The corporate watchdog has sought answers from Harvey Norman over its full-year accounts as pressure mounts on the retail chain to provide more detail about the performance of its franchised stores.
The Australian Securities and Investments Commission said it would never discuss any such conversations with a third party but it's understood it has sought clarification from Harvey Norman on a number of issues in relation to its financial accounts, which were audited by Ernst & Young.
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Harvey Norman FY profit up 30pc
Retailer Harvey Norman has reported a 30 per cent increase in net profit on the back of Australia's strong appetite for housing and connected devices. Vision courtesy ABC News 24.
The high-profile accounting firm were similarly circumspect about the retailer, saying it would not make any comment on an audit client.
There is no suggestion Harvey Norman hasn't adhered to the accounting standards, however the big name retailer has come under intense scrutiny in recent weeks after proxy adviser Ownership Matters published a report, calling on shareholders to reject its full-year accounts at the annual meeting, held on Monday this week.
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In its report, Ownership Matters highlighted that Harvey Norman had advanced more than $943 million to its 673 franchisees and written off $566 million of these loans, which it refers to as "tactical support" in the past five years.
The proxy adviser believes Harvey Norman should consolidate the financial accounts of the franchisees and provide shareholders with a clearer picture of the retailers' group profits.
Like Domino's?
Executive chairman Gerry Harvey compares Harvey Norman to other franchised retailers, such as fast food operation Domino's, but critics suggest it operates through a different structure and that the franchisees are virtually controlled by head office.
The Australian Shareholders' Association called for Mr Harvey to resign this week and suggested the company should also change its auditor, prompting Mr Harvey to threaten to abandon annual meetings altogether.
Deutsche Bank analyst Michael Simotas said Harvey Norman's franchise accounting was "opaque" and consolidated retail accounts would be "easier to interpret".
However Mr Simotas said Deutsche Bank was confident the group's "accrual profit and loss" was an accurate reflection of its underlying performance.
"The business has a strong track record of consistent cash generation, both at the operating and free cash flow levels," Mr Simotas said.
Profit jump
Harvey Norman's full-year profit jumped 30 per cent to $348.61 million last financial year compared to an 11.5 per cent increase in competitor JB Hi-Fi's full-year profit to $152.2 million.
In the first quarter Harvey Norman's preliminary profit rose 26 per cent to $115.6 million however same store sales rose 5.4 per cent, compared to 7.1 per cent in the same period last year.
Mr Harvey blames short sellers for questions about the accounts and the franchisees but the stock, which is more than half owned by Mr Harvey and interests associated with the billionaire retailer, is not one of the highly shorted stocks in the market.
Bronte Capital's chief investment officer John Hempton was drawn into the skirmish after Mr Harvey named him as the short seller who had written to Harvey Norman's Ernst & Young.
The outspoken businessman put Mr Hempton at the centre of his conspiracy theory, which he shared with investors at the annual meeting as he lambasted foreign short sellers, who he claims are spreading "flawed"information about the retailer's accounts and the financial relationship between the franchisees and Harvey Norman head office.
It's understood Mr Hempton's letter was also sent to ASIC, it's not known whether this letter played any role in ASIC's decision to reach out to Harvey Norman.
Gerry Harvey and Harvey Norman were contacted for comment.
Do you know more? Contact: catie.low@fairfaxmedia.com.au
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