Accounting and Audit

Renold Accounts, Audit Quality and Abnormal Price Movements

Chain maker Renold (RNO) has provided the latest example of sloppy accounting work. On the 9th July it reported that it had identified accounting issues in the three years ending March 2017, 2018 and 2019. Assets and profits were overstated and liabilities were understated in the Torque Transmission division. In total adjusted operating profits were overstated by £1.8 million. As a result the AGM is being postponed to give time for revising the Annual Accounts. Their auditors are Deloitte. The Financial Reporting ...

Redcentric (RCN) Campaign: Important Developments

There have been important developments in our campaign regarding the accounting scandal at IT service group, Redcentric. Firstly the FRC have moved at "lightning speed" (by their usually interminable standards), and published their findings in little more than two years after the matter was brought to their attention. And secondly there is news on the parallel FCA investigation in Redcentric's recently published annual results for 2018/19. FRC Report The FRC concluded that Redcentric's auditors, PwC, did not meet expected professional standards in their audits ...

Paying Illegal Dividends, Burford Capital, Woodford Patient Capital Trust and Zero Carbon Objective

A group of investors including Sarasin, Legal & General, Hermes and the UK Shareholders Association (UKSA) has written to Sir Donald Brydon who is undertaking a review of the audit market. They have yet again raised the question of whether the International Financial Accounting Standards (IFRS) are consistent with UK company law. In particular they question whether profits are sometimes being recognised, thus allowing the payment of illegal dividends. The particular issue is whether profits can arise on certain transactions under ...

Good News – Autonomy CFO Jailed

Good news – former CFO of public company jailed for fiddling the accounts. Oh to see that happen more often so as to deter manipulation of accounts that is so prevalent and so damaging to investors. Sushovan Hussain, the former CFO of software company Autonomy, was sentenced to 5 years imprisonment by a US Court yesterday plus he was fined $4 million and ordered to forfeit $6.1 million he made from the sale of the company to Hewlett-Packard. He won’t even be ...

Warren Buffett and FCA Review of RDR & FAMR

There was an interesting article on the career of Warren Buffett in the last FT Weekend magazine. It was a wide-ranging interview with the renowned investor who became one of the richest persons in the world by making investments which consistently outperformed the markets over the last 50 years. At age 88 he still claims to be having fun by working at investment. But in the last ten years he has fallen behind the S&P index. The reason is primarily because he ...

Horizon Discovery – Defective Accounting Discovered

Horizon Discovery Group (HZD) announced their full year results this morning. Horizon is a biotechnology company focused on cell engineering and CRISPR screening. Revenue was up by 68% to £58.7 million helped by an acquisition. But the “reported loss” increased to £35.8 million due to the exceptional write-off of past investment in “In Vivo”. Although this is a non-cash impairment it suggests that there was past over-optimism in the viability of that business unit and excessive capitalisation of development expenditure. This ...

Audit Market Shake-Up, Ocado on TV, and Judges Scientific Presentation

The Competition and Markets Authority (CMA) have issued their final recommendations to improve competition in the audit market after an earlier public consultation. This follows widespread concerns over the dominance of the big four audit firms, the lack of apparent competition on price or quality, and repeated complaints about the quality of audits following several big and small company failures. Audit firms seem to have got off relatively lightly if the CMA’s recommendations are implemented by the Government. Here’s a brief ...

Grant Thornton, Interserve and Arc Fund Management

The Financial Reporting Council (FRC) have announced an investigation into the audits by Grant Thornton of the accounts of Interserve (IRV) in the years 2015-2017. Interserve was a large outsourcing company with most of its business from Government contracts. It ran out of cash and went into administration on the 15th March with debts of £738 million. Readers will no doubt be aware that Grant Thornton were also the auditors of Patisserie Holdings and Globo, both cases where very substantial fraud ...

Patisserie and Interserve Administrations, plus Brexit latest

Yesterday the administrators (KPMG) of Patisserie (CAKE) issued their initial report. It makes for grim reading. The hole in the accounts was much worse than previously thought with an overstatement of net assets of at least £94 million. That includes: Intangible assets overstated by £18m; Tangible assets overstated by £5m; Cash position overstated by £54m; Prepayments and debtors overstated by £7m; Creditors understated by £10m. The accounts were clearly a total fiction. It is uncertain whether there will even be sufficient assets ...

FRC Revolution to Fix Audit and Accounting Problems

A major announcement that will impact investors was made yesterday by the Government. You may not have noticed it in the midst of political turmoil, but it’s worth studying. The Kingman review of the Financial Reporting Council (FRC) was published last December. It was a quite damning criticism of many aspects of the current regulatory regime that had resulted in so many audit failures and poor-quality financial reporting. See my previous blog post on this subject here: https://roliscon.blog/2018/12/18/all-change-in-the-audit-world/ There are few experienced investors ...