Auditors are supposed to be experts at accounting matters, and their audit reports, especially for public companies, are expected to provide users with accurate information. At the same time, the Jamaica Stock Exchange (JSE) monitors financial reports put out by the companies listed on their exchange, while the Financial Services Commission advises that they also review them.
Since 2010, around 60 companies have listed shares on the JSE with new shares to the public. The vast majority of them split the shares to facilitate meeting the JSE rules or for greater liquidity of the shares. One would have thought that qualified accountants would by now be fully conversant in computing the correct number of shares and the average where applicable, thus computing the correct earnings per share. That is not the case. The JSE gets and vets financial reports and is clueless about what is happening with many of the financial reports put out by companies. If they did, they would not allow Omni Industries to report critical information that is incorrect in their financials for three quarters without revisions, now the audited statements have also incorrectly reported it.
Omni did so for their quarterly reports since listing in the early summer. Their auditors compounded the error by issuing financial statements with serious errors.
In February last year, the company converted 20.09 million shares into 2.25 billion units by splitting each issued stock. In May, 250 million new shares were sold to the public, increasing the total issued shares to 2.5 billion units and the weighted average to 2.47 billion units. In a strange twist, the company reported an average number of shares at just 1.402 billion units, a figure the auditors have unfortunately used as well.
The critical factor is that the earnings per share are overstated. This is crucial as many investors use EPS to value stocks. The market average is now around 15 2024 earnings, so at 9 cents, some may consider the stock to be undervalued at 94 cents, it traded today. If the correct EPS of 5 cents is used, the stock would be valued at nearly 21 times 2024 earnings and is well above the market average, too vastly different pictures.
In addition, neither the company nor the auditors have reported the appropriate earnings per share for 2023 nor the correct average number of shares issued.
Accounting standards require that the average number of shares in issue is the weighted number of shares outstanding during the period. The company split the 20.9 million shares before the IPO into 2.25 billion units; as such, the average issued shares cannot be less than this plus the average for the new shares issued.
The audited report shows a profit of $127 million and an EPS of 9 cents for 2024. In reality, EPS for 2024 is around 5 cents and 6.7 cents for 2023.
In another matter that is not related to Omni, auditors are computing deferred taxes at 25 percent on revaluation surplus on land and buildings. That would be in order if gains on disposal of land and buildings were taxed at the rate of income. Such an application is blatantly incorrect as the only amounts that will be taxed would be amounts relating to capital allowances already claimed on buildings and not lands. The applicable tax would be a transfer tax, which is at a far lower rate than income tax.