Freedom Foods, Deloitte accused of ‘betraying mum and pop investors’

An accounting scandal, which erupted mid last year, is continuing to plague Freedom Foods.

Freedom Foods and its auditor Deloitte Touche Tohmatsu are the targets of second shareholder class action.

Lawyers running the second shareholder class action against Freedom Foods and Deloitte have accused the two companies of “betraying mum and dad investors” as the fallout of Freedom’s accounting scandal continues.

Listed litigation funder, Omni Bridgeway has agreed to invest and fund the second lawsuit, which is being run by Phi Finney McDonald and alleges breaches of the Corporations Act, The Australian Securities and Investments Commission Act and Australian Consumer Law.

The proceedings have been lodged in the Victorian Supreme Court and come two months after Slater and Gordon launched an investor class action against Freedom Foods and Deloitte.

Deloitte has been under pressure after it signed off on not one, but two sets of accounts that Freedom Foods restated last year as part of a $590m writedown of its business. Analysts have also questioned the role of independent auditors, whose job it is to verify company accounts to ensure the accuracy of what is reported to the market.

The Australian can reveal that Freedom Foods paid Deloitte $5.4m to audit its accounts and provide other services over the past 10 years, including $1.2m for the company’s 2018 and 2019 accounts, which have since been restated and subject to the massive writedown.

Phi Finney McDonald said in a statement this action centred on “allegations of significant disclosure failures by Freedom Foods and misleading and deceptive conduct on the part of both Freedom Foods and Deloitte”.

“The above alleged conduct by Freedom Foods and Deloitte was particularly egregious and betrayed mum and dad investors who trusted Freedom Foods with their savings,” Phi Finney McDonald said.

“The class action provides shareholders who bought Freedom Food between December 7, 2014 and July 24, 2020 with exceptional funding terms. The plaintiff will seek orders which would guarantee group members the lion’s share of any recovery and provide certainty that any settlement or award cannot be diluted by legal costs.”

The claim has been bought by investor Lester Buch. Freedom Foods — which is also the target of an Australian Securities & Investments Commission investigation — confirmed it was served with the second shareholder class action on Tuesday and said it had appointed Arnold Bloch Leibler to defend the proceeding.

The company did not provide any further comment. Deloitte also declined to comment, with a spokesman saying: “we do not comment on client matters”.

Freedom’s board launched a forensic investigation in June after identifying a series of accounting discrepancies. The company said at the time much of the writedowns relate to capitalisation costs not being treated as expenses, new products being sold below cost and accounting treatments being “based on unrealistic assumptions”.

Phi Finney McDonald said: “These accounting practices contravened accounting standards and resulted in Freedom Foods significantly overstating its financial position and performance in its annual and half yearly reports”.

“The claim also alleges that during the claim period the company’s auditor, Deloitte, signed off on the company’s financial reports in its audit and review opinions without a reasonable basis, thereby contravening auditing standards and misleading investors.

“The claim alleges that Freedom Foods’ share price was inflated by its disclosure failures and by its and Deloitte’s misleading and deceptive conduct, causing shareholders to suffer loss and damage.”

A Deloitte spokesman told The Australian soon after Freedom launched its own investigation that: “We stand by our audit. Beyond that we do not comment on client matters.”

In Deloitte’s report, which accompanied Freedom’s 2020 accounts — and a job it was paid $684,639 to complete — it said “no reliance” should be placed on the restated accounts, citing insufficient evidence.

For example, 2019’s $55.2m in earnings before interest tax, depreciation and amortisation had since been restated as a loss of $88m.

“We have been unable to obtain sufficient appropriate audit evidence to determine whether the restatements to the consolidated statement of financial position as at June 30, 2018, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cashflows for the year ended June 30, 2019, and related notes to the financial report are appropriate,” Deloitte partner David White wrote in the auditors report.

“As a result, no reliance should be placed on the above mentioned comparative information.”

Mr White then wrote that Deloitte completed its audit “in accordance with Australian Auditing Standards”.

“We are independent of the (Freedom) group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants that are relevant to our audit of the financial report in Australia.

“We have also fulfilled our other ethical responsibilities in accordance with the code.”