Royal carpet maker Victoria’s shares tumble on auditor’s fraud risk warning

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Shares in Victoria, a UK supplier of red carpets to the royal family, tumbled on Monday after the group’s auditor warned there was a “risk of material fraud” in its accounts.

Victoria, a more than 120-year-old carpet company, has transformed itself over the past decade through a series of acquisitions. In 2020, it secured an investment from Koch Industries, the sprawling industrial conglomerate owned by one of the US’s richest families.

The UK group published its delayed annual report on Friday after the London stock market closed, with auditor Grant Thornton delivering a qualified audit opinion on the accounts covering the year ending April 1.

The audit firm’s concerns focused on a small subsidiary of Victoria in the north of England called Hanover Flooring, where it identified “risk factors of fraud”, breaches of money laundering regulations and “potential irregularities in respect of certain transactions”.

While Grant Thornton sought to carry out further audit work on the subsidiary, Victoria’s management imposed a so-called “limitation of scope” preventing it from doing so. Victoria’s board then refused a request from the audit firm to remove this block on further work, said Grant Thornton in its opinion.

Heavily-indebted Victoria has acquired more than 20 other flooring companies around the world since New Zealand financier Geoff Wilding took the helm as executive chair in 2012.

Wilding presided over a blistering increase in Victoria’s share price, with the company’s market capitalisation climbing from £15mn to more than £1.4bn at its peak in 2021.

Victoria shares were down 20 per cent in early trading on Monday and have now fallen almost 60 per cent from their peak. The prices of Victoria’s €750mn in junk-rated bonds also slipped, with its debt maturing in 2028 trading at 73 cents on the euro to yield about 11 per cent.

The Worcester-based company has previously attracted scrutiny from short sellers and sceptical analysts.

Since 2020 it has counted Koch Industries as a shareholder. Charles Koch and his late younger brother, David, grew the refining business their father founded into one of the largest privately owned US companies, with the family gaining influence in the Republican party by donating to conservative causes. 

While Victoria published a summary of its audited annual results on September 14, which disclosed that it had received a qualified opinion and gave a summary of some of the issues surrounding Hanover Flooring, it did not mention that a risk of fraud had been identified.

In that earlier announcement, Victoria also seemed to suggest that the problematic transactions were below the £2.4mn materiality threshold Grant Thornton set for its subsidiary.

However, Grant Thornton stated in its audit letter: “Whilst we set component materiality at £2.4mn for Hanover, we have concluded that these matters are qualitatively and quantitatively material to the group financial statements.”

Victoria told the Financial Times that “there is no wrongdoing at Hanover and nor are the auditors alleging this”, stating that the subsidiary’s issues mainly stemmed from “inadequate accounting records” that are regularly seen in smaller businesses. 

“It is essential to note that the amounts involved are immaterial as Hanover as a whole represents less than 1.25 per cent of our total revenues and the sums for which inadequate records existed were less than 0.08 per cent of our revenues,” Victoria added.

“We have obligations to both shareholders and bondholders to publish our audited accounts within a certain timeframe and the board concluded that further work and delay on this immaterial matter would not generate any additional evidence beyond what was already known,” the company said.