Surfswitch Group Facing Class Action Amidst Falling Share Prices, Essay. (70 Characters)

Overview of Surfswitch Group

Question:

Discuss About The Prices Falling Company And In The Process?

Surfswitch group is one the major online sports action pack centre and has evolved has as an online action sports retailer in the past. Today it has a customer base of 6 Million customers. The online fashion retailer giant is is facing a class action on behalf of the shareholders amidst the falling share prices of the company and in the process the total investments have been wiped out (Chiapello 2017). One of the law firm filed an open suit against anyone who held or bought shares between Aug’15 to Jun’16. It shares have fallen drastically by around 90% in Jun 2016 on 3 profit warnings in 2016 and is accused of misleading the markets and breaching the disclosure requirements and claiming falsely that it is the market leader. The market also claims that the company failed tio dsclose that the EBITDA would be less than the forecast and continued to  make false claims without reasonable grounds (Abbott & Kantor 2017).

The goodwill of the company has gone major changes in 2015 on account of the wide changes in acquisition of the different entities. Moreover, the opening balance was $ 36 Mn, new acquisition of $ 25 Mn and then the impairment amounted to $ 54.6 Mn which resulted in $ 6 Mn at the year end. It majorly included impairment on account of goodwill recognised within books for acquisition of 100% in subsidiaries like Surfdome Shop Limited ($ 10.9 Mn in goodwill), Megicseaweed Limited ($ 3.07 Mn impairment in goodwill), acquisition of Rollingyouth private limited ($ 0.9 Mn impairment in goodwill), 100% acquisition of Garage entertainment Aus Pty Limited amounting to adjustment of $ 1.2 Mn in goodwill and final acquisition of SHI Holdings Pvt Ltd. amounting to adjustment of $ 11.1 Mn in the value of the goodwill (Chariri 2017). Th cash position of the company has declined from $ 39.7 Mn in 2015 to $ 21.3 Mn in 2016. The major change whih was shown in the financials is the reclassification of amount from payment providers from cash and cash equivalents to the other receivables as on 30the June 2015 towards the year end reporting (Crosby & Henneberry 2016).

There has been a major changes in the profit and loss account in 2016 as when compared to the 2015 financials. The selling and distribution expenses have increased from $ 44 Mn to $ 101Mn without substantive changes in the business opeartions, the impairment cost has moved from 0 to $ 89 Mn in 2016 which shows that there is something which was being misstated in the books in 2015 and now the same has been impaired all of a sudden. The administrative expenses have risen more than 7 times in a span of 1 year from $ 7 Mn to $ 49 Mn without substantial increase in the business base. This also points to the material misstatement being there in the financial statements (Minnis & Sutherland 2017).

Class Action and Alleged Material Misstatements

Based on the analysis mentioned above without taking into consideration the post facto impact and the trade halt, etc., I would have never asked my clients to buy or hold the shares of this company as it appears prima facie from the financials of the company that there is something fishy and the accounts are materially misstated, the company is window dressing its financials with no supporting for the calculations made, false claims being made in the market and variance analysis showing some adhoc figures. The consistency and the matching concept has been violated and it points to material misstatements and chances of fraud (Maynard 2017).

It is been quite a time since the rule of continuous disclosure have been introduced in Australia, and is followed by the companies as per the in Chapter 6CA (ss674-678) Corporations Act and through the ASX Listing Rules (Chapter 3). Continuous disclosure is one of the important disclosure provisions of the Australian company framework.The same has been explained in the report given below.

As per section 674, it is important for the companies to provide notification to the investors through the ASX of any information that may not be generally available but all that may have a material impact on the company and its investors (Sweeting 2017). As per the Listing Rule 3.1 it requires that all the material that is sensitive for the investors must be informed to them. Once the company becomes aware of any such information than the investor must be made aware of the same. There has been a lot of conflict whether such information must be made public or not and whether this policy of continuous disclosure is viable or not.  The same has been presented hereunder with all the necessary disclosures and results (Kew & Stredwick 2017).

There is a lot of advantages that are associated with continuous disclosure of information to the investors. With the help of continuous disclosure it will help in reducing the symmetry between the mangers and the investors but also within different other categories also. It is one of the best methods of governance as it helps in maintaining the required level of transparency between the companies and their investors (Crosby & Henneberry 2016). It also helps in improving the confidence of the investors and helps them in taking decisions that might affect their companies materially. In cases where the companies do not comply with the same than those companies will be penalized. There are provisions as per the ASIC, in which the companies who do not comply will have to pay penalty and that may be as much as 1 million, along with several criminal penalties and enforceable undertakings. Many companies may find it easy to deal with the infringement case notices but in the long run if the default continuous than criminal proceedings may be undertaken (Guragai et al. 2017).

