2GO cites causes of accounting woes

The new owners of 2GO Group Inc. did not mince words on what they believed was the root cause of an accounting controversy that emerged when they assumed control of the logistics giant last year and hired a new independent accountant, which conducted a special audit.

In its 2017 annual report, 2GO said key adjustments to its numbers were “attributable to the lack of or the apparent breakdown in internal controls and the inconsistent application of accounting policies.”

The changes prompted the downward revision of profits by almost P2 billion over two years.

The way certain non-cash assets were also recorded cast the spotlight on how the company—under the previous regime—was able to stay within key loan agreement terms and avoided defaulting on multi-billion peso debt.

The allegation in 2GO’s annual report is remarkable in the field of accounting, which seldom sees such public controversies, and also because the Securities and Exchange Commission has yet to release its own findings.

SEC spokesperson Arman Pan yesterday said a “fact finding task force,” launched last year, had been reorganized into an “investigating body.”

The controversy also stands out because it deals with gray areas in the business, or those that require estimations and judgements. These could vary between the company’s management that prepares financial reports and independent auditors that determine whether these conform with acceptable standards.

For listed companies like 2GO, financial reports are crucial in helping investors make decisions on where to place their funds.

2GO is now controlled by businessman Dennis Uy and the SM Group. They bought out 2GO’s shareholders last year and replaced the management team led by Sulficio Tagud Jr.

They also brought back SyCip Gorres Velayo & Co. (SGV), which conducted a special audit that eventually triggered the restating of financial figures through 2015. Those periods were handled by rival company KPMG-R.G. Manabat & Co., hired by Tagud in 2014 due to disagreement with SGV over the treatment of deferred tax assets.

KPMG and Tagud’s camp did not immediately respond to requests for comments yesterday.

The allegation on the inconsistent application of accounting policies is a specific one, and 2GO outlined areas where these occurred.

It noted, for one, how 2GO had overstated receivables, inflating the company’s equity and earnings between the first quarter of 2017 going back to 2015.

2GO noted in its annual report that previous management did not set aside any allowance for doubtful receivables for “unpaid invoice balances that were deducted outright by customers upon payment and disengaged customers.”

Doubtful receivables refers to income that may no longer be collected. For example, in 2016, 2GO’s previous management provided an allowance for doubtful receivables amounting to P390 million. Under new management, this was restated to P1.2 billion, reflecting a more conservative view.

Also highlighted was the inconsistent application of accounting rules on the treatment of expenses, revenues and goodwill.

The restatement also had an impact on when 2GO’s long-term debt became due. Most of its debt is owed to the BDO Unibank Inc., controlled by 2GO shareholder SM Investments Corp.

As of the end of last year, long-term debt amounting to P731.3 million and P2.7 billion for 2017 and 2016, respectively, were reclassified into current liabilities. This means they are due in the next 12 months. These were reclassified because 2GO no longer complied with its debt covenants.

“The group has not received a notice of default from its creditors and continues to pay long-term loans based on original credit terms,” 2GO said in its 2017 annual report.

2GO said revenue in 2017 rose 13 percent to P21.6 billion. It posted a net loss of P310 million last year, against a profit of P344 million in 2016.