MANILA, Philippines – Sulficio Tagud Jr, who was president and chief executive officer of 2GO Group Incorporated for 6 years, denied allegations that the company's profits had been inflated in 2015 and 2016. He described the restatement of 2GO's financial statements for those two years as "an attack on the integrity" of its former officials.
"This is totally false. I am fully confident of our audits. When the new management took over, we approved financial statements in April this year. We then passed that on to internal auditors and then they approved it. The board also approved. We even did audits twice a year – June and December – just to make sure," Tagud told Rappler in a phone interview on Thursday, July 13.
He was referring to the group led by businessman Dennis Uy who took over 2GO's board and management in April.
2GO last week restated its 2015 and 2016 financial statements, after a special audit requested by the firm's new management – a major accounting scandal that is now being investigated by the Securities and Exchange Commission (SEC).
The restated financials pruned a whopping 90% off 2GO's net income in 2015 to P109.131 million. It also turned out that its 2016 net income should have been 74% lower than what was reported.
The special audit conducted by SGV & Company also showed that in the 1st quarter of 2017, there was a net loss of P264.86 million, instead of the earlier reported net income of P267.562 million. (READ: Doubts hound KPMG following 2GO accounting scandal)
This was followed by the resignation of Jeremias Cruzabra as chief financial officer and treasurer. He was replaced by William Charles Howell.
"The only explanation for this fiasco is that the new external auditor might have found an opportunity to get back at us," said Tagud, who retired from both the management and the board last April.
SGV used to be the external auditor of 2GO. But in 2014, the 2GO board of directors replaced SGV with the accounting giant's rival KPMG RG Manabat & Company.
Deferred tax asset issue
Tagud explained that the 2GO board decided to replace SGV in 2014 due to a major disagreement between management and the auditing firm over how to treat a deferred tax asset during the 2013 audit.
"In 2014, the company (finances of 2GO) turned around. And because there were losses in the previous two years, there was net loss carryover. It is in deferred tax assets," Tagud said.
A deferred tax asset is an accounting item on a company's balance sheet that may be used to reduce taxable income.
"Part of that deferred tax asset, which is more than P300 million, would have been used the following year, 2015, but SGV that time said we have to write it off so you make money. And then the board decided to fire SGV because they insisted for us to write that off," he added.
This issue was even escalated up to the level of the SEC, the ex-2GO chief stressed, finding irony now in the investigation that the corporate regulator has recently initiated. (READ: 2GO management, auditors may face over P1-M fine)
The deferred tax assets fit the details that the new board and management of 2GO disclosed to the investors on July 11. Businessman Dennis Uy described the discrepancies as "non-cash and non-recurring,"
"The restated financials were subsequently disclosed for fairness and transparency to the shareholders and the investing public. The restatement also reflects the commitment of the new management and board to raise corporate governance standards in the company," Uy had said.
In its separate statement, KPMG Manabat maintained that it had performed the audits of 2GO in compliance with the Philippine Standards on Auditing.
KPMG also said it has requested but has yet to receive from SGV the full details of the restatement of its 2015 and 2016 financial statements.
"As a courtesy procedure, when the financial statements audited by an auditor will be restated by another auditor, the current auditor should at least discuss and seek concurrence from the prior auditor," Tagud said.
Tagud vs Dennis Uy
Tagud hinted of two squabbles to explain the ongoing accounting saga: Aside from the one between 2GO's previous management and SGV, he also referred to the previous rift between him and businessman Dennis Uy, a Davao-based businessman close to President Rodrigo Duterte.
"SGV has been the auditor of Nenaco from the time I came in all the way to 2014. It was also SGV for Aboitiz Transport," he said, highlighting the previously strong auditor-client relationship with the auditing firm.
Nenaco, or Negros Navigation, was the shipping company acquired by a management team led by Tagud from infrastructure firm Metro Pacific Investments Corp (MPIC) more than a decade ago.
