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Harts: anatomy of a disaster

Tony Thomas analyses the downfall of Australasian accountancy and financial planning firm Harts.

Friday, November 30th 2001, 8:08AM

The following is an article from Mission Critical, a quarterly newsletter written by Tony Thomas which reports on the changing ownership and restructuring of accounting and financial planning practices. For details on subscribing to Mission Critical please email editor@goodreturns.co.nz or call 0800-345675.

Also available exclusively in New Zealand through Good Returns is Tony Thomas's award-winning book Invasion of the Practice Snatchers. This book is a must read for anyone who is thinking of buying or selling an accountancy or financial planning business. Order your copy through the bookstore or call 0800-345675.

 

Harts Australasia, now in liquidation, was not always treated with disrespect. Billing itself as "Harts…not your normal accounting practice", Harts floated in May 2000 raising $30m at $1 a share.

The shares peaked at $1.50 late that year, putting a value on Steve Hart’s half share of $75m.

On November 22, 2000, when Harts shares were $1.23, Merrill Lynch put a 12-month price target of $1.65 on Harts. The broker said Harts was likely to have an 80% success rate in its negotiations to buy 50 accounting firms, which could raise its accounting fees tenfold from $20m to $200m.

"Consequently, we are confident that Harts FY01 profit would exceed its prospectus forecast of $12.4m," the report said.

In the event, Harts reported a $93m loss.

CSFB: worth $2.50


Credit Suisse First Boston was even more bullish on August 30, 2000, when Harts shares were $1.39. It put a 12 month target of $2.50 on Harts, describing the company’s model as ‘simple and effective’ and forecasting 2003 net profits at $20m.

BNP Equities was also bullish on the stock.

Most of Harts’ acquisitions had problems, and the company itself had two chairmen and three managing directors within 18 months.

Former chairman Steve Hart, in his personal capacity, is defending charges of 11 tax frauds, including six counts of forgery, three of false pretences, one of defrauding the Commonwealth and one of organised fraud.

Hart spent the night of October 3 in a police cell, emerging for a bail hearing in socks and handcuffs.

Crown allegations
The Crown alleges that in 1990-93, Hart made misrepresentations resulting in 29 clients over-claiming deductions. It was also alleged Hart forged clients signatures to conceal details such as that insurance bonds from AMP were only five years not 10 years as Hart told the clients.

Hart has been on bail after handing over his passport and pilot’s licence to federal police.

His counsel told the court Hart had business interests in Hong Kong, US and NZ, with more than 20 staff. The court has allowed Hart to fly inter-state but not overseas.

ASIC, APRA investigate ASIC and APRA are also investigating. Deloitte and Sims Lockwood are winding up the company and its subsidiaries.

Hart was born in Darwin. His accounting career began in 1979 as a 27 year old, when he set up Harts Pty Ltd, a sole practice, in Sunnybank, Brisbane. Despite lack of tertiary qualifications, he expanded by acquiring other small firms from Canberra to Bundaberg, building to 8000 clients.

His 17 vintage and aerobatic planes, reportedly now impounded, include a Sea Fury, Tiger Moth, Chipmunk and French Cap 232.

Hart, known to colleagues as "Blue Leader", sign-painted "Bushranger Steve Hart" on his aircraft and used the ra-dio call sign "Bushranger".

$4m aerobatics business
His aerobatics business at Archerfield Airport, Brisbane, was said by his legal counsel to involve $4m revenue a year.

He also has 37 aircraft prints and paintings by war artist Robert Taylor. Prints and model aircraft decorated his George St, Brisbane office. He also had a collection of about 15 paintings by his name-sake, Pro Hart, valued at about $350,000.

Other office decorations included Chinese dragons, moved during the day in comformity with the sun’s path, and small feng shui mirrors in the ceiling.

His second wife, Laura Perry, who worked and lunched congenially with his first partner Shirley Petersen at Harts, is an aerobatics judge. The two women are both shareholders of Hart family companies.

Employment contracts
Several principals of acquired firms are seeking legal advice on whether they must still honor their employment contracts.

Others are preparing to sue Harts and Hart, and buy back their firms.

Some have said they will just take their clients and set up a new business. "If you just walk away and low, there's no-one stopping you," one member told the Australian Financial Review.

One claimed he had been questioning Harts’ solvency since November 2000 after the company proved reluctant to pay creditors.

