year ended 31 July 1971, included fictitious sales invoices amounting to some £68,000.

5, Both in the 1970 and the 1971 accounts, inadequate provision was made for liabilities to suppliers, the amounts involved being of the order of £40,000 and £80,000 respectively.

6. Owing to the breakdown in financial controls, the provisions for bad debts and claims proved inadequate and provisions at 29 July, 1972 amounting to £166,000 have had to be made, of which £67,000 has been related to prior years. These amounts cover bad debts, counter claims by customers for short deliveries, overcharges, etc.

7. Inadequate cash planning has contributed to the serious financial position shown in the consolidated balance sheet as at 29 July, 1972, which records net current liabilities of £2,341,616.

Breakdown

It must be expected that shareholders at the agm will ask how it arose that a company floated as recently as November 1970 by as solid an institution as the Industrial and Commercial Finance Corporation experienced a breakdown of its accounting and financial control systems by the middle of 1971.

They may well ask how it arose that an HTS board, packed with experienced hauliers, arrived at the decision to expand — by buying, among others, struggling haulage concerns and extending its warehousing capacity — at a time when the industry was suffering a recession.

They will certainly ask for details of the unlawful loans to directors balances due at July 29, 1972 were £8,703 — referred to in the inordinately long qualification of the 1972 accounts by the joint auditors.

The joint auditors (the HIS auditors since 1959, Wilson Wright & Co, and Peat, Marwick, Mitchell & Co — the firm that conducted the large-scale investigation into HTS affairs after application was made to the Stock Exchange to suspend the company's share quotation in July 1972) found themselves in great difficulty in producing accurate figures for 1972 and agreeing adjusted figures for 1971.

In fact they express no opinion on the adjusted profit figures for 1971; but they do agree with the adjustments that have been made. The significance of this, one assumes, is that in view of the faulty accounting records nothing short of a re-audit would permit the auditors to vouch for the accuracy of the 1971 figures. But a re-audit would have taken too long and cost too much, James McNaughton told me at the weekend.

Other points made by the joint auditors in their qualification of the accounts:— • "The statutory registered and minute books of many of the companies in the group were not properly written up at 29 July 1972. Since the end of the accounting period the statutory registers and, so far as is practicable, the minute books have been brought up to date. We have not been able to satisfy ourselves that all material transactions entered into which were not in the normal course of events have been recorded in the relevant minute books.

• "The internal controls and accounting disciplines operating in the company and in two of its subsidiaries were inadequate to ensure that all transactions were properly recorded in accordance with Section 147 of the Companies Act 1948; in our opinion the books of those three companies were not properly kept during the period ending 29 July 1972. Consequently reliance has had to be placed on information supplied by third parties.

• "Provision has been made for liabilities for goods and services supplied, based on circularization of suppliers; this method of ascertaining liabilities necessarily involves undue reliance on information from third parties. Accordingly, although we concur with the basis used in the circumstances obtaining, we have some reservation as to the adequacy or otherwise of the amount provided.

• "We are unable to confirm that turnover is correctly stated.

• "To the extent that the records were incomplete, we have not received all the information we consider necessary for the purpose of our audit."

Finally the joint auditors conclude that for these reasons, and others which they specify, they are "unable to express an opinion as to whether the accounts for the period ended 29 July 1972 show a true and fair view of the results of the group or of the state of affairs of the company and the group respectively at that date."

The number and nature of these qualifications make it impossible for HTS to obtain a re-quote on the Stock Exchange in the current financial year. The best that can be hoped for is that the 1973 accounts -which Mr McNaughton hopes to have available before the end of this year — contain no qualification of any real severity.

James McNaughton, a bachelor of commerce and a Canadian chartered accountant, described himself as a "company doctor" when I first met him at the huge HTS depot at Charlton in January. At that time he was obviously heavily preoccupied and, I seem to recall, mentioned that 28 accountants had been working on the "investigation" at one time.

With the departure of Ralph Hilton, McNaughton, who took over as chief administrator last July, is now chairman and managing director. But he will not be chairman for long, as he told me at the weekend. "Although I have accepted the appointments of chairman and managing director, I do not believe it to be correct in a public company that these two positions should be held by one person for any appreciable length of time."

