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More evidence of dodgy accounting at Spar

Katharine Child Retail Writer

In another revelation that puts Spar CEO Brett Botten at the centre of questionable accounting practices, an investigative report has uncovered a second fictitious loan that would have painted a misleading picture about the financial health of one of SA’s biggest retailers.

According to the report, Spar — primarily a wholesaler to individually owned stores — sold one of its corporate-owned stores for just under R11m book value to a group of Vaal-based independent merchants, who were advanced a loan by Spar to buy and refurbish the store in 2018.

The report conducted on behalf of Spar’s board by Harris Nupen Molebatsi highlighted that the retailers paid only R8m, with Spar choosing to shoulder the rest of the loan via a socalled monthly marketing contribution and ensuring that the wholesaler recorded the receipt of the full book value of the outlet. The arrangement meant Spar wouldn’t have to record the difference between the lower payment and higher book value of the store as a write-off on its books.

It is the second “fictitious loan” highlighted in the investigative report, which was conducted after allegations of unfair treatment and racism.

Last week, Business Day reported on a similarly structured fictional loan worth R8m at the Spar division headed at the time by Botten.

This finding comes amid growing governance concerns swirling around the JSE-listed group. The Financial Mail has reported at some length on Spar’s legal battles and raised questions around the independence of the chair, Graham O’Connor, as he was former CEO and he and his direct family members did business worth more than R250m with the group in 2022, according to the annual report.

Spar declined to comment on

the report, saying it was in confidential mediation with retailers whose unhappiness sparked the investigation.

In a letter to the board written in 2021, company secretary Kevin O’Brien admits this “transaction may have reduced the possible bad debt write-off but it is not the intention”. Instead the loan to buy the store was intended to empower black retailers and aid transformation efforts.

It is not unusual for Spar to pay monthly marketing subsidies to struggling retailers or to stores that need a revamp or need assistance to better compete with a rival, according to the report. The better the independent stores do, the more goods they buy from Spar, making the subsidies a win-win situation.

While there is nothing untoward about Spar providing marketing subsidies to stores, the report highlights it did this at least twice to make its South Rand division books look more flattering than would otherwise have been the case.

In reply to a question from the investigators as to whether the R3m fictional loan was a “subterfuge”, the investigative report quoted a staff member saying it was “common practice”. The staff member provided lawyers with a list of over 30 stores that received subsidies for different reasons, including legitimate ones, such as financial difficulty, as well as subsidies to “offset loan repayments”.

This suggests there are more than two stores where Spar was helping retailers buy the stores with a loan and then repaying the loan itself in monthly instalments. Auditors would have difficulty uncovering murky loans booked as income by Spar and then repaid in monthly contributions by Spar, as the repayments would be recorded as ordinary marketing expenses.

The disclosures of possible misreporting have raised questions as to why Spar’s South Rand division, of which Botten was head at the time, would go to the trouble of creating “fictional” loans in such small amounts relative to the size of Spar’s business. Spar earned R136bn in revenue in its most recent financial year.

One allegation made in a whistle-blower email is that the bonus structure places pressure on managers to reduce debt.

A senior manager will earn up to 15% of their annual salary in a bonus if all targets are met, a more senior manager 30% and an executive up to 60%, with the MD earning up to 100% of their annual salary in a bonus, according to the annual remuneration report.

About 60% of the bonus structure is based on financial performance of the staff member’s divisions, according to the annual report.

Insider documents provided to Business Day show that missing financial targets by hundreds of thousands of rand can mean a much lower bonus.

Botten, who was MD at the time of the two fictional loans, could earn as much as double his salary if all targets were met. This means there is an incentive to inflate income and spread out repayments over a few years.

INSIDER DOCUMENTS SHOW THAT MISSING FINANCIAL TARGETS BY HUNDREDS OF THOUSANDS OF RAND CAN MEAN A MUCH LOWER BONUS

THE BETTER THE INDEPENDENT STORES DO, THE MORE GOODS THEY BUY FROM SPAR, MAKING THE SUBSIDIES A WIN-WIN SITUATION

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2022-12-08T08:00:00.0000000Z

2022-12-08T08:00:00.0000000Z

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