What was the basis for KPMG's concern regarding the Company's internal control over financial reporting as related to integrity and tone at the top for Liberty Tax, Inc. (Ledgers' parent company)?
Ledgers Franchise · 2025 FDDAnswer from 2025 FDD Document
KPMG expressed to the Audit Committee and Company management its concern that the actions of former Chief Executive Officer John T. Hewitt, who remains the Chairman of the Board and controlling stockholder as the sole holder of the Company's outstanding Class B common stock, have created an inappropriate tone at the top which leads to ineffective entity level controls over the organization. Prior to the termination of Mr. Hewitt's employment as Chief Executive Officer of the Company on September 5, 2017, the Audit Committee oversaw an investigation of allegations of misconduct by Mr. Hewitt. In particular, KPMG noted that Mr. Hewitt took actions to replace two independent members of the Board around the time information relating to this investigation appeared in media reports. KPMG also noted that following the replacement by Mr. Hewitt of two Class B directors, the chair of the Audit Committee retired from the Board, the Company's Chief Financial Officer announced her intention to resign from the Company, and another independent member of the Board announced that he would not stand for reelection at the Company's next annual meeting. Further, KPMG was made aware that following his termination as Chief Executive Officer, Mr. Hewitt may have continued to interact with franchisees and area developers of the Company. Although Mr. Hewitt stated to KPMG during a meeting on November 9, 2017 that he would not reinsert himself into the management of the Company, in light of Mr. Hewitt's actions and his ability to control the Board as the sole holder of the Class B common stock, KPMG informed the Audit Committee and management that it has concerns regarding the Company's internal control over financial reporting as related to integrity and tone at the top and such matters should be evaluated as potential material weaknesses.
Source: Item 22 — CONTRACTS (FDD page 46)
What This Means (2025 FDD)
According to Ledgers' 2025 Franchise Disclosure Document, KPMG's concern regarding the company's internal control over financial reporting, specifically related to integrity and tone at the top, stemmed from the actions of the former Chief Executive Officer, John T. Hewitt. Hewitt remained the Chairman of the Board and controlling stockholder. KPMG communicated that Hewitt's actions created an inappropriate tone, leading to ineffective entity-level controls within the organization.
Specifically, KPMG noted that around the time information regarding an investigation of allegations of misconduct by Mr. Hewitt appeared in media reports, Mr. Hewitt took actions to replace two independent members of the Board. Following the replacement of these directors, the chair of the Audit Committee retired, the Chief Financial Officer announced her resignation, and another independent member of the Board stated he would not stand for reelection.
Furthermore, KPMG was aware that even after his termination as Chief Executive Officer on September 5, 2017, Hewitt may have continued to interact with franchisees and area developers. Despite Hewitt's assurance on November 9, 2017, that he would not reinsert himself into the company's management, KPMG remained concerned due to his past actions and his continued ability to control the Board as the sole holder of Class B common stock. KPMG informed the Audit Committee and management that these matters should be evaluated as potential material weaknesses.