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Bank Notes: Conn's, World Acceptance

Adam Rust's picture

Posted September 12, 2014

KPMG quits on World Acceptance: It is highly unusual when an accounting firm walks away from a long-term relationship with a large corporate client. Realistically, it only occurs when the firm believes that

its reputation is at risk. Someone in the accounting firm decides that something is fundamentally wrong with the information being submitted to their accountants by their client.  KPMG resigned and subsequently, World said that it would begin the process of selecting a new independent accounting firm. 

This happened last Friday, when KPMG resigned from its position as the registered public accounting firm for World Acceptance. According to World, KPMG said that World did not have adequate policies in place for how it determined allowances for loan losses, nor did it have a control in place as to whether renewals were booked according to GAAP. 

World uses the "recency method" as part of how it determines when an account is delinquent. This is an unusual choice, as it tends to overstate the performance of a loan portfolio. In the recency method, the period of delinquency is defined from the date of the last payment. If a borrower goes for four months without making a payment and then comes up with the monthly payment, the loan is considered current under the recency method. At least in the short run, then, the recency method is not going to be very predictive of the quality of a portfolio. Of course, the recency method exists because it can be helpful in some cases. In instances where a borrower is making regular payments after a period of non-payment, the recency method considers them to be current whereas the "contractual method" would still define the borrower as delinquent. 

Specifically, World uses 4.25 percent of their gross loan portfolio plus 100 percent of loans 91 plus days delinquent on a recency basis as inputs for determining their ultimate level of set asides. 

Here is what the Federal Reserve said about the use of the recency method: 

In general, the contractual method provides a more accurate reflection of loan performance and, therefore, is the preferred methodology, especially from the standpoint of financial statement transparency and public disclosure.

The recency method is only one element of the unusual accounting approach at World. World employs the Rule of 78ths when it records repayments on its consumer loans. 

Conn's management steps in the gap, buys shares: Now that shares of Conn's have dropped by sixty percent this year, leaders of the Texas retailer and lender are buying up its stock personally. 

  • On August 28th, Conn's CIO Todd Renaud purchased 3,161 shares at $45.87.
  • On September 3rd, Conn's Director Scott Thompson purchased 16,100 shares at $30.89.
  • On September 4th, Conn's CEO Theo Wright purchased 10,400 shares at $28.74.
  • On September 5th, Thompson purchased 10,000 shares at $28.80.
  • On September 9th, Conn's COO Michael Poppe purchased 2,000 shares at $30.65.
  • On September 10th, Conn's Director David Schofman purchased 1,000 shares at $29.95.

Question: do they think that all of those credit losses are a problem? 

This week LCG Holdings, an investment company with an assortment of subsidiaries registered in Delaware and the Cayman Islands, reported that it now owns 12.6 percent of Conn's.