Boral Limited (ASX: BLD) CEO Mike Kane is holding fast in the face of a barrage of criticism from shareholders. The building supplies group has disappointed with 4 profit downgrades in the past 18 months. Now an accounting scandal threatens to engulf Boral's North American windows business, Krestmark.
The Boral share price fell nearly 6% overnight last week, dropping from $4.93 to $4.64 following the announcement that 'financial irregularities' had been discovered in the windows business. These irregularities involved misreporting in relation to inventory levels and raw materials and labor costs.
Forensic accountants and lawyers have been retained by Boral to conduct a 'privileged and confidential' investigation. Based on preliminary details, the irregularities appear to relate to the period between September 2018 and October 2019 and will result in a one-off impact on earnings before interest tax depreciation and amortisation of US$20 million to US$30 million.
Any potential impact on the business beyond October 2019 is still being determined. CEO Mike Kane stated: "we have implemented immediate steps to bolster the management and controls within the business. Once we have all the facts we will ensure appropriate action is taken at all relevant levels."
"Quite frankly in 46 years of business I've never seen anything quite like this," Kane told the Australian Financial Review (AFR). The Krestmark business was only acquired by Boral in May 2017 as part of Boral's acquisition of the US Headwaters business, which cost Boral $3.5 billion. Krestmark was itself only acquired by Headwaters in August 2016 for US$240 million.
The AFR article reports that at the time of the Headwaters acquisition, Kane assured investors he intended to onsell Krestmark, posthaste. Yet more than 2 years hence it remains in the Boral portfolio, 'financial irregularities' and all.
The article reports that only a couple of months ago the head of the the US windows business told analysts Boral had 'overhauled' hiring practices in a bid to cut the number of temporary workers, and warned of rising raw materials costs. Labour and materials costs are now in the spotlight as the investigation into 'irregularities' heats up.
In the period since the acquisition, Kane has pocketed $2.7 million in bonuses – $1.6 million in FY17 and $1.1 million in FY18. That's on top of a base salary of US$1,299,674, which rose to $1,338,664 in September 2018. Boral profits on the other hand, have declined, sliding 7% from $473 million in FY18 to $440 million in FY19, although admittedly in a challenging trading environment.
Foolish takeaway
Boral shares are currently trading at $4.59, well down from their peak of over $8 in early 2018. Investors (and Kane) will be hoping the 'financial irregularities' in the windows business do not spill over into any of Boral's other North American business units.
