Whistleblowers raise more alarms at Lewis

Cape Town - Whistleblowers at Lewis Group [JSE:LEW] have raised more alarms about alleged dubious practices at the furniture retailer, Dave Woollam, a director of consumer watchdog Summit Financial Partners, told Fin24 on Friday.

This has led Woollam to approach the Western Cape Division of the High Court in Cape Town for permission to add additional affidavits - substantiating these new allegations - to a case Lewis is bringing against him.

Lewis launched the court proceedings in June this year to set aside a demand by Woollam in his capacity as an ordinary shareholder. Woollam demanded, in terms of Section 165 of the Companies Act, to declare four Lewis directors, including CEO Johan Enslin and chair David Nurek, delinquent.

Lewis then turned to the high court to have Woollam's claim dismissed as being "frivolous, vexatious and without merit" in terms of the act. Lewis regards Woollam’s demand as calculated to damage the company’s reputation, operations and business. Lewis has also filed a complaint with the Financial Services Board in respect of what it alleges to be Woollam’s short position as a shareholder. Something Woollam denies.

READ: Lewis receives demand to declare execs delinquent

Woollam's demand related, among others, to Lewis charging customers a cost of loss of employment insurance, which the company claimed was mistakenly sold to them and the manner in which Lewis accounts for income received from extended maintenance contracts.

In July 2015 Lewis was referred to the National Consumer Tribunal for alleged breaches of the National Credit Act (NCA) in relation to the sale of loss of employment insurance and disability cover to customers who were pensioners or self-employed persons, the group explained.

Following an internal investigation the group then identified about 15% of cases where loss of employment insurance policies were invalidly sold to pensioners and self-employed customers “as a result of human error at store level and contrary to company policy”, it said. Lewis undertook to refund a total of R67.7m.

Whistleblowers

Woollam told Fin24 on Friday that he is applying to add additional affidavits to the Lewis court case, because about 15 current and former employees of Lewis have come forward since his original answering affidavits were filed. He said they revealed Lewis' practices which in their view are seemingly designed to hide bad debts by significantly understating the provision for doubtful debts.

However, only three of the whistleblowers - a current employee and two former employees - were prepared to go on record for the court case. Woollam said the others claimed to fear victimisation.

The practices relate mainly to alleged large scale so-called "re-invoicing" and "sweeping of credit balances". Re-invoicing is where arrear debtors’ accounts are converted into cash sale accounts. The arrears would then not be identified in non-performing loans and a greater debtors’ book will look far healthier than it actually is.

READ: Lewis, hit by new credit rules, sees 26.5% profit drop

Sweeping of credit balances is where consumers have over paid or something similar, resulting in a credit balance. Such credit balances are then allocated to other debtors who are in arrears. This would then reflect as a payment and show the arrears debtor to be in good standing.

If it is found that these allegations are indeed true, it would amount to accounting fraud, according to Summit CEO Clark Gardner.

Woollam emphasised, that even if the court refuses permission to add the additional affidavits, Summit intends to then bring a separate case against Lewis based on those.

READ: Lewis Group takes action against 'vexatious' shareholder

"The key our investigation uncovered, is around the manipulation of provisions at Lewis. We had long held a view that the debtors' book has been deteriorating and the provisions have not been sufficient to ensure the evaluation of the book is correct in terms of international financial reporting standards and relative to its peer group in this industry," explained Woollam.
 
"Our affidavits set out the uncovering of what we allege to be a systematic process of manipulating data to make the book look healthier than it is. This would be to justify lower provisions, which have to be carried through the income statement as an expense and so your profits will look better. Basically, this amounts to 'kicking the can down the road'."

Woollam, therefore, alleges that Lewis did this to maintain its profit levels at the expense of an over-valued debtors’ book.

"I believe there does not have to be a compromise between ethics and responsibility. You can build an ethical strategy for a sustainable and profitable business," said Woollam. That is why he wants an independent third party to investigate the affairs at Lewis.

Results

In May Lewis announced a 26.5% decline in full-year profits. It said it was caused by tough trading conditions in the credit retail sector, adverse economic conditions and the introduction of the National Credit Regulator's affordability assessment regulations. Group credit sales for the year were 4.5% lower. Credit sales in Beares account for 50% of the brand's total sales while in Lewis and Best Home and Electric 66% of total sales are on credit.

In March this year Lewis completed the acquisition of a portfolio of 57 Ellerines and Beares stores in four southern African countries. This expanded its store presence outside South Africa to 120, including in Namibia (21 stores), Botswana (20), Lesotho (10) and Swaziland (6).

Fin24 contacted Lewis for comment on the latest development in its court case against Woollam, but have been unable to obtain a response at the time of publication.

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