It is widely accepted, he says, that able and independent non-executive directors who will give time to the affairs of the company are essential ingredients for an effective and balanced board. "We have therefore approached our financial advisors, Industrial and Commercial Finance Corporation, with the object of seeking two such directors, of sound commercial standing and knowledge, and it is anticipated that within a short time two such directors will be appointed to the board, one of whom will be chairman."

Early last year, committed to a substantial expansion programme, HTS faced the serious problems of underutilization of its equipment. It was impossible to find sufficient work for the heavier, long-distance vehicles and those that were operating were doing so at uneconomic rates. Now the fleet has been reduced from more than 1000 vehicles to about 720.

Asked who was responsible for the largescale errors now revealed, Mr McNaughton observed: "The blame must be taken by the person who is in charge and that has to be the chairman. It is then shared by the rest of the directors, for not making sure that proper controls were implemented and that suitable people were organizing every aspect of the business. I do not mean just the accounting function; it was just as important to see that the planning of depots was right."

Overheads not met "Somebody should have been making sure that there were suflicient vehicles in a depot, so that when the contribution of these vehicles was added up it would be sufficient to meet the overheads of the depot. This was a basic thing that wasn't done. We had a very large depot at Charlton and the strength of vehicles there was about 82 or 83 which was just not sufficient to meet the overheads of the depot, even if you got a full contribution from the vehicles. So the depot was forced to lose money — because there is an economic limit beyond which you cannot go when it comes to charging rates to customers.

"That was such a fundamental fault. That's not financial planning, it's understanding the problems of running a large business."

Mr McNaughton was vehement that the failure of HTS had not stemmed from the purchase of J & H Transport, as has been reported in various financial columns. "Totally untrue," he said. "It had started to go very seriously wrong before then. What J & H did was to provide the last straw

accountancy wise. But only accountancy wise."

The strange thing in this unhappy story is that there were management accounting systems at HTS. They were installed some while ago. Profit centres had also been created and monthly profit reports were produced from October 1970. Somebody had taken the trouble to instal the machinery of financial control. But was it an adequate system? "It could have become an adequate system with the proper tests being applied to it," said Mr McNaughton. Were the figures being added up? "They weren't adding up the figures correctly. But the most unfortunate thing is that even when they were being added up correctly, nobody was paying any attention to them."

It was apparent, though, that HTS was short of professional accountants at the highest level. In an investment article which I wrote for a weekly paper on June 22 1972, referring to HTS, I observed: "One important factor. here is the whole consideration of the quality of financial control of companies which, in many cases, leaves a tremendous amount to be desired. It really is useful to look through the names of directors of any company you wish to invest in to check that at least one of them is a member of one of our senior accountancy bodies.

"The letters which will confirm this are CA, ACA, FCA, ACCA, FCCA, ACMA and FC M A.

"It is noteworthy that none of these qualifications appeared after the name of any R. Hilton director in the 1971 accounts."

Asked whether he believed that the problems of HTS could basically be attributed to the arrogance of self-made men who had enjoyed success with smaller business and were not inclined to accept advice from an accountant, Mr Mc Naughton remarked: "You're totally correct."

The Ralph Hilton Transport Services share price was suspended at 33p last July. It seems strange now to think that four months previously it had soared to 109p on the strength of strong rumours of a takeover bid. And though the company has net assets of £5.7m, it seems impossible that it should again reach anything approaching that price in the foreseeable future.

Mr McNaughton does not agree with the Sunday Times that when the company comes back to the market it might do so under another name. "I don't know where they got that idea," he said. "We may drop the personal Ralph Hilton Transport Services and change to the HTS Group — but nobody really knows us as Ralph Hilton."

He will not forecast results for the current year, but says that the information of the first six months, now available (not published) indicates that the enormous losses of 1972 have been contained, though results for the whole year are unlikely to show a trading profit.

I asked Mr McNaughton if there had been many redundancies among HTS employees in the current year. "Only at senior management level," he replied.

But he intends to stay.