Your Capital at Risk Part 5: Audit Opinions 4

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

The auditors of Plus500′s UK accounts do not inspire confidence.

In some of the discrepancies identified in Part 4, it is the Admission Document or the 2013 and 2014 Group accounts that appear to be overstated when compared the Plus500UK subsidiary filings. In others, statements in the Plus500UK subsidiary filings appear to be exaggerations relative to the company’s statements elsewhere. It is difficult to determine which filings, if any, are more reliable. While it is not generally the responsibility of auditors to proofread basic statements about the business by the company in a director’s report, one wonders if similar errors might be present elsewhere.

For the year ended 2013, the audits of Plus500UK, Plus500AU, and Plus500 Ltd were performed by three separate, unaffiliated audit firms. For 2014, Plus500 has begun to take steps to clean up the audit structure by having PricewaterhouseCoopers affiliates in the UK and Cyprus perform the local audits. However, in 2013, Kesselman & Kesselman (PwC) in Israel would have had to rely on the work of Baker Tilly (formerly RSM Tenon) in the UK and Gauld Tulloch Bove in Australia.

The 2010-2013 auditor of Plus500UK is a cause for concern. RSM Tenon nearly collapsed in 2012 after being discovered as having misrepresented its own accounts. After Baker Tilly bought the firm out of administration in 2013, the same RSM Tenon audit partner responsible for the 2012 report, Malcolm Pirouet, signed the 2013 report on behalf of Baker Tilly.

Nor does the replacement of RSM Tenon/Baker Tilly with PwC necessarily improve the situation in the UK. After all, PwC was RSM Tenon’s auditor. Perhaps more importantly, just after completing the 2014 audit, Plus500UK hired Gareth Derbyshire from PwC to serve as head of compliance. Though not required, it is common for a company to change auditors after making a senior hire from its auditor. The new appointment creates the appearance of a potential auditor independence issue.

Whatever the potential risks of the audit structure, the audit of the 2013 Group accounts was completed on 10 March 2014, which was at least after the Australia report on 7 March and the UK report on 3 March.

In 2015, by contrast, Kesselman & Kesselman’s report on the 2014 Group accounts was dated 16 March 2015. However, Plus500CY’s audit report was not signed until 29 April 2015 and Plus500UK’s is dated 10 April 2015. What exactly was Kesselman & Kesselman auditing in March of this year? Were they relying on unaudited subsidiary results? In the context of a significant restatement of the UK subsidiary’s accounts, how could Kesselman & Kesselman complete its Group audit ahead of time?

The 2014 Plus500UK accounts include significant inter-company payables (“Other amounts owed to group undertakings” at note 17) that would be eliminated upon consolidation in the Group accounts. The revised revenue recognition policy at Plus500UK implies that amounts owed under the inter-company agreement are paid to the Parent immediately and therefore not even recognized in revenue at the subsidiary level. How, then, did the amount of inter-company payables balloon from GBP 1.6 million in 2012 to 8.8 million in 2013 and 12.4 million in 2014? Are the audited inter-company amounts reported by Plus500UK the same amounts the company reported to Kesselman & Kesselman for the Group audit?


On to Part 6: Analyzing Plus500′s unlicensed activities –>

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4 thoughts on “Your Capital at Risk Part 5: Audit Opinions

  • Reply
    Thomas Simpson

    Dear Jacob,

    Thank you for your insightful research on Plus 500. I should comment that I am also an analyst at a hedge fund (UK-based in this case), specialising in the financial services industry with a primary focus on the UK and US markets, and look to identify ideas for profitable long and short trading opportunities. However, whilst the research on Plus 500 is well-phrased and presented, I have researched Plus 500 heavily over the past year or so and spoken in detail to both management and the company’s auditors and it strongly appears that this is a fundamentally sound business with strong future prospects. The firm has encountered administrative problems this week with AML checking but this is a short-term blip which is rapidly being addressed. I have also spoken to a number of brokers in the City this week and all are looking at this as a strong buying opportunity and as a share price fall that has been massively overdone. Most of what you say sounds convincing but, I contend, when probed, has little justifiable basis. I would be interested in working with you in future on research but strongly feel that in Plus500 you have completely the wrong target. This is a profitable company with very strong cashflows, whilst the significant majority of its clients are unaffected by the AML checks. I would suggest that a target price of say 650p would be appropriate (ignoring future growth prospects), certainly not 76p. In terms of short targets, I would suggest firms with high P/E ratios and low cash conversion ratios where the valuations have run ahead of themselves, or companies in decline where future earnings are likely to be significantly downgraded. Incidentally, I have no position in Plus500, long or short, but would be very wary of being short this stock given a 67% decline this week. I have never seen such a large decline in one week (excluding 2008), especially for a company that is fundamentally strong! As I mentioned, I would be keen to work together in future on research and analysis if you are interested. Please feel free to e-mail me.

    Have a good weekend.

    Best regards,


    • Reply
      Jacob Ma-Weaver Post author

      Hi Tom, thank you for the comment. I am always happy to hear the other side and discuss opposing views. Since you are a short seller as well, I am surprised you have not observed any other securities with steep price declines over the past 7 years. It is not uncommon among businesses that have been found to make misrepresentations. I’m not sure why you would find “little justifiable basis” for the observations in this series. In part 3, I suggest a valuation methodology for Plus500 on a going concern basis – do you disagree with it? I do not think it is appropriate to capitalize earnings from customers who leave after 15-18 months. I’ve acknowledged the profitability, cashflows, and possibility that the AML scrutiny is temporary. What do you think of the undisclosed subsidiary and inconsistencies in the filings?

  • Reply

    To me it’s not a surprise that the 2015 auditor’s reports of the subsidiaries were signed after the group’s audit. As there are no operations or documents in the UK or Cyprus anyway, failing compliance with FCA regulation, the auditors could study documents in Israel only. I strongly believe that Kesselman & Kesselman did all the auditing, and PwC London as well as PwC Cyprus simply confirmed their findings. Not taking into account that Kesselman & Kesselman does not seem independent enough even without knowing in detail who is the weak person in charge. BTW, have you noticed that Gareth Derbyshire still states PwC as his employer although he himself claims to work for Plus500 since January 2015? Probably he’s still on the payroll of PwC to help solving problems PwC London missed to check before accepting the mandate for Plus500 UK last year. If PwC International would know the case they certainly would not allow Kesselman & Kesselman to stay Plus500′s auditor, and at the Annual General Meeting on Wednesday (27 May 2015) they simply could refuse to be-appointed.

    • Reply
      Jacob Ma-Weaver Post author

      Thank you for your comment. It’s possible Derbyshire simply has yet to update his profile, but I do agree his history at PwC raises auditor independence issues. I would expect the firm to closely evaluate the reputational risk in this scenario.