From The National Business Review, October 22, 1999
Auditors let Power Beat off hook despite ‘going concern’ issues
By Alan J Robb

Power Beat International is an innovative company.  It has pioneered emerging technologies, often in the face of scepticism and doubt.

It was delisted from the Stock Exchange since December 1995 but provides an eye-catching catchy and easy-to-use web page for shareholders and interested parties.

The page labelled Shareholder News contains a section entitled Financial Reports Online with interim and annual report material for 1996 to 1998.  It deserves full credit for these things.
Where Power Beat falls short is in the omission of the auditors’ reports for 1996-98 the lack of the report for the year ended 31 March 1999.

The audit reports contain significant comments for shareholders or anyone considering investing in Power Beat.  As Power Beat is an “issuer” for the purposes of the Financial Reporting Act it has an obligation to be seen to provide full and complete information.

Last year the auditor commented that there was fundamental uncertainty whether Power Beat was justified in relying on the going concern assumption in preparing its financial statements.  Two main causes were cited:

First, the auditors questioned Power Beat’s ability to repay amounts totalling $1,530,000 and to meet further ongoing running expenses.  Second they questioned its ability to collect a debt of $4,629,630.

The latter was the licence fee payable by Rial Dirham, a Malaysian company owned by Mohammed Ayub Bin Hassan, a substantial shareholder in Power Beat.  The debt dated back to 1997 and was to have been paid on 31 March 1998 but an extension of time was sought, and granted, to 31 March 2000.

Despite that uncertainty the auditors gave an unqualified opinion, having been satisfied that adequate records had been kept, that there had been adequate disclosure and that it could be said that the statements complied with generally accepted accounting practice and that a true and fair view was shown.

The 1999 year has been described by managing director Peter Witehira as one of “ongoing difficulties” although a profit of $803,725 was reported compared to a loss of $3,773,250 in 1998.  On the face of it this looks to be a magnificent turnaround.  Reference to the audit report, however, shows that this is far from the case.

The auditors again highlight doubts about the going concern assumption, but this year they take the more serious step of giving a qualified opinion.  The qualifications they mention are material, and in my view raise serious doubts whether the auditors should say that the reports present a true and fair view of financial position.

Their comments are specifically directed at the valuation of investments, the recognition of revenue and the adequacy of accounting records kept by Power Beat.
The first comment is “We were unable to obtain independent confirmation of two investments stated at $6,968,414 as at 31 March 1999, ….”  Note 16 of the accounts shows that five investments totalled $9,392,591.  In other words the auditors could not independently confirm nearly three-quarters of the total value of the investments.

The auditors have confirmed they tried to follow the normal audit procedure of contacting the other party to confirm the amount of the debt – but could not make contact with them.  Such a situation is almost beyond belief.

And who were these debts owed by?  Note 16 shows that the Rial Dirham debt was the largest at $4,488,507 and the next largest was $2,533,784 owing by Powercorp Gibraltar.

Rial Dirham, as noted, is an associate of a major shareholder and is the licensee making Power Beat batteries in Malaysia. Note 3 discloses that PowerCorp Gibraltar is “an Al Tajir Group company, owner of the Gulf Power Beat battery plant.”  Power Beat also discloses that it has taken a 9% shareholding in PowerCorp Gibraltar.

More worrying is that the auditors go on to say “…and we were unable to satisfy ourselves as to these balances by other audit procedures.”  A reasonable interpretation is that the records of Power Beat were deficient and did not allow the auditors to confirm the balances.  Small wonder that the auditors also say later that “We have not received all the information and explanations that we have required.”

The second major problem commented on by the auditors concerns the revenue reported by Power Beat.  The company reported revenue of $2,975,698 which was up from $2,136,851 in 1998.

Having said that they were unable to confirm investments totalling nearly $7 million the audit report continues “In addition the revenue of $2,533,784 has been recognised on the sale of a license to PowerCorp Gibraltar which we are unable to confirm.”  Again one has to wonder how it can be that the auditors could not obtain confirmation of 85% of the year’s revenue.

Not surprisingly, the auditors conclude with the comment:  “Any misstatement of these balances would affect the results for the year ended 31 March 1999.  Revenue would be overstated by $2,533,784 bringing the result from a profit of $803,725 to a loss of $1,730,009.  Equity would be reduced from $9,878,800 to $2,910,386 if the two investments were excluded.”

It is therefore surprising to find that the auditors say that “except for adjustments that might have been found necessary” had they been able to obtain sufficient evidence concerning investments and revenue “the financial report…complies with generally accepted accounting practice and gives a true and fair view of the results of the company’s operations…financial position…and cash flows…”

In my opinion there is fundamental uncertainty whether the result is a profit of over $800,000 or a loss of $1,700,000 and whether shareholders’ equity is $9.8million or $2.9million.  In these circumstances I believe that auditors should have stated that they are unable to conclude whether the financial statements show a true and fair view. Because the auditors have not received all the information and explanations they required the Financial Reporting Act requires the matter to be reported to the registrar of companies within 7 days.  The registrar in turn is required, forthwith, to report to the Accounting Standards Review Board and the Securities Commission.

The registrar has refused to disclose whether he is investigating the Power Beat situation although the auditors themselves have confirmed that they have been having discussions with the registrar.

Alan Robb is a senior lecturer in accountancy at the University of Canterbury.  He holds no shares in Power Beat.