When a company is listed on a stock exchange like the Zimbabwe Stock Exchange (ZSE) there are reporting requirements meant to give potential investors the information they need to make informed decisions. As it stands in Zimbabwe, there are too many moving targets for accountants to hit that reporting target.
The very first thing to state is that the ZSE listed companies themselves are not to blame for what we are about to discuss. Of course, we could throw a little blame their way. However, most of the problems come from the economy they operate in. The ZSE itself is blameless.
Now note that I said the published accounts are almost useless. That means they are useful but with caveats. An investor always has to invest time to understand the available opportunities in front of them. However, when the skill and time needed to glean the nuggets from the data presented is too extensive, it’s as good as there is no data to sift through.
That is where the Zimbabwean investor finds himself.
The average investor on the ZSE
The average investor profile in our heads is somewhat inaccurate. The picture of a savvy investor, sat in front of three screens and on call with five stockbrokers couldn’t be more wrong. Two main factors have attracted the average Zimbabwean to the ZSE.
I. The ZSE has been performing well. The ZSE All Share Index saw a gain of around 230% from October 2020 to date. That was significantly higher than the year on year inflation rate for September 2021 which was just 51.55%. So the average Zimbabwean has seen how stocks can better protect or even increase the value of their cash holdings.
2. The ZSE has worked hard to include more people by removing a lot of barriers that prevented the average Zimbabwean from participating on the stock market. Reducing the minimum amount one can invest, releasing a mobile app and actually teaching first time investors the basics of investing worked to lure the average Zimbabwean.
This first time investor can sit through the basic teaching offered by the ZSE but that won’t be enough to navigate the financial reports being published by the companies. Those accounts are complex and are usually written with the assumption that the investor will have financial advisors to help them understand the contents. The average investor does not have that.
The financial statements
In any country the condensed information in final accounts requires some accounting background to truly appreciate. In Zimbabwe, there are a few issues that make the accounts hard to fully understand even for those with an accounting background.
We discussed how some companies cited the requirements of IAS 21 and IAS 29, the accounting standards for dealing with effects of changes in exchange rates and reporting in hyperinflationary economies as reasons for them delaying the publishing of their financial statements.
The goal of these standards is to make sure the reports present a true and fair view of the companies. However, the methods for dealing with hyperinflation for example may not be intuitive for the average person.
The standard proposes applying a general price index to restate the amounts in the accounts. However, which price index is used? The Consumer Price Index released by ZIMSTAT which some don’t trust or some other one? Does the average investor understand all this? Probably not.
The other factor is that when a currency is unstable and depreciating rapidly, it becomes harder to understand if a figure should be impressive or not. Right now if I told you that I had 250 quadrillion in my bank account in September 2006, you are not quite sure if that was a lot or peanuts.
Same applies today, how worried should we be about Steward Bank’s ZWL$940m loss? We can’t know until we sit down and analyse the final accounts. How many have the capacity to do that?
Effects of changes in exchange rates
This one is even more difficult to deal with. We have multiple foreign currency exchange rates in Zimbabwe, one official and the other illegal. However, the parallel market one is the influential one when it comes to pricing of goods and services in the country. The official rate is often criticised for not being accurate as it is not fully market determined.
So how does a company decide which rate to use to translate foreign currency monetary assets and liabilities? One rate will be more accurate than the other.
So, should they use a different rate from those two? Will the authorities accept the legality of that rate as to be used in the financial statements of a ZSE listed company? Probably not, and so the investor is presented with misleading information and is not equipped to restate the accounts to be more accurate.
The Simbisa case
There was drama recently when Simbisa Brands Limited’s financial statements were published. Their auditors said their accounts did not present a true and fair view because of the exchange rate they used to translate their foreign currency assets and liabilities. Simbisa used neither the official auction rate nor the parallel market. They used a transactions-based exchange rate which will be a mystery to many.
Simbisa argued that using the auction rate as the auditors recommend would produce misleading results. The two parties disagree on which rate meets the requirements of financial reporting standards. The different rates produce a significant difference and Simbisa say they were able to declare a dividend payout which they would not have been able to declare had they used the auction rate.
- Net assets differ by ZWL$2.8 billion,
- Operating profit by ZWL$336 million and
- Net debt by ZWL$605 million.
It’s not exclusive to Simbisa
Now an investor needs to understand that this disagreement applies to other companies. Not all companies had the guts to discard the auction rate as this would lead to an adverse report by auditors. Not to mention how the government would respond to listed companies using an exchange rate different from their auction rate.
In accounting, the country’s laws take precedence over International Accounting Standards. This means that the ZSE listed companies will have to use the official auction rate and so that’s where the auditors are coming from.
So can we expect the investor to be able to effectively compare the performance of companies across different industries? That would involve first determining which rate of exchange would be best suited for the different companies.
The auction rate’s shortcomings
Simbisa for example gives reasons as to why the auction rate is not appropriate for them. They cite that:
- They are barred from bidding on the auction rate because they have positive balances in their foreign currency accounts.
- There is no immediate delivery on the auction system. [We have covered this before here]
- The forex from the auction system is insufficient to meet the demand of those who want access to it.
In the end, the auction rate becomes just a government mandated rate that auditors have to insist on. In practice, even the few ZSE listed companies whose forex needs are fully met by the auction system are not getting the forex at the average figure that shows up on the RBZ’s website.
So, even when a company has the records of it acquiring forex from the auction system at say 1:100, they have to translate their accounts using the official rate which is much different.
Does that result in a true and fair view of their accounts? It is hard to say that. The investor should be aware of this and be able to make their own calculations to determine what the final accounts would look like using different rates. That is not something the retail investor is going to be able to do.
The ZSE has commendably taken strides to attract the average Zimbabwean to invest. The retail investor is crucial for the future of the ZSE and trading volumes since that push show that retail investors have really adopted the investment lifestyle.
The complexity of financial statements has always meant the retail investor is usually unable to fully understand them. Now in Zimbabwe, further technical accounting matters make published accounts even harder to break down.
This is not an unfair criticism of the ability of the retail investor. One equities analyst tells of how even some senior executives at listed companies still do not understand these things.
For as long as the complexity of published financial statements continues to increase, they will become useless to more and more retail investors. In the end, this leads to uninformed investment decisions being made. This could backfire if the new retail investors lose their investments. I’d hate to see retail investors retreating from investing on the stock exchanges thinking it’s some kind of scam.