Harts in New Zealand
Harts at the time of its collapse in September 2001 employed about 60 NZ staff. Viv Brownrigg, principal of a Harts’ target Business Results Group, Te Puke told the NZ Herald (10/10/01): "I can find it very amusing now, but it was definitely a rollercoaster ride. At the time, it was like being part of Monty Python's Flying Circus."

Harts executives persuaded her that her 30 staff and 1300 clients would benefit from sharing resources and she was also promised a starring role as a mentor to other firms in the company.

Her firm at the time had $1.1m fees and the arrangement was for it to be bought for 753,000 Harts shares priced at $A1.05.

By December 2000 she had decided to accept. "We placed a huge reliance on the balance sheet of the company at the time and on various forecasts for the next 12 months.

"We were assured that while the property division had taken a little bit of a hammering post-gst, that broadly speaking they expected to be within 10% of their target."

She was assured the company had at least A$12 million set aside for acquisitions.

"Of course, what the annual report didn't say was that by November they'd chewed through a fair bit of that capital."

Visiting Australia, she was horrified to find that a Canberra office of Harts had been threatened with eviction because its rent had not been paid, and a manager on the Gold Coast had not been paid for three months.

Brownrigg rang her husband and partner Ashley, and told him to hold off on Harts signage and letterhead.

A couple of weeks later, she returned to Australia. On January 25, a New Zealand colleague from a Harts acquired NZ firm, Iles & Campbell, David Steele, knocked on the door of her Brisbane hotel room to tell her that Harts had that morning reported a A$9.7 million loss for the six months ending in December.

Many of Iles & Campbell’s staff and clients had bought Harts shares, to their cost.

Row with executives
"We were told we were just being paranoid - that we were just suburban account- ants." Brownrigg said she contacted her lawyers and despite "repeated threats, corporate (pressure) and various, but futile, legal bullets" eventually managed to cancel her deal.

"If it hadn't been for Ashley I don't know how I would have coped. I was very lucky to have him to talk to," she told the NZ Herald.

While the board and senior management maintain they had no knowledge of the losses until January 11, Brownrigg claims that she has since seen balance sheets that appear to show as early as October 2000 that the company was in serious trouble.

Brownrigg says the Harts- type model will not work be- cause head offices suck profits out without adding value or efficiency.

She says her small firm continues as a great and profitable team with flexibility that large companies lack.

Steele, who has since gone into the coaching business, agrees and says the consolidation model is weak because no corporation can buy the relationships owned by financial services firms, according to the Herald.

David Steele was one of five partners in Iles & Campbell, Taupo, NZ, who agreed to sell to Harts in September 2000. "We ran a quick check on his background and knew he had been involved in property deals in the 80s which were a bit questionable, but there were no charges," Steele says.

"We knew he was fighting with the tax office but thought, 'That's good, he's aggressive'.

"We looked at his business and talked to a few people, and we had the Ernst & Young (independent accountants) report."

Steele’s role was new acquisitions and he examined more than 40 Australian and NZ firms, until he saw the danger signs at Harts.

This article is from the latest edition of Mission Critical, a quarterly newsletter written by Tony Thomas which reports on the changing ownership and restructuring of accounting and financial planning practices. For details on subscribing to Mission Critical please email editor@goodreturns.co.nz or call 0800-345675.

Also available exclusively in New Zealand through Good Returns is Tony Thomas's award-winning book Invasion of the Practice Snatchers. This book is a must read for anyone who is thinking of buying or selling an accountancy or financial planning business. Order your copy through the bookstore or call 0800-345675.

Content of the December quarter edition of Mission Critical includes:
*Investor Group delivers on its forecasts; executives confident about the next two years
*Investor’s latest acquisitions and how they have been priced
*Stockford gets more popular, despite a weak first quarter and some fee resistance
*H&R Block: a good 2001 season
*Acquest/MGI roll-up hits a rough patch
*Garrisons still digesting its five acquisitions
*What Garrisons has paid for its five firms
*Tasman rollup: still in with a chance
*The Andersen ITS progress
*What’s being paid for dealer group’s funds
*Harts: anatomy of a disaster as a high-flier crashes to earth
Plus news from the UK and USA markets.

ORDER NOW either by calling 0800-345675 or buying online through the Bookstore
Subscribers will be emailed a copy of Mission Critical each quarter.

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