Harvey Norman Facing 100 ASIC Questions, Court Rules Franchisees Not Independent
Serious problems are mounting for Harvey Norman and his franchise network, with Australian Securities and Investments Commission investigators now probing the Companies books, after finance director Chris Mentis initially denied that any ASIC investigation was underway.
What Harvey Norman would like the market to believe is that their network of franchise stores is independent and operate at “arm’s length” from Harvey Norman’s corporate operation.
Australian Courts have already ruled that this is not the case.
In December 1999, the WA Supreme Court and Court of Appeal grappled with this issue after Harvey Norman tried to avoid the ban on Sunday trading by companies with more than 10 employees by arguing that franchisees operated independent stores claims the AFR.
Justices Eric Heenan and David Ipp found that Harvey Norman franchisees were conducted substantially for the interests of Harvey Norman, who not only received a 50% management fee which was 50% of a franchisee’s profits they were also forced to report daily to Harvey Norman thus they were not seen as independent stores.
Franchisees who contacted ChannelNews last week said that “There is nothing independent about running a Harvey Norman franchisee. One has to not only prop up corporate operational costs, report revenues every night but have little say in the brands we sell or range”.
On the question of product selection one franchisee said “A Harvey Norman committee picks the brands and products we are supposed to sell and then we the franchisees have to choose whether we want to range the products chosen by the committee. Metropolitan stores need different products than rural or outer city stores and this is sometimes a problem “.
Back in 1999 Justice Ipp found that “Harvey Norman, either directly or through its subsidiaries, not only receives a large share of the profits earned by each of the franchisees but also, and in my opinion more importantly, it receives the accruing goodwill of the businesses which are conducted by the franchisees,”.
Also, set to be questioned by ASIC investigators is an 84-year-old former franchisee, Joe Deen, who has mysteriously liquidated more than 110 failed franchise companies each year, resulting in the losses failing to appear in the Harvey Norman group accounts.
On Friday, Harvey Norman shares dropped 2.6 per cent to $4.26 before recovering to $4.38, slightly up on the day.
Chris Mentis told the ASX shortly after our story on the ASIC investigation appeared last Monday, that claims that ASIC was investigating its accounts, was “false”.
On Wednesday night Mentis was forced to do a backflip after ASIC intervened.
The upside in Harvey Norman shares on Friday was driven primarily by Chairman Gerry Harvey who waded into the market to buy 1 million shares, on top of 2 million shares he bought on Monday.
The wobbles in the value of Harvey Norman shares came after Mentis told the ASX that “ASIC is undertaking a routine review of HVN’s financial report for the financial year ended 30 June 2016 as part of its financial reporting surveillance program,”.
ChannelNews has been told that ASIC has put hundreds of questions to Harvey Norman, this has led to the retailer calling in outside consultants to help them in how best to answer ASIC questions.
They have also asked ASIC for an extension so that as one insider said “They can get their answers right”.
The investigation has come at a bad time for the mass retailer with global online retailer Amazon set to take Harvey Norman and their franchise network on.
Despite Gerry Harvey claiming that Amazon should be banned labelling them a “curse” and “plunderers” and saying Australia will be left poorer if it fully enters the local retail market the reality is that there is nothing that Gerry Harvey can do to stop big chunks of his business being attacked by Amazon.
His franchise network is seriously vulnerable especially stores that don’t stock the full range of products that many Harvey Norman inner city stores carry.
Gerry Harvey does not have a good track record when it comes to talking about the Internet.
Back in 1997 he told me that the Internet was a “fad” that consumers “would never buy product from online stores” and that most online shops would fail.
He got that wrong.
Now he is having a go at Amazon.
He told 3AW presenter Neil Mitchell that Amazon would deliver Australia no long-term benefit, saying the group was a corporate citizen the nation did not need.
He also told that Herald Sun that Amazon was “the world’s greatest tax evader” and the Federal Government should consider blocking its entry into Australia.
Amazon plans to ‘decimate’ Australian retailers he said.
This is a man whose business has openly gone after competitors in the past.
