ASX grills Smiles Inclusive over KPMG audit

The Australian Stock Exchange (ASX) has called on embattled dental group Smiles Inclusive (ASX: SIL) to provide copies of all email communications with its auditors KPMG since August 30 in the wake of a surprise $31 million loss announcement this week.

The result is much worse than the $19 million loss announced just over a month ago in Smiles' unaudited results, stemming from a $13.7 million impairment of assets.

In the wake of those unaudited results, the ASX questioned Smiles over when it became aware of that charge. Chairman David Usasz affirmed the board only became aware of it after the close of trade on 30 August, meaning it was included within three hours.

On 1 October SIL released its audited report showing an impairment of goodwill and property, plant and equipment that totalled $31.1 million.

In a fresh response to an ASX query Usasz indicates these surprises were once again last-minute in nature.

"While the Company has worked constructively with its auditor since 30 August 2019 on all aspects of the Company's accounts, the Company's audit process had not been sufficiently progressed for the Company's auditor to provide an indication of its views on impairment until the evening of 24 September 2019," he says.

"The actual impairment finally disclosed in the Company's annual report released on 1 October 2019 was only determined late in the evening on 30 September 2019.

"The Company notes that neither the announcement on 30 August nor the announcement on 25 September nor the release of the Company's annual report on 1 October resulted in a material movement in the price or volume of trading in the Company's shares."

The statutory audited results were released after Smiles had kicked off a $3.3 million capital raising to pay down debt and fund working capital requirements, at a time when the group has been quickly burning through cash.

Joint venture partners (JVP) Dr John Camacho and Dr Arthur Walsh have welcomed the ASX's "robust interrogation" of the Smiles audit process, and allege something much more problematic might be at play.

"We allege the Smiles audit has been deliberately staged [sic] managed between the Board and KPMG to avoid disclosing the $31 million loss ahead of the Smiles capital raise," says Walsh.

"This is precisely why a Senate enquiry is currently underway into the auditing industry and ASIC is holding auditor firms to greater account.

"Does KPMG not realise that it, along with Morgans, are already in the frame relating to a $40m class action concerning Smiles disastrous IPO?"

Camacho has called on Smiles to issue fresh investor information and stop the capital raising retail offer document mail-out due to be dispatched today to investors.

"Smiles investors are being asked to invest based on false and misleading information. We also believe the true loss is closer to $40 million based on any reasonable assessment of goodwill impairment," he says.

"Does Smiles really want the world to believe that the final numbers were only known on Monday night and that they were then able to produce an 80 page annual report thereafter within a few hours?"

"We will have more to say on today's developments in the coming days. Today's news goes to the very heart of the Corporations Act and respect for the stock market and investors," adds Walsh.

Founder and former CEO Mike Timoney also alleges Smiles has incorrectly stated in the financial report that he sold all his 9.67 million shares in SIL in FY19.

Timoney was voted off the Smiles board at an extraordinary general meeting (EGM) held on 23 May.

"I campaigned at the EGM on good corporate governance and having the right knowledge in the company," he says.

"When I called the EGM the shares were 30 cents, they are now 5 cents.

"Clearly Usasz continues flouting good governance with repeated "please explain" from the ASX."

Business News Australia