Folli Follie's audit crisis hammers Greece-based international luxury firm

Company under intense pressure as creditors, shareholders and other stakeholders await answers following accusations of financial misinterpretation

A pedestrian passes a display of women's handbags inside a Folli Follie SA store in the Glyfada district of Athens, Greece, on Monday, June 23, 2014. Dimitrios Koutsolioutsos, the founder and chairman of Folli Follie, has become a billionaire as the Athens-based maker of jewelry, handbags and fashion accessories increased almost 10-fold in the last two years. Photographer: Kostas Tsironis/Bloomberg
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Athens // Greek jewellery and fashion accessory designer and retailer Folli Follie Group, which has branches in Dubai, Abu Dhabi and Kuwait as well as further afield internationally, is facing renewed uncertainty after accusations of misleading finances set off a series of crises at the company.

The former darling of the Greek corporate sector came under intense scrutiny when, in early May, New-York based long/short equity fund Quintessential Capital Management (QCM) alleged that its due diligence picked apart much of Folli Follie’s dazzling financials.

In particular, the fund alleged that Folli Follie noted 630 points of sale in its 2016 annual report, while QCM was able to confirm the existence of only 289.  QCM also said Folli Follie's reports showed constantly negative free cash flow despite growing revenues and profit, especially for the Asian arm of the business.

"The most important thing Folli Follie must do is provide full audit of its accounts using an internationally renowned auditor as at this point trust in reported numbers has waned," Chris Chaviaras, senior retail analyst at Bloomberg Intelligence, told The National.

“It also needs to be very responsive and open with investors.”

He said the company’s response had not been acceptable and in terms of recovering from the fall-out, he added: “In that sense the feeling is that the company has a long way to go until it has even a chance of bouncing back.”

Folli Follie Group also owns Links of London, which it acquired in 2006. The group’s 2017 full-year results reported that revenues reached €1.42 billion (Dh6.08bn) compared to €1.34bn in 2016, up by 6.1 per cent. Net profits after tax and minority rights came to €212.3 million, declining by 4.5 per cent against the previous year’s figure.

Folli Follie declined to comment additionally when approached by The National, referring to previously issued statements. On Monday it said the group appointed Alvarez & Marsal (A&M) to undertake a forensic evaluation of the most recent financial statements of its Asian subsidiaries.

Within that statement, George Koutsolioutsos, Folli Follie’s CEO, said he was aware that creditors, shareholders and other stakeholders were waiting for answers. “In the interim we continue to fulfil our commercial and financial obligations. We are taking additional steps to demonstrate we can do so and to restore stakeholder confidence, including undertaking a wider review of the Group’s internal control systems and corporate governance,” he said.

On the first trading day following the publication of QCM’s report, Folli Follie Group’s share price began to slide steeply. Within a few days, over 30 per cent of the shares value had been wiped out. Soon after, the Hellenic Capital Market Commission (HCMC) announced that it was requesting a full and independent audit of Folli Follie’s 2017 financial statement from an internationally recognised audit firm. Share trading was subsequently suspended.

In the weeks that followed, Folli Follie embarked on an extensive share buyback, and appointed EY as its new independent audit firm to look at specific items of its 2017 financial statements. The group received a vote of confidence when Fosun International increased their direct and indirect participation in the company from 13.9 per cent to 15 per cent via the purchase of 750,000 additional shares.

However, in the midst of several board members resigning and the HCMC saying it was taking unspecified legal action against the directors of Folli Follie, EY announced that it was unable to re-examine the finances of Folli Follie due to conditions it faced while attempting to complete the audit, and recommended a complete forensic analysis. The announcement prompted the resignation last week of Dimitrios Potamitis, Folli Follie’s chairman of the audit committee, who was only elected on June 8.

"We are pleased with the assertive approach undertaken by the HCMC in its handling of the case against Folli Follie Group and we sincerely hope that, eventually, truth will prevail and any responsible parties will be brought to justice." Gabriel Grego, managing partner at QCM, told The National.

Trading remains suspended on Folli Follie Group’s shares. The A&M re-audit and EY's specific items audit are expected to be completed in early August.