When Melbourne based RIO Sound + Vision moved into a Preston location, right opposite a Harvey Norman store, Harvey Norman management moved to get supply to the RIO store blocked.
They approached Yamaha management to stop supply and within days, executives at RIO were told that they were no longer a preferred Yamaha dealer.
Gerry Harvey said “Amazon is worth $500 billion dollars. They have been going for 23 years.
They’ve virtually made no money in that time, they’ve virtually paid no tax in that time. Across America they have sent retailers broke all over the place — family businesses that pay tax and employ people.
“I don’t see the point of letting them in. At the end of the day they are going to contribute to chaos. They are going to cost a lot of people their livelihoods.”
This is despite the fact, that the Australian Government now has in place new taxation regulations that has resulted in big consumer electronics firms such as Google, Apple and Microsoft forced to pay a significant increase in taxes in Australia.
The reason that ASIC are probing Harvey Norman financials is because several organisations have questioned how the Company operates, in relationship to their reporting process and the way in which information is interpreted on their books.
Despite hundreds of AIC questions, the calling in of outside consultants Harvey Norman still issued a scathing letter to the ASX late on Thursday evening stating that reports in the Financial Review and the Sydney Morning Herald that ASIC was investigating Harvey Norman’s accounts were “further false statements”, urging journalists to contact ASIC for confirmation – a suggestion that appeared to take ASIC by surprise.
ASIC is legally barred from disclosing information about its inquiries.
The original ASIC request was based on a desktop review of Harvey Norman’s accounts after the November 2016 annual meeting when Gerry Harvey told attendees to “piss off” when he was questioned from the floor.
At this AGM meeting, which caught the attention of ASIC and followed several complaints to ASIC by shareholders, Gerry Harvey gave a firm rebuttal to allegations that the retailer is guilty of avoiding taxes and obfuscating problem loans, saying recent reports have been started by a short seller looking to profit from the company’s misfortunes.
“He’s been trying to disrupt our company,” Harvey said of one person questioning his accounts.
He called those looking to ask questions about the rumours concerning his franchise operation, “stooges” and asked them to leave the meeting.
“If you are here, please get up and piss off!”
“There are no franchise bad debts,” insists Harvey. “Harvey Norman pays every cent of tax it is obliged to pay”.
This came after governance group Ownership Matters questioned whether Harvey Norman should consolidate the accounts of its 791 franchisees, and listed 16 areas that showed company control, including salaries and vehicle allowances paid to franchisees and a daily sweep of the franchisees’ bank accounts.
The Company is expected to make a written response to ASIC shortly.
According to the AFR ASIC has three stages of accounting oversight. The first is a desktop review, in which ASIC staff examine a company’s accounts without the company being aware of the process.
Where warranted, the review is then escalated into an inquiry with direct contact with the company, which is asked to respond to a number of queries and concerns.
If ASIC is not satisfied with the response from the company, it can pursue remedial action, beginning with a direction to reissue financial statements.
Three other ASIC inquiries, into Seven West Media, Nine Entertainment Co and MMA Offshore, which were conducted in the same time frame as the Harvey Norman inquiry, were completed in time for the release of the half-year results. The inquiries had the three companies write off a total $590 million on overvalued assets and investments, at ASIC’s insistence the AFR reported.
While not disputing the accounts directly, Ownership Matters said the auditor’s “reliance on a ‘significant accounting judgment’ to assert that HVN does not control franchisees (and hence does not consolidate them) gives cause for concern. Either HVN controls a particular franchisee or it does not.”
In October, Harvey Norman detailed for the first time in its 2016 annual report how it had lent $943 million to its franchisees not only to fund their inventory and working capital, but also for unpaid franchise fees, rent and interest payments that had already been booked as profit. The figure rose to $1.15 billion in the latest half.
“The difficult question is how much economic influence does Harvey Norman have over the conduct of the franchises and their financial affairs,” says Professor Stephen Taylor of the UTS Business School.
If franchisees depended upon Harvey Norman to support them through loans, “it gets kind of tricky to figure out what is effectively a subsidiary and what’s not”, he says.