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The third and last of the Priceclub directors to give evidence in the court case instituted by Valle del Miele Ltd against the Priceclub told the court that it never crossed his mind that the accounts of the supermarket giant that crashed spectacularly in 2001, could be incorrect.
Chris Gauci followed his partners Wallace Fino and Victor Zammit, who also said they had signed the accounts of the company but did not verify the figures because they trusted their accountants and auditors.
The reliability of the accounts had been torn to shreds in evidence given in court in October 2003 by audit expert John Zarb, who was asked to give a professional opinion on them.
Interrogated in court by Valle del Miele lawyer Shazoo Ghaznavi, Gauci said he was not a shareholder in Priceclub even if his family owns shares in a company that owns 25 percent of the Priceclub Operators Ltd shares.
In John Zarb’s evidence major doubts were shed on the reliability of the stock values and Zarb said: “Priceclub Operators Ltd had no stock records. It had no reliable ongoing system of stock recording through which management could estimate closing stock at any point in time, which meant that management was in effect operating in the dark, not knowing the full extent of PCO’s losses.
“In my experience…a food supermarket business in this situation should as a minimum have instituted a system of regular frequent stock takes. Yet management never instituted a complete stock take within PCO at any time in the course of its operations.”
John Zarb calculated that the stock figures appearing in Priceclub’s accounts were overstated by Lm151,000 in 1998, after six months trading; by Lm772,000 in 1999 and by Lm504,000 in 2000.
Ghaznavi grilled Gauci on the reliability of stock taking and valuation:
Ghaznavi: “What type of stocktaking did you have?”
Gauci: “..we invested in a good IT system. We bought a hand take system and we had done several stock takes. ….our IT system…became fully operational in January 2001 when we had (financial) problems.
“Before that date, I don’t know exactly how stock takes were carried out….
Ghaznavi: “In 1998, how were stock takes carried out?”
Gauci: “We did a general stock take exactly when we took over the business.”
Gauci, Wallace Fino and Victor Zammit took started operating the Priceclub mid-1998, and the lawyer wanted to know whether a stock take was held at the end of the first financial period: Ghaznavi: “Towards the end of 1998?”
Gauci: “A retail method was used, but I am not technical and don’t know how to say more than that.”
Ghaznavi: “Do you remember if a physical stock take was carried out?”
Gauci: “I don’t remember.”
The lawyer then changed the subject to the accounts:
Ghaznavi: “Did you sign the accounts of 1998?”
Gauci: “Yes, I signed the accounts. I have a basic knowledge of accounts. I only have an ‘O’ and ‘A’ level in accounts. It is obvious that if a stock level is wrong it will affect the Gross Profit. That is why the stock level has to be close to reality so that one can have the exact figures.”
Ghaznavi: “When you signed the accounts did you do something to check that the figures were correct.”
Gauci: “We had a finance team, there were auditors and it was them that prepared these accounts and it never crossed my mind that these accounts were not correct.”
Ghaznavi persisted: “When a physical stock take takes place, what happens. Did you check?
Gauci: “No I did not check. I made sure that there were competent people to do the work.”
Ghaznavi: “Who is responsible for a company?”
Gauci: “The director.”
Ghaznavi: “If the financial controller and the directors do not do their work, who is responsible?”
Gauci: “We took care to have auditors so that the process is done properly and so that their would be an audit on the entire process.”
At this point Ghaznavi showed Gauci the accounts of Priceclub Operators in which the responsibility of directors are clearly laid out, and asked him to read the sentences: “The directors are responsible for ensuring that proper accounting records are kept which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act 1995.
“They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detention of fraud and other irregularities.”
Ghaznavi then asked “So who is responsible?” and the prompt reply was “The Director.”
At a later stage during the hearing, Ghaznavi asked Gauci: “You knew that the finance and audit team were responsible. And also that if they made a mistake you would be held responsible?
Gauci: “Today, I know what the responsibilities of a director are and I say that there is surely a mechanism in the law that holds them responsible for their work.”
Commenting on the accounts of Priceclub, in his testimony, audit expert John Zarb, had noted that: “The financial statements concerned, and the accompanying Report of the Directors, unfortunately may have served to mislead creditors who examined them, on the true financial position of Priceclub Operators Limited or the group as at 30 September 1999.”
The evidence given by the three directors stands in complete contradiction to that given by John Zarb who before the court said: “I believe that at the time of my firm’s initial investigation in April 2001, the directors of the group may well have been aware of the gross overstatement of stocks in the company’s accounting records.”
And later: “The question arises is when the directors became aware – or should have become aware – of the inevitability of the insolvency of the company…one can realistically argue that a position of insolvency existed from the outset.”
Still later: “I believe that the directors over a long period disguised the company’s real position.”
Up to 200 suppliers and other creditors lost between Lm8 to Lm12 million when the Priceclub crashed in a story that, as the evidence comes to light, reads like a Hollywood thriller.
The evidence given by the three Priceclub directors flies in the face of what was said recently by MFSA chairman Professor Joe Bannister who in his annual report for 2003 said: “it is at the door of company directors that first responsibility lies. The law must come down on board members who elect to turn a blind eye or who blindly accept financial statements.
“An auditor in doubt must ring alarm bells and institutional investors have a great duty of care to satisfy themselves that companies are managed by fit and proper persons.”
Christopher Gauci was giving evidence in the court case instituted by Valle del Miele Ltd against the Priceclub directors for wrongful and fraudulent trading.
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