Grenke AG has offered a briefing about the advisory opinion by Warth & Klein Grant Thornton and, separately, KPMG, both of which were commissioned by the German leasing company to examine the company’s accounts following serious allegations of wrongdoing.
Grenke AG said the purpose of Klein Grant Thornton’s investigation, commissioned by the supervisory board of Grenke AG, was to verify the advantages, if any, of the acquisitions of franchises.
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Audit by Klein Grant Thornton
Review of the advantageousness of acquisitions of franchises
The company said that Klein Grant Thornton has concluded that the 17 franchise acquisitions to date can be described as positive overall for Grenke AG.
Grenke said: “In summary, according to Klein Grant Thornton, the returns on franchise acquisitions considered by the accounting firm are within the scope of earnings expectations that justify investing in investments.
“According to Klein Grant Thornton’s surveys, a pre-tax return of at least 10.7% was achieved or exceeded for the portfolio of acquired former franchisees in the years 2016 to 2019.
“This return relates to the entire investment of Grenke AG. To this end, the purchase prices, the capital injections, the ex-post directly generated earnings contributions of the companies under IFRS, as well as the results obtained in the group from the business of these companies, are used for this purpose.”
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By GlobalDataReview of the acquisitions
Grenke said: “Also, Klein Grant Thornton has reviewed the franchise acquisitions. As a result, the auditing firm considers the expansion model of Grenke AG, in which the franchise companies are taken over after about five years, to be very specific and difficult to compare with other transactions accessible on the market.
“The involvement of the external financial investors was judged to be fundamentally comprehensible for the expansion, but the exclusive cooperation with CTP is only partially comprehensible for Klein Grant Thornton.
“The management board of Grenke AG had already announced its intention to integrate the existing franchise sits into the Group and to expand with its own start-up companies in the future.
“According to Klein Grant Thornton, the valuation methodology of the agreed purchase options contains numerous market-compliant elements, but differs in part from the standard customary in M&A practice, especially in the concrete implementation of individual transactions.
“According to Klein Grant Thornton, it is quite common to take into account the specificities of young growth companies when determining the valuation and setting of purchase prices in the form of growth-related profit adjustments and multiplier discounts.
“In several acquisitions of previous years, the negotiation process for Klein Grant Thornton is only comprehensible against the specific background of permanent cooperation with the business partners of the franchise model.
“In some cases, price-increasing deviations from the originally agreed basic valuation methodology were found, but according to Klein Grant Thornton, they were about the total purchase price within the framework of normal corridors for the valuation of companies in an early development phase.
“In total, Klein Grant Thornton found price-increasing deviations from the originally agreed basic valuation methodology of EUR 15.1m (approximately 13% of the purchase price).
“Of this amount, EUR 9.2m is attributable to the transaction in Portugal in 2012 alone.
“From Grenke’s point of view, this is to be assessed primarily based on strategic considerations and expansion intentions to Brazil at the time.
“Other transactions account for between €30,000 and €1.8m. According to Klein Grant Thornton, the discrepancies observed are not insignificant but are in the context of normal uncertainties in the valuation of companies in an early development phase.”
Audits of personnel and company law relationships concerning the ownership structures of the acquired companies
Grenke said: “Following the completion of the audit procedures on advantageousness and marketability, Klein Grant Thornton is now continuing its research into personnel and company law relationships concerning the ownership structures of the acquired companies. The board of management also commissioned Klein Grant Thornton to evaluate the franchises to be acquired.”
Audit by KPMG
Regarding the allegations made by Viceroy Research LLC, the Grenke supervisory board commission auditors KPMG to offer an update of Grenke’s annual financial statements and to offer a risk assessment.
Grenke said: “This level of knowledge does not constitute partial anticipation of the audit results for the consolidated financial statements and is subject to further findings that can be obtained until the audit is completed in full.
“In addition to obtaining an updated understanding of the company, environment and internal control system, KPMG has also carried out functional audits of internal controls as well as statement-related audits, including case-by-case audits at various times.
