INVESTORS have been urged to vote down Betfair's annual report after the online bookmaker admitted to breaching accounting rules when it paid illegal dividends out of capital between 2011 and 2013.
Shareholder governance group Pirc has recommended that investors reject Betfair's accounts at the group's annual general meeting and oppose the reappointment of auditors KPMG for failing to spot that Betfair had paid dividends to shareholders without having "sufficient distributable reserves to make those distributions".
"Shareholders have been asked in prior years to vote on the payment of dividends that in fact were illegal due to defective accounts. That makes the validity of the company's accounts themselves questionable," said Pirc managing director Alan McDougall.
The gambling website's annual accounts revealed £30m in dividends and £50m in share buy backs were issued over three financial years, contrary to ICAEW guidance and conditions of realised profits and distributable reserves, the rules of which were amended in 2010.
Betfair said in its report: "As a result of certain changes to the technical guidance issued by the... ICAEW in October 2010, the company did not have sufficient distributable reserves to make those distributions and so they should not have been paid by the company to its shareholders."
Pirc has subsequently raised questions as to why the distributions were made after the guidance was issued, "particularly as the mistake was not a one off but repeated five times".
"The accounts themselves were not an appropriate basis to declare a lawful dividend from, then the accounts did not give a true and fair view, and Pirc questions whether they still do," said McDougal.
Betfair has hit back and accused Pirc of "materially misrepresenting the facts in a number of ways".
"Its most serious error is to claim that Betfair's profits are overstated," it said in a statement.
Last month, a group of institutional investors raised "grave concerns" that IFRS - with its emphasis on neutrality over prudence - has "dangerously weakened" the true and fair accounting concept and claimed that as long as IFRS does not require companies to disclose underlying capital reserves - and which part is available for distribution - businesses are at risk of paying dividends out of capital.
The group, which includes Threadneedle Investments, Royal London Asset Management and the London Pensions Fund Authority, said Betfair's failure to meet the conditions of realised profits and distributable reserves "highlighted the importance of the matter" despite Betfair reporting under UK GAAP rather than IFRS.
Auditors KPMG have also been questioned for apparently failing to identify that illegal dividends have been paid by the company to shareholders over the last three years, due to non-compliance with the Company Law. Pirc additionally raised concerns that KPMG's total non-audit fees were approximately 66.6% of audit fees during the year under review.
"There are concerns that this level of non-audit fees creates a potential for conflict of interest on the part of the independent auditor," Pirc said. EU regulation, set to be transposed into the UK, requires that non-audit fees must be below 75% of total audit fees over a three year period.
KPMG was not immediately available for comment.
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