In the summer of 2012, Brandon Evertz and his estranged father, Richard Evertz, embarked on a campervan adventure around the coast of Australia.
During this trip, the younger Evertz stumbled on an idea for a social video review site; a video version of Yelp catering to all types of business ranging from florists to kitchen renovators. Later that year, at the ripe age of 19, Brandon founded Big Un Limited and its subsidiary, Big Review TV. The elder Evertz was the CEO, while Brandon was the COO.
Two years later, Big Un listed on the Australian Securities Exchange via a reverse merger with a defunct gold mining company. After three listless years of general disinterest, Big Un suddenly burst onto the investment radar in 2017, becoming the Australian bourse’s strongest-performing stock.
Predicated on the belief that annual cash sales would soon reach A$100 million, the share price powered from 25 cents at the start of the year to almost A$5 by November. The peak valuation of A$840 million put Big Un almost on par with Seven West Media, one of Australia’s largest media groups.
There was just one problem: Big Un’s sales in 2017 were mostly funded by a secret financing deal and the company was insolvent. Within three months of the gushing investor enthusiasm in November 2017, Big Un was suspended. In less than a year, Big Review TV, the main operating arm of the listed company, entered voluntary administration.
While Big Un had investors convinced, it never fooled Transparently.AI’s Manipulation Risk Analyzer, which studies a company’s financials and produces a 0-100 percent risk score that a company is manipulating its accounting. Big Un had manipulation risk scores in 2016 and 2017 of 94% and 91%, respectively, putting it squarely in the 100th percentile of companies globally for risk of account manipulation and subsequent failure.
In the eyes of Transparently’s AI-powered system, Big Un was always destined to fail. This article details what we discovered about Australia's biggest accounting fraud.
Table of contents
Richard Evertz
The founder’s background is always material to corporate accounting scandals. In the case of Big Un, its founding CEO, Richard Evertz, was a man with a chequered history of fraud.
In 1994, The Age newspaper reported that Richard Simon Evertz had been sentenced to eight months' jail, seven months of which were suspended, for two counts of blackmail. According to the report, Evertz approached innocent men in public toilets claiming to be a police officer and threatened to charge them with indecent behaviour unless they paid him A$1000.
Figure 1: The December 1994 report in the Age detailing Richard Evertz’s jailing
Big Un failed to disclose these offenses in its reverse listing prospectus on the basis that they were “spent convictions”. A spent conviction is a legal concept that allows non-disclosure of certain offences provided: 1) the offender had not re-offended; 2) the conviction did not result in a prison sentence of more than 30 months, and 3) a 10-year period had passed since the date of the offence. Evertz served 26 days in remand, and was released within the week.
The prospectus did reveal, however, that in 2008 Evertz was the subject of an action by Australia’s regulatory watchdog, the Australian Competition and Consumer Commission (ACCC). The allegation concerned another listed company founded and managed by Evertz, Imagine Un Ltd. At the time, Evertz went by the name of Richard Evans.
Imagine UN was in the business of negotiating lower prices for telephone, gas, and electricity services for customers. The company sold licences to operate its proprietary system, which involved agreements that Imagine claimed to have negotiated with essential service suppliers. These licences were sold for between A$60,000 and A$250,000 to small business people.
Regulatory investigation
In 2008, the ACCC instituted legal proceedings against subsidiaries of Imagine UN and against Richard Evans for making false and misleading written and verbal representations in relation to these licenses, and for breach of the Trade Practices Act, 1974.
The Big Un listing prospectus disclosed that, “No penalties were imposed on Richard and he continued to act as Imagine’s chairman.” The prospectus also noted that he changed his name back to Evertz in 2010.
In actuality, Justice Gordon of the Federal Court found Imagine Un guilty of all charges brought by the ACCC. Richard Evans was found to have aided and abetted and to be “directly knowingly concerned in the company’s offending conduct.” The court issued several orders of a minor nature, required Imagine Un to publish information about the proceeding on its website, notify licensees, and ordered Imagine and Evans to pay $50,000 towards the ACCC’s legal costs. In simple terms, Evertz (a.k.a. Evans) was found guilty of fraud.
