The Investment Dar - Analysis of 2008 Financials - Auditors' Report

Earlier today TID released its 2008 financials on NasdaqDubai (in connection with TID's Sukuk).  Apparently, it's not yet had the opportunity to release them on its website.  Nor do they appear yet on the KSE website, but then again it does take quite a bit of work to accomplish a task like this.

Let's start with the audit report - which should be the careful investor's first stop in reading any financial report.

There are a couple of new bits of news here - previously not reported:

1. A change in auditors - or at least one of them.  PwC has exited.
2. A report of a material violation of Central Bank of Kuwait exposure limits in (you guessed it) a related party transaction.

First the change of auditors. While KPMG is still engaged, Deloitte now appears in place of PricewaterhouseCoopers.  (By Kuwait regulations a Kuwaiti company must engage two auditing firms).  No reason given why PwC left.  Unclear whether they excused themselves or were excused.  I'm guessing the former for both risk management reasons (not just here but related to other troubled auditing clients) as well perhaps disagreements over the application of some accounting principles. I'm sure that all of these are theoretically in line with the letter of IFRS,  though I suspect they may have been a bit aggressive for PwC's taste.  Having said that I'd acknowledge that I tend to be a bit "high church" on this topic so I may be projecting my own feelings onto PwC.  See the comments section for some discussion of the shuffling of local partners among PwC, E&Y, and Deloitte.  There may be other factors in play here than the ones I mentioned above.

Second, as noted earlier, the auditors have disclaimed an opinion.  That is, they did not express an opinion on the financials.  Their position is based on (a) uncertainty about ability to agree the restructuring and (b) the fate of the Boubyan Bank shares.  If there's an adverse judgment against TID on the latter it could lead to an approximate KD67 million or so loss - a major impact on its KD201 million in shareholders' equity.

On the former - the restructuring - TID's auditors state:  "We have not been able to obtain sufficient, reliable audit evidence to determine whether the Group will be able to reach an agreement to restructure its debt obligations."

What's particularly interesting is they are making this statement not as of 31 December 2008 but as of 13 April 2010 the date they signed their audit report.  A date after the FSL Court had granted  at least initial protection under the FSL to the company.

No doubt, the auditors are being careful.  They can't be 100% sure and so prudence would dictate such an approach. A completely rational response not only given the situation (a restructuring) but also the company's reputation.  

Finally, there is a bit of new news in the last paragraph in the section on legal and other regulatory requirements where the auditors note that they have not become aware of any material violations except relating to Murabaha and Wakala placements with a related party, "which exceeds the credit concentration limit stipulated by the Central Bank of Kuwait" as disclosed in Note 7.   Apparently, not a sufficiently important item to be mentioned in TID's earlier announcement on the KSE of its 2008 summary financial results, where it mentioned the two reasons for the auditors' disclaimer of an opinion.  Sitting here it seems to me that a material violation of a CBK regulation would be a bit of material information that an investor would want to know to enable him to make an informed decision.  

As an aside I'd note there is also an apparent similar issue for The Investment Dar Bank Bahrain which seems to have placed KD253 million with TID as disclosed in Note 16.  While TIDBB's website is no longer password protected, it has no content (though to be fair it has some really nice pictures) so it's a bit difficult to see what percentage this amount represents of its capital.

I'll go out on a limb here and guess well over 25%.

TID's report (Note 2 page 9) informs that TIDBB's auditors have modified  their earlier 2008 audit report to include an "emphasis of matter" item that if TIDBB can't recover the placements with TID it might not be able to continue as a going concern.  Not having seen the original audit report for TIDBB, it's unclear why this sort of eminently reasonable comment wasn't made before, particularly given the rather large "bet" TIDBB had placed on TID.

Comments on the body of the financials will follow.