The shares of Royal Carpet maker Victoria plummet after auditors warn about fraud

The shares of Victoria, the UK-based supplier of red carpets for the royal family, fell on Monday, after its auditor warned that there was “risk of fraud material” in the group’s accounts.

Victoria has undergone a transformation over the last decade, thanks to a series acquisitions. It secured an investment in 2020 from Koch Industries, a sprawling industrial conglomerate that is owned by one of America’s wealthiest families.

The UK group released its delayed annual report after the London Stock Exchange closed on Friday. Grant Thornton delivered a qualified auditor opinion for the accounts covering the period ending April 1.

The audit firm was concerned about a small subsidiary in England’s north called Hanover Flooring. It identified “risk factors for fraud”, “violations of money laundering regulations” and “potential irregularities with respect to certain transactions”.

Grant Thornton wanted to continue auditing the subsidiary but Victoria’s management put a “limitation of work” on it. Grant Thornton’s opinion stated that Victoria’s board refused to allow the audit firm access to further work.

Since New Zealand financier Geoff Wilding became the executive chair of the heavily indebted Victoria in 2012, the company has acquired over 20 other flooring companies in the world.

Wilding was responsible for a rapid increase in Victoria’s stock price. The company’s value soared from £15mn to over £1.4bn in 2021.

Victoria shares fell 20 percent in the early morning trading of Monday, and are now down almost 60 percent from their high. Prices of Victoria’s €750mn junk-rated bonds have also fallen. The debt due in 2028 is trading at 73c per euro, yielding about 11 percent.

The Worcester-based firm has been the subject of critics and sceptical analyst.

Koch Industries has been a shareholder since 2020. Charles Koch, and his late brother David, built the refinery business that their father started into one of the biggest privately owned US businesses. The family gained influence in the Republican Party by making donations to conservative causes.

Victoria’s summary of its audited results was published on 14 September. It disclosed that the company had received a qualified report and summarized some of the issues relating to Hanover Flooring. However, it didn’t mention that fraud risk had been identified.

Victoria’s earlier announcement also appeared to imply that the problematic transactions fell below the £2.4mn threshold Grant Thornton established for its subsidiary.

Grant Thornton’s audit letter stated: “While we set component materials at £2.4mn in Hanover, we concluded that these issues are both qualitatively and numerically material to group financial statements.”

Victoria stated that there was “no wrongdoing” at Hanover, and neither the auditors nor Victoria have made any allegations. She said the issues with the subsidiary were primarily due to “inadequate financial records”, which are common in smaller businesses.

Victoria said: “It’s important to note that these amounts are insignificant, as Hanover represents less than 1,25 per cent our total revenue and the sums where inadequate records were available represented less than 0,08 per cent our revenue.”

The company stated that “we have obligations both to shareholders and bondholders, to publish our audited financial statements within a specified timeframe. We concluded that further delay and work on this non-material matter would not produce any additional evidence above and beyond what we already knew.”