Imagine UN drifted into obscurity after the ruling and was suspended from official quotation on the Australian Securities Exchange after failing to pay its annual listing fee for the year ending June 2012.
Thanks to his son’s insight, the demise of Imagine Un was immaterial to Richard Evertz. He was already onto a much bigger scam.
Big Un listed in December 2014. Given his colourful history, Richard Evertz promoted his son as the primary force behind the business and eschewed a role on the board. Big Un’s first Chairman would be Richard Corner, who also served as the CFO. To say this dual role was problematic would be an understatement.
Unsatisfactory governance
The CEO was effectively the Chairman’s boss. The rest of the board consisted of young Brandon and Sonia Thurston, the partner of Richard Evertz. The company raised A$3 million on listing.
Hugh Massie was one of the founding investors, and would replace Corner as Chairman in May 2016. Massie failed to disclose any holdings during his tenure. Governance and forensic accounting firm Ownership Matters would later question the non-disclosure of Massie's potential holdings.
From the get go, Big Un’s governance structure was deeply unsatisfactory. A reverse takeover is one thing but having the CFO as chairman is a red flag that can be seen from the moon.
The Australian fiscal year ends in June so the first financial statements issued by Big Un as a listed entity were the 2014 accounts for the year ended June 2015.
Transparently.AI’s MRA identified grave problems with this first set of statements. In fairness, the first year’s accounts of a backdoor listing can be a dog’s breakfast. It is not uncommon to find surprises in hidden accounting cupboards. Nevertheless, the AI risk engine found numerous issues that could not be blamed on the confusion caused by the reverse listing.
The system found governance issues related to insider activity, options issuance and option compensation. From its earliest days, Big Un developed a habit of issuing discounted share issues to meet expenses, whether as shares or options. In fact, in a later judicial hearing the CFO disclosed he had once proposed issuing shares to pay for a lavish Company dinner. This habit of paying expenses via equity issuance not only distorted the true cash flow situation but also inflated profitability.
An AI system cannot precisely say what equity and option issuance is financing but issuance at a deep discount is always deeply suspicious.
The young company was bleeding cash and thus the AI system found cause for concern
The young company was bleeding cash and thus the AI system found cause for concern in risk clusters pertaining to credit, working capital, cash quality and margins. Further, there was evidence of potential business manipulation in relation to expenses, abnormal cash flow and cash generation.
In part, these signals related back to the company’s habit of paying expenses with discounted script, but this was only part of the manipulation story. The system also found evidence of extreme accruals management, heavy reliance on non-operating income and non-core business, and suspiciously strong growth.
Big Un’s risk score for the year to June 2015 was 91%, placing it in the worst 1% of companies globally. In the following year the risk score worsened slightly to 94%, mostly due to a restatement of earnings combined with an improbable hike in retained earnings.
Asset quality deteriorated from the prior year due to a big jump in intangible and other long-term assets, the latter suggesting expense capitalization. Income quality remained poor due to high non-operating income, income from non-core business and a hike in extraordinary charges. All of the previous concerns related to governance, business manipulation and business viability remained.
As of mid-2016, therefore, the assessment remained that Big Un lacked a viable business model and was reliant on creative accounting to hide the malaise as best as it could.
To this point, Big Un’s share price had spluttered along between A$0.10 and A$0.20 in spite of apparently strong sales growth. There was investor skepticism because sales were not backed by cash receipts.
Investor doubt
Investors rightly doubted the viability of providing SMEs with cheap marketing videos and reviews on YouTube. While Big Un could offer this service at a lower of the cost of traditional production units, the fact remained that a teenager with a smart phone and post-production skills could achieve a similar outcome.
The perceived value-add of Big Un’s offering was wafer-thin.
As with Imagine Un, Richard Evertz sought to hide the lack of value-add with hyperbole. The service was sold as a subscription-based software-as-a-service model. This service cost $12,000 and consisted of a video review platform called BRTV, which hosted the YouTube videos of the companies, and provided a platform for users to review the company via video rather than text.