Changes in the Profit and Loss Account

The main point of question is why it is important to follow this provision. The fact that it provides help to the investors in proving them correct information that may affect their materiality position, helps them in taking important decisions. It also helps in trust building as the investor’s gets information about the company and hence the transparent position improves the market position of the company in several ways. It helps in improving the position of the investors and their confidence in the secondary markets. There are several information that the investors may not get in general through the internet and that might be affecting their material position in that cases these policies makes the investors aware and helps them in taking important decisions. The main features of continuous disclosure are that the market is properly disclosed. All the information that affects the market materially must be disclosed to the investors (Dichev 2017). The information must be disclosed timely, because if not delivered at the right time than the information might become irrelevant. It is also a policy that all the information that is price sensitive must be made available to all the investors and there should not be any kind of biasness in the same. Selective disclosure of information gives the investors an upper hand to trade on the basis of information that is not generally available. Insider trading has a lot of negative impact on the market and can affect the overall position of the competitors and the investors (Birt, Muthusamy & Bir 2017). There should be a proper balance between what one is disclosing and when the information is being disclosed. Premature disclosure of information must be avoided as it may lead to emergence of a false market that may affect the overall trading. The parties who are disclosing this information are often at a risk. Hence it is important that commercial viability of such traders must be safeguarded (Prasad & Chand 2017). Information might be withheld from getting disclosed if any case they are affecting the position of the investors. It is also important that balance must be there between information being disclosed and the parties who have the details before it is disclosed should not be allowed to indulge in the trading of those particular shares. These steps must be followed to make sure that the entire process is authentic and proper information should be disclosed to the proper party keeping in mind all the important steps (Dichev 2017).

Importance of Continuous Disclosure Policies

It is important that such process must be properly enforced to make sure that it is effective enough. Proper guidelines must be given to the companies for following these specific provisions. Specific rules must be stated in order to disclose price sensitive information to the investors. There is a regime of penalties that have been included for specific defaults in this matter (Given 2016). But on the basis of the research that has been taken it can be seen that the companies found can easily escape from these because the civil penalties or the letters that are issued are not that effective (Fay & Negangard 2017). In case of penalty provisions it can be said that balance must be there between the need for a credible treatment to prevent controversies and also the need to maintain proper safeguards. It will help the companies and motivate them to follow the provisions that have been laid down by the law. There should be perfect mechanism to deal with defaulters that will make the entire process effective enough (Chariri 2017).

The present state of the disclosure policies of the AISC can be judged form the records of the authorities that have details about the number of companies that have defaulted and have been given the infringement notice. But the nig companies find easy to deal with these infringement notices than making price sensitive information available to the investors. As per records, there are currently 25 active insider trading investigations and around 11 infringement notices have been issued to nine companies that have defaulted in this case for effective disclosure of effective information (Burke & Clark 2016). Thus on the basis of the same it can be said that the ASIC has been successful in making the effective application of the provisions , however there are certain matters and areas  still exist that are to be taken care of. It is important that the entities must follow the guidelines as it will be helpful for the company and the investors (Minnis & Sutherland 2017). Selective disclosures have a lot of issues and that might affect the overall functioning of the market and lead to large amount of speculation. Hence the need of the hour is that the companies follow these policies to safeguard the market and promote safe functioning of the same (Burke & Clark 2016).

Conclusion

After considering all the facts and details we can say that the provisions related to continuous disclosure of information is very effective and will be very helpful for the all the players in the stock market. It will also help in safeguarding the price sensitive information, and making it available to the right person as and when required at the right time. All these will be helpful in managing the market and also benefit the investors (Laursen & Thorlund 2016). On the basis of the current situation it can be said that the steps that have been taken by the ASIC is helpful and effective. However there are many changes that the ASIC needs to done, changing the various methods of penalties and other framework that can motivate the companies and compel them in following these provisions and rules. Changes are required in the overall penalty structure, more strict rules are required to be followed and applied. All these will eventually help the ASIC in better implementation of the policies that will benefit both the investors and the entities at large (Han, Subrahmanyam & Zhou 2017). Thus this policy of continuous accounting disclosures must be followed both by the entities and the investors who invest in these companies at large (Alexander 2016).

Advantages of Continuous Disclosure Policies

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