Nenaco was the original partner of Dutch firm KGLI BV in holding firm KGLI-NM, which until recently was a major shareholder of 2GO.
The Filipino and Dutch group go all the way back. In 2008, they wanted to acquire Nenaco’s domestic rival Aboitiz Transport Shipping Corp, but the foreigners’ finances were strained by the global financial crisis at the time. Nenaco was eventually able to proceed with the acquisition after it reached an agreement with China Asean Marine BV, which infused additional equity in 2010 simultaneous with the KGLI NM-Aboitiz Transport $81-million deal.
China Asean, a private equity fund sponsored by China Export-Import Bank, became the controlling stakeholder of the combined companies, which were later rebranded as 2GO.
Tagud and the Dutch group squabbled after the latter sold its stake in KGLI NM to Dennis Uy’s firms in September 2016. The Dutch firm had voting stocks and beneficial interests in 2GO through its stake the holding firm KGLI NM, which owns a stake in Nenaco that in turn owns a substantial stake in 2GO.
Citing his firms' 21% voting interest and 28% beneficial interest in 2GO following the deal with the Dutch, Uy said he was entitled to board seats in 2GO. Tagud's group, however, blocked Uy since he was left out of the deal.
A bruising legal battle ensued: Uy sued the 2GO owners, and Tagud filed a case against the Dutch partners. After the regional court told the squabbling parties to bring their cases to an international arbitration court, which would have prolonged the legal saga, the clashes simmered down. Uy was eventually allowed on 2GO’s board in February 2017.
The country’s richest family followed in April after the Sy family-led SM Investments Corp acquired a 34.5% stake in 2GO for $124.50 million by buying the 2GO shares of China Asean. (READ: How SM Investments acquired stake in 2GO)
The Uy and Sy groups took over the board and management of 2Go that month. (READ: Phoenix boss Dennis Uy replaces Tagud as head of 2GO)
Tagud and the Sys
Tagud stressed that the Sy group and SGV were aware of the finances of 2GO even before the legal disputes started.
He said the new owners and their affiliates conducted an extensive due diligence review prior to acquiring a majority stake in 2GO.
He specified that BDO Unibank Incorporated, the banking arm of SM Investments Corporation, and Ernst & Young, the foreign partner of SGV.
BDO has been the principal creditor bank of 2GO since 2011, he stressed. The logistics firm would periodically submit its financial reports to the bank.
"On a yearly basis, BDO Unibank said it would conduct a financial evaluation of 2GO for the renewal of its credit facilities, and BDO never raised any issue regarding overstatement of any amounts," Tagud added.
He also said that way back in June 2016, SGV and Ernst & Young have already gone over the financial books of 2GO. At the time, the Singapore office of Ernst & Young was engaged by Dubai-based private equity investor, ABRAAJ, to conduct a due diligence. ABRAAJ was interested in partnering with him to acquire an interest in 2GO, he said.
"Ernst & Young, for its part, deputized SGV to assist it for this engagement. Again, they never raised any issue regarding misstatement or overstatement of any amounts," he said.
Tagud said that when Dennis Uy and SM were still negotiating with the principal shareholders of 2GO, they issued a formal advisory that they would complete their due diligence examination of 2GO prior to proceeding with the acquisition.
Rejecting any possible overstatement of the income of 2GO, Tagud said that from the inception of the partnership, he had always intended and, in fact, ventured to purchase the majority interest in 2GO from its then foreign partners.
"I negotiated with BDO and, after conducting the necessary due diligence examinations, BDO approved a $120-million loan to purchase the shares of the foreign partners, the very same shares now owned by the SM Group and Dennis Uy. The due diligence examination did not contain any finding as to the overstatement of income in 2GO," Tagud said.
He added that the former management of 2GO will welcome any inquiry by the SEC and the Philippine Stock Exchange on the supposedly overinflated figures.
Shares of 2GO went up by 6.58% to P24.30 on Thursday. – Rappler.com