The company claimed to possess IP-protected technology to produce a high volume of videos for SMEs at a fraction of industry rates. It is unclear whether anyone actually believed this claim.
The problem with the review aspect of the business was that it takes considerably more effort and skill to do a video review than to write a quick review for your sister’s Airbnb. This is why YouTube pays for video content. If one desired to make video reviews, why not do it for revenue on YouTube rather than for free on an obscure Australian platform?
All of these problems would have been obvious to Richard Evertz for some time but, like Wile E. Coyote laying a trap for the road runner, Evertz had an elaborate scheme for explosive sales growth. His scheme relied not on Acme Co., but on First Class Capital (FC Capital), an alternative asset manager with a focus on private debt.
Big Un's big pitch
Armed with a scheme to generate bags of cash receipts, Evertz began spruiking (an Australian expression for selling snake oil) Big Un to all who would listen in the later months of 2016. His pitch focussed entirely on growth.
He argued that the video review industry had an addressable market of more than US$1 billion. Speaking to SmartCompany during a A$2.6 million capital raising in late June, Evertz boasted of 14,000 users, 50% quarter-on-quarter growth. He projected 30,000 users by end-2016 and annual revenue exceeding A$6 million.
Although rapid growth was costly to manufacture, he would burn through the latest capital raising in a matter of months, Evertz was obviously feeling confident. Evidence from the judicial inquiry in 2022 would later show that in early October 2016, he emailed Corner to authorize a big jump in option remuneration for himself, Corner and the Big Un board members.
At the same time Big Un issued more than 3 million shares to FC Capital at an enormously generous discount of 90%. This undisclosed placement was partial inducement for a deal in which FC Capital would “sponsor” customers of Big Un.
The sponsorship deal ran as follows: Potential customers would sign an agreement allowing Big Review TV to film a video of their business, a free trial. If the customer liked the video, they could buy it for a fee of A$1000 a month for one year, or A$12,000.
If they declined, which most did, Big Review TV would be allowed to substitute another customer, another free trial, to retain the funding. Big Review TV would present a sales invoice for A$12,000 to FC Capital that would advance $4200, but retain 24 per cent, or $2880, as a commission. The difference of $4920 would remain in a bank account controlled by FC Capital, but appeared as cash on Big Un’s balance sheet.
Big Un was also liable for any outstanding amounts that customers did not pay, and therefore each deal created a contingent risk.
Auditor change
The terms of the agreement were completely uneconomic to Big Un. The company was effectively borrowing A$4200 for an upfront interest charge of 68.7%. In the short term, this would allow the company to demonstrate good cash flow and a strengthening balance sheet. In the long term, of course, it spelled disaster.
Three days after this sponsorship deal was struck, on October 19, Anthony Meyer, the company's largest shareholder, authorised a change of auditors, moving from respected Melbourne audit firm PKF to Graham Swan of Rothsay Auditing, a suburban auditor in Sydney and Perth offering “minimum fuss” audits.
In a remarkable coincidence, Big Un’s new auditor set the threshold for materiality in Big Un’s accounts at A$12,005. Perhaps partly influenced by events at Big Un, the IFRS amended its definition of materiality in October 2018, rendering Big Un’s treatment illegal.
In any case, with the deal set and approved by the auditor, the scene was set for parabolic sales growth, frenzied deal-making and relentless share issuance.
In April 2017, the company reported that revenue from customers’ cash receipts in the March quarter was a staggering A$5.6 million, up 372% from the previous year. It reported a pipeline of 24,500 users, and an 82% increase in paying subscribers.
The company also reported positive cash flow and a cash surplus of A$1.2 million. In the subsequent quarters of 2017, Big Un reported quarterly cash receipts of A$9.4 million, A$15 million and an incredible A$22.5 million, respectively.
By late 2017, annualized cash sales were poised to exceed A$100 million, all from the sale of little videos to SMEs.
The share price, which had already more than doubled to $0.50 by the time of April announcement, rallied hard as the company released increasingly optimistic announcements. The stock price reached A$4.98 in November on news the company was expanding into the US via the acquisition of a small consumer platform called Tipsly for US$4.2 million. This would prove to be the peak.