“Subject to the audit results, KPMG has already obtained the audit evidence presented below in the context of the risk assessment until this report has been drawn up.”
Evidence of the existence of leasing contracts based on confirmation requests, leasing payments received and verification of supporting documents
Grenke said: “KPMG has so far been unable to identify any evidence to suggest that the leasing business does not exist.
“For a random selection, KPMG has obtained evidence of the existence of these leasing contracts. KPMG has not reported any evidence to suggest that sales partners or specialist trading partners with whom Grenke cooperates in leasing do not exist.
“A background research on the 30 largest distributors found no evidence that they do not exist, are involved in criminal transactions or, in any other respect, the business is questionable.”
Dependence on sales partners
Grenke said: “To identify possible concentration risks and potential dependencies, KPMG analysed the structure of the Grenke Group’s sales partners based on sales data. As of August 31, 2020, the group’s 10 largest sales partners accounted for just under 4.2% of the Group leasing contract portfolio.”
Involvement of sales partners in risk management and business relationship with Viewble Media UK
Grenke said: “KPMG does not currently confirm the allegation that Grenke facilitated or deliberately concealed fraud by financing the leased goods.
“The company intends to take up indications of process weaknesses identified by KPMG, including in the ongoing monitoring of suppliers, and to examine integration into internal processes.
Arrangements to prevent money laundering and terrorist financing
Grenke said: “For the allegation that Grenke AG was systematically involved in or facilitated money laundering, KPMG has not provided any indications or confirmations based on previous investigations.
“KPMG was unable to identify a breach of a BaFin order in the review of the individual case referred to in the allegations. KPMG could not substantiate the allegations of business ties with unlicensed trading platforms.
“KPMG has formulated significant complaints regarding the adequacy of organisational money laundering prevention in the Grenke Group.
“The potential for improvement in the internal money-laundering prevention process identified in the audit is already under review.
Assessment of the allegation that Grenke Bank AG provides guarantees to group companies that jeopardise their existence
Grenke said: “The assertion that Grenke Bank AG assumes guarantees for the Group’s financial liabilities, and in particular for bonds issued, is also not confirmed based on the findings so far.”
Inclusion of franchisees in the consolidated financial statements.
Type and scope of disclosures about related parties in the IFRS consolidated financial statements of Grenke AG
Grenke said: “The nature and scope of the persons and companies to be included in the consolidated financial statements of Grenke AG – the subject of consolidation or “related parties” – are the subject of KPMG’s ongoing audit.
“Without prejudice to the ongoing audit, Grenke shall evaluate KPMG’s guidance to classify the disclosures relating to the franchisees or their shareholders as disclosures under IAS24 and to post weaknesses in the internal control system in the notes to the annual consolidated financial statements and to address weaknesses in the internal control system.£
Continuation of KPMG’s audit procedures
Grenke said: “KPMG expressly points out that further comprehensive analysis and work is needed, which can be applied to all areas of the audit.
“KPMG continues its separate audit procedures. These are part of the normal annual audit, so no separate, independent report will be submitted by KPMG to the Company.
“Irrespective of this, the most important thing to be carried out or to be completed is: the review of risk provisions and the validation of the models used for their evaluation, in particular in the light of the impact of the Covid-19 pandemic, the assessment of the impairment tests for goodwill, the audit of the internal control system, the implementation of the audit procedures agreed through the Group Audit Instructions by the auditors of the subsidiaries.
“KPMG reports on the final results of the audit on 31 December 2020 in the audit report.”
The independent audit procedures by BaFin continue
Grenke said: “The special audit, pursuant to Section 44 of the German Banking Act (KWG) and the audit of the consolidated financial statements 2019 of Grenke AG (“DPR audit”) by the Federal Financial Supervisory Authority (BaFin) will be continued unchanged by the auditing and consulting firm Mazars on behalf of BaFin and independently of the ongoing audits by KPMG and Warth & Klein Grant Thornton.
“The audits of BaFin and Mazars are not prejudged by the investigations of KPMG and Warth & Klein Grant Thornton.”
