iSoft founders may face legal action as probe deepens

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The crisis at the healthcare software provider iSoft deepened yesterday after it launched a formal investigation into accounting irregularities, giving rise to speculation that it could take legal action against some founding members.

The move came as iSoft suspended its commercial director Steve Graham, a founding member and former chief operating officer, alongside an unnamed staff member after admitting its accounts may have been flattered over a two-year period.

ISoft said "other employees that appear to be involved have since left the group". It refused to name the individuals to be investigated, saying "it would be inappropriate to make any further comments".

Tim Whiston, the former chief executive who resigned this year, and the former chairman and founder, Patrick Cryne, were in charge during the period under investigation. The unexpected resignation of the finance director John Whelan in December 2004 a few months after he took the job is also likely to come under scrutiny. Sir Digby Jones, the former director general of the CBI, was the senior independent director of iSoft until last year and sat on both its audit and remuneration committees. Mr Cryne declined to comment but has not yet been contacted by iSoft.

David Toms, at Numis Securities, said the investigation "could involve a move towards legal action". He also noted that Mr Graham sold shares worth more than £20m over the two years under investigation. A spokesman for iSoft declined to comment on the length of the inquiry or whether it would extend to fraudulent behaviour.

An initial investigation by Gavin James, iSoft's finance director, and the auditors Deloitte & Touche into potential accounting irregularities over the past month has uncovered issues serious enough to warrant a formal independent investigation.

ISoft said it appears to have booked sales earlier than it should have done in 2004 and 2005. The company adopted a less aggressive accounting policy earlier this year and has already restated its historic accounts to reflect that shift. The company stressed that the investigation would not affect its cash position.

The investigation and suspension of Mr Graham heightens the seriousness of the crisis at iSoft. After a string of profits warnings and the restatement of its accounts earlier this year, the Manchester-based software company has yet to publish results for fiscal 2006. The results, originally scheduled for release in June, must be published by 25 August if iSoft is to avoid a share suspension.

More worrying is the fact that the company has yet to agree new banking arrangements after the change in accounting policy and is still awaiting a renegotiation of crucial NHS contracts. There is added uncertainty around those contracts as its partner, Accenture, has hinted it might switch software suppliers.

The company also has yet to name a new chief executive. ISoft has lost 87 per cent of its market value since the start of the year, and shed 3.4 per cent yesterday to close at 57.5p.