3 scandals too late: Securities Authority launches a round of inspections of sitting directors
Financial failures were recently discovered in a series of new companies on the stock exchange - right under the noses of the gatekeepers. Now, the Securities Authority is launching an extensive audit focusing on the work of the board of directors and, in particular, on the way directors are classified as having "accounting and financial expertise". A market source: "When you appoint a director who lacks professional knowledge, he doesn't know how to 'lift the carpet'."
Against the backdrop of a multitude of financial irregularities recently discovered in new companies that arrived at the Tel Aviv Stock Exchange, the Securities Authority has launched an extensive audit in recent weeks, focusing on the work of the boards of directors and mainly on the way in which directors defined as "having accounting and financial expertise" were classified, and whether they indeed possess such expertise.
A source at the Authority told Globes that this is a sample audit, but one that is supposed to cover a long line of companies and sectors.
A sequence of failures in new companies
The need for the audit arises from a series of recent cases in which the gatekeepers — directors, underwriters, accountants, and rating agencies — failed to identify financial irregularities in several companies that recently arrived at the stock exchange through an IPO or merger.
3 new companies on the stock exchange, three scandals
Tomer
Company: Food importer. Merged into a shell company at a valuation of 100 million NIS.
What happened? The CFO refused to take the position after seeing the financial statements. The company reported concerns regarding "the method of handling inventory in previous years". Trading in the stock was halted.
Best
Company: Real estate group. Issued at a valuation of about 3 billion NIS.
What happened? The owners paid from the company's funds more than 2 million NIS for private works illegally. The financial statements had to undergo correction by external directors, and an audit committee was appointed only this week.
Simed
Company: Operates in the field of summer camps in the USA.
What happened? The controlling owners withdrew about 100 million NIS from the company, which led to non-compliance with interest payments to investors and in the financial statements. The board of directors resigned.
The list includes two American bond companies (BVI) that issued bonds in Tel Aviv: the summer camp company Simed, where the owners, the Shabseles brothers, took over 30 million dollars (100 million NIS) from the company's coffers, without approval and reporting, and led to its collapse; and the income-producing real estate company Cohen Properties, whose controlling owner, Mike Cohen, took 9.6 million dollars from its coffers, also without approval and reporting.
It continued with the construction company Best, where it turned out after the issuance that the controlling owners from the Tanous family paid from the company's funds more than 2 million NIS for private works on properties owned by them and their relatives, "illegally and not in accordance with the company's procedures", which will require it to correct past reports.
The latest swallow is the company Tomer Mazon. Last month, the company's new CFO, Avital Perlstein-Cherny, resigned even before taking the position against the backdrop of "the method of handling inventory of the Tomer company in previous years".
Following the CFO's announcement, an "immediate audit of the method of handling inventory" began at the company, including the question of whether this affects — and to what extent — the financial statements it published at the end of last April, as part of the approval of the merger.
"Directors need to raise questions"
This series of events sharpens the question of the functioning of directors in public companies. In every company, there are three types of directors: a "regular" director, an external director (Dahat), and an independent director.
Every new company must choose two external directors within a period of up to 3 months since it became public. One of the two external directors is required to have accounting and financial expertise. The requirement for such skill stems from the need to stimulate a discussion in the board of directors regarding the way the company's financial data is presented.
A source in the capital market says that the functioning of directors in public companies where irregularities were discovered does indeed raise questions: "They need to approve financial statements and challenge the company's financial system. If a new CFO comes and challenges them, and immediately leaves, the question arises how those same directors who approved the financial statements still didn't notice this thing. This raises question marks regarding their ability to meet the criteria and their duties."
Chief of Staff's wife is a director in a company that got into trouble
The company Tomer Mazon, whose stock trading was recently frozen following concerns of financial irregularities, appointed last May Orna Zamir, the wife of the Chief of Staff Lieutenant General Eyal Zamir, to the position of independent director. This is while Tomer Mazon is a supplier in tenders of the defense establishment.
In the IDF, they strongly reject any connection between Zamir's appointment and Tomer's business with the army: "This is an invalid and baseless manipulation," the IDF Spokesperson's Unit stated. "The Chief of Staff does not deal and has not dealt with any aspect related to the mentioned company. The appointment of the Chief of Staff's wife to a position in the company was declared in accordance with the procedures, to prevent even the appearance of a conflict of interest."
"The board of directors is becoming a 'rubber stamp'"
As a rule, the appointment system for the board of directors, says a veteran lawyer familiar with the field of public companies, is impaired when there is a lack of real professional knowledge. He points to a situation where an "inability to ask hard questions is created: managers and controlling owners who know the business in depth can present brilliant presentations. A director who does not understand in depth the field, the technology, the market, or the real risks of the company, simply does not know which questions to target. He is forced to settle for what he is told and cannot 'lift the carpet'.
In practice, the controlling owners are the ones who decide his very appointment and his director compensation. Bottom line: the appointment becomes an elegant 'rubber stamp'. The company presents to the public a 'supervising and professional' board of directors, but in practice, the controlling owners and managers continue to do as they please without any real checks and balances."