What Transparently.AI's system saw
As the media and investing public gushed with enthusiasm over this little company, seemingly founded by a wunderkind but, in reality, by a seasoned con artist, the Transparently.AI risk engine saw nothing but disaster.
The MRA gave Big Un a manipulation risk score of 91% for the financial year ended June 2017. As with previous years, this put the company in the highest risk percentile globally. The company scored poorly on a wide range of risk clusters, most notably those shown in Figure 2 (see below), which is a summary table from the risk report produced for Big Un by the Transparently system.
The report displays only three signals for each risk cluster. There will be more than three if a cluster exhibits significant risk. In this situation, the system will show the three most pervasive risks.
Since an AI system simultaneously compares a vast array of data, one often cannot always precisely see what is driving the results. Every line item in a company’s financial statements should exhibit a systemic relationship to other items. The weaker the link, the greater the risk of manipulation. A risk score of 91% indicates the system detected very little systemic connection between the various items in Big Un’s financial statement.
Abnormal relationships within the accounts are often detected when we observe the relative growth of different line items. If sales are growing rapidly, cost of goods sold and other variable expenses should be growing in lock-step. If a company is exaggerating sales, this is typically not the case because the expenditure to generate sales is not actually occurring.
Unrealistic growth is the most common red flag the AI system uncovers in fraudulent companies
As a consequence, unrealistic growth is the most common red flag the AI system uncovers in fraudulent companies. Unrealistic growth is always present because nobody fakes weak growth.
Fraudulent activity always causes distortions. For example, if a company is hiding debt which nevertheless must still be serviced, it will distort the relationship between interest paid and interest expense. Interest expense represents the interest cost that a company has recognized on its income statement, whereas interest paid represents the actual cash outflow for interest payments.
If a company lacks the wherewithal to service such debt, then we should observe some form of abnormal non-cash payment, often in the form of equity issuance.
Figure 2: An excerpt from Big Un’s manipulation risk report for 2017
Source: Transparently.AI
If a company is lying about its cash holdings, for example, it should distort the relationship between reported cash balances and interest receipts. Big Un’s cash balances supposedly rose sharply through 2017. Interest receipts on cash balances, however, were stagnant. This was a factor impacting the risk cluster for cash quality on our system.
In general, if a company appears to be growing rapidly and generating strong cash flow then we should not expect to see a heavy reliance on debt, various forms of non-cash income or aggressive equity issuance, especially dilutive issuance.
If a company is growing strongly, all aspects of its accounts should exhibit improving financial strength. This pattern will differ if a company is growing by acquisition, in which case different distortions will be apparent in asset and income quality.
Accounting red flags
Looking at the AI system’s output for Big Un, several risk clusters were signalling extreme care. Some, such as gearing, growth and accruals are transparent to read; the company was carrying too much debt and its growth appeared unrealistic in part due to aggressive use of accruals.
In the clusters for credit and cash quality, for example, the system flagged risk for interest expenses and interest payments, respectively. The system flagged interest expenses because debt-related expenses in the income statement were significantly disproportionate to total debt costs. In both cases, the system was indicating a risk of hidden liabilities.
One characteristic of the Big Un scam was that the cash released from FC Capital was tightly controlled by FC Capital. As such, Big Un still had cash flow problems which it mostly resolved by issuing equity and options. Since companies growing 50% quarter-on-quarter and with parabolic cash sales growth do not typically rely on equity issuance, this showed up as a number of anomalies in the system.
To name a few, in the cash quality risk cluster the huge growth of equity-settled share option expenses triggered a red flag for non-cash items. Excessive option issuance also featured in the risk cluster for corporate governance. The company demonstrated excessive reliance on equity issuance for non-cash payment, a sign of stress.
This sign was also present in the risk cluster for income quality which showed excessive reliance on non-operating income and non-core businesses. High non-operating income in a simple business such as Big Un can indicate that a company's core operations are not generating enough income to sustain its business. A company demonstrating parabolic sales growth should not need to bother with non-core activities.
