Unlearned lessons from the demise of Globalsoft

 

From all the cases that caused investors most harm in 2000 two deserved most the public scrutiny: Globalsoft and Laiki Investments. Neither was scrutinized and so lawmakers and regulators missed the opportunity to draw lessons. The delisting of Globalsoft brought to surface the failure of the prosecution to successfully bring charges against those who allegedly misled and perhaps manipulated investors.

The Globalsoft story is not limited to the massive accounting fraud that has been reported by the Securities and Exchange Commission of Cyprus in December 2001. Perhaps the most problematic issue was its corporate governance. In virtually every functional area of the organization there were significant weaknesses ranging from strategic planning, acquisitions, credit management, budgeting, financial reporting and internal controls. Ironically, the Cyprus SEC at times acted as the “spokesman” of GLC and has failed completely to conduct a successful investigation.

The company was dominated by Mr. Lykourgos Kyprianou who was and still is the Chairman and the CEO. Although most and perhaps all of the initial members of the board of directors left the company, there is no evidence that these officers and directors made any attempts to curb, stop or challenge any of the conduct of the CEO which may have prevented its collapse. Instead, it appears that the company’s board went along with Mr. Kyprianou’s decisions, even under circumstances that suggested corporate actions were at best imprudent, and at worst inappropriate. For example, Globalsoft’s approach to acquisitions and significant sales transactions were ad hoc and opportunistic. The board gave the CEO a blank check to execute massive acquisitions without scrutinizing fundamental corporate finance issues, such as the history of these companies, the strength and competence of their respective management or the prospects of their core business. Globalsoft’s reported criteria for these acquisitions were simply turnover and profit – however no audited accounts of these companies were ever given to the public and based on at least one board member no formal valuations were ever conducted.

Profit warnings were far from inaccurate. In January 2001 Globalsoft issued a statement, telling investors that it expects to report more than CYP21 million in net profits for the year. A month later the company reassured investors that business is on track and expectations regarding its profit will come true. In addition, on the 8th of February 2001 it claimed that the share drop was “unfounded”. Despite its overly optimistic statements the company never bothered to warn investors of any change of fortunes even when it was clear things were going from bad to worse, thus leaving investors in the dark. Other accounting irregularities discovered by the Cyprus SEC also escaped justice. Perhaps the most troubling issue was the fact that the regulators allowed management to continue to run the business even though it suspected and later charged for inappropriate actions. This allowed those responsible to hide critical evidence and ultimate escape justice. The sale of the Bulgarian companies back to the management only a year after their acquisition proves just that. By disposing these “trouble” companies, Globalsoft effectively prevented regulatory scrutiny and the opportunity for a meaningful investigation. In many respects, Globalsoft appears to have represented the polar opposite of model corporate governance. With hundreds of millions of pounds lost, investors can hardly rely on any checks and balances to safeguard their interests. Although significant regulatory improvements have been made, few can claim that another Globalsoft can be prevented.

 

Michael Olympios