Guardian IT, ironically a so-called disaster recovery business, yesterday had its own disaster to report after unveiling a raft of accounting "discrepancies". The timing could not have been worse, coming hot on the heels of the Enron collapse and the increased scrutiny that has opened up over accounting practices.
City analysts have been combing corporate accounts for oddities and questioning accounting policies in the hopes of identifying other "Enrons" before they blow up.
Against that backdrop, the City's reaction to Guardian iT's admission was understandably severe. Around £24m was wiped off the company's value after the price of its shares lost 46 per cent, or 34p, to close at 40p.
"Accounting irregularities is not the phrase one wants to bandy about in this market at the moment," said Adam Lawson, an analyst at Teather & Greenwood.
Guardian iT, headed by the chief executive Peter MacLean, yesterday admitted that it had "very recently" uncovered some accounting "adjustments and discrepancies" relating both to 2001 and to earlier periods.
It expects it will have to take exceptional charges totalling at least £20m to £21.5m in 2001 while "correcting" operating profits for that year. It estimates the latter will now be £11.5m to £12.5m, compared with its previous forecasts of £13m to £14m.
The discovery has forced its chairman, Richard Raworth, to resign although he will stay on while the forensic accountants KPMG carry out their enquiries. The investigation means Guardian iT's full-year results for 2001 will not be released until April. While it is still unclear what is behind all of the "discrepancies" at Guardian iT, the investment community fears its problems could be the tip of the iceberg.
The accounting practices of Sage, which sells accounting software, came under close scrutiny last week after questions over its policy of amortising goodwill were raised.
The troubled internet security software group Baltimore Technologies also admitted yesterday that it had overstated revenues in Japan for the year ended 2000 and for the six months ended 30 June 2001.
But there is growing concern over the accounting practices of telecoms companies, particularly the process whereby groups can generate artificial revenues by trading network capacity. On that note, US regulators have began investigations into Qwest's dealings with Global Crossing, the US telecoms group which filed for bankruptcy protection last month.
As for Guardian iT, it made no effort to cast any more light on the reasons behind its accounting problems. No one at the company would speak to the press or financial analysts and the company's advisers also seemed in the dark.
Worryingly, Mr Raworth said neither he nor the board was aware of any issues "that would have given rise to the announcement". "Nor given their nature do I believe that your board could have reasonably been expected to be aware of them," he said in a statement to the Stock Exchange.
Guardian simply said the problems surfaced when it was preparing its year ended 31 December 2001 accounts and that KPMG was now conducting a detailed investigation. It estimates it will have to make an exceptional charge of £2m to £2.5m in 2001 to cover discrepancies in 2000 and earlier periods.
Another £10m to £11m of exceptional items will have to be made to cover reorganisation costs, costs of abandoned projects and the write-off in value of a facility in Heathrow. It also expects to have to take a further £8m exceptional write-down in respect of that facility. Finally, it expects to make a "substantial" exceptional charge to cover the impairment of goodwill taken on through its frenzied acquisition spree.
"The fact that they've come out not only with these additional discrepancies but also with these corrections which are not detailed has to be worrying," Mr Lawson said.
Guardian iT's announcement, however, is shocking on two counts. Firstly, it is worrying that more horrors have been uncovered less than two months after its second profit warning last year in December. Back then, it said a financial review undertaken by its new finance director Neal Roberts, who started at the beginning of December, showed a "substantial" deterioration against previous forecasts. That, it said, was due to the overly optimistic forecasting of expected sales, a reduction in achieved sales and the under-forecasting of costs and currency implications.
"It's difficult to fathom. One would have thought they'd have used that opportunity in December to get everything 'kitchen-sinked'. What else is there in the closet?," said another analyst.
The latest scandal at the company also raises the question, however, of why a review wasn't begun at the time of the December profit warning since the company had already admitted then that its own financial controls were partly at fault.
A Guardian IT spokesman said the accounting issues behind the company's December alert were not "in any way" related to the set of problems exposed yesterday. He said the latest discrepancies, discovered "a day or two ago", had come to light only once the auditors, PricewaterhouseCoopers, had started work in January.
For Guardian IT, which had already started talking to its banks to persuade them to relax certain covenants attached to its borrowings, the prognosis is not good. City analysts have taken it for granted that Guardian's banks will, if they continue to support the group, clearly impose stricter, more expensive, criteria on borrowings.
Some feared Guardian might, at best, be forced to carry out a rescue rights issue in a last-ditch effort to raise cash or, at worst, go under. Others were left praying for a bidder to materialise.
The only ray of light the company offered investors was that sales in December were ahead of expectations and that sales in January were in line with budget. It also said it was considering making some disposals but was looking at "all methods" of maximising shareholder value. That, however, is little consolation to those left on the share register. Its policy of "radio silence" is also likely only to damage sentiment further.
With the investment community bracing itself for a raft of announcements on the same theme, the fall in Guardian's shares serves as a reminder of the sort of punishment that will be meted out to other companies confessing accounting mishaps.Reuse content