In the credit risk cluster, the AI system flagged retained earnings risk. This risk is only rarely flagged. The retained earnings of Big Un were exceptionally low. The main reason was the excessive use of stock options. Stock options are considered a non-cash expense, which means that they do not affect the company's cash flow. However, they do affect the company's net income used to calculate the retained earnings.
In summary, in the second half of 2017 when Big Un was the best performer on the Australian stock exchange, Transparently.AI’s MRA was suggesting the company had exceptionally high risk of account manipulation and was likely to fail.
Big Un exposed
At around the same time of the Tipsly announcement in November 2017, web experts began to question Big Un’s reported viewership numbers. Reports also surfaced that many reviews on the website appeared identical to those on other sites.
In early February 2018, Jonathan Shapiro, a journalist with the Australian Financial Review, began a series of damaging articles about Big Un.
In the first, Shapiro demonstrated that Big Un had represented loans from a finance company, FC Capital, as cash sales to artificially inflate its value. Shapiro also revealed that FC Capital was a significant shareholder in Big Un, holding around A$9.3 million in shares at the time the story went to press. He revealed those shares were purchased from Big Un at a price of $0.20 when shares were publicly trading at $3.31. Since the lending by FC Capital had propelled the value of Big Un shares, the situation smacked of account manipulation and possibly also insider trading.
Big Un’s share price fell 40% after the revelation. The company denied it was financing customers and described the financing relationship as a third party sponsorship arrangement solely related to FC Capital.
Shapiro went on to make further revelations. He discovered that FC Capital had been granted security over all of Big Review TV's assets until 2041. This confirmed that the relationship between Big Un and FC Capital was indeed that of debtor and creditor. Moreover, it raised doubts about whether the cash presented on Big Un’s balance sheet was legitimate. In addition, a whistleblower gave Shapiro an invoice for a sale to an SME that never bought the service. It emerged that Big Un booked sales when customers accepted a free trial, few of which resulted in a genuine sale.
After this, the company’s shares were suspended pending an ASX investigation which revealed that Big Un paid an exorbitant 24% commission on all sales to FC Capital and had breached ASX listing rules by failing to announce an agreement to issue shares.
The Australian Securities & Investments Commission (ASIC), began an investigation and directed the company to restate its accounts for the 2017 fiscal year. As a consequence of the restatement in July, revenue fell to A$4.1 million from A$14 million, the loss worsened to -17.3 million from -4.2 million, cash on hand fell to A$0.9 million from A$9.2 million, Total liabilities doubled toA$25.7 million from A$13.8 million. The company’s net financial position worsened to -A$9.6 million from A$1 million.
In August, the company delisted and called in administrators from Deloitte to oversee a potential sale. Deloitte recommended the company be wound up after finding it had likely been trading while insolvent for more than a year. The administrators also reportedly found a number of the company’s directors ‘likely’ committed multiple breaches of the Corporations Act.
Over five days in mid-February 2022, liquidators in the Federal Court conducted public examinations in which Big Un’s CFO, auditor, company secretary and financier were quizzed about their involvement. The hearing provided tremendous insight into the actual fraud scheme, the relationship between Big Un and FC Capital, and the internal machinations of Big Un, especially relations between Richard Evertz and Richard Corner.
An article in The Australian Financial Review provides an excellent summary of the details of the goings on within Big Un.
Both Richard Evertz and Richard Corner have been charged with insider trading as a consequence of this hearing. The legal process is ongoing. Evertz faces up to 10 years in prison.
Big Un's auditor, Graham Swan, was convicted of failing to conduct the audit in compliance with accounting standards. He was ordered to pay an amazingly small fine of just A$2000.
Disclaimer: Views presented in this blog are the author’s own opinion and do not constitute financial research or advice. Both the author and Transparently Pte Ltd do not have trading positions in the companies it expresses a view of. In no event should the author or Transparently Pte Ltd be liable for any direct or indirect trading losses caused by any information contained in these views. All expressions of opinion are subject to change without notice, and we do not undertake to update or supplement this report or any of the information contained herein.
