The City's top financial watchdog yesterday issued a stinging rebuke to SFI, the troubled pubs group, for "misleading" investors with an "overstated and over-optimistic" financial snapshot last summer, adding that the Slug & Lettuce owner only escaped a massive fine because it lacked the cash to pay.
The Financial Services Authority criticised SFI's lax financial controls, which saw it overstate its accounts for the year to May 2002 by more than 30 per cent.
Andrew Procter, the regulator's director of enforcement, said: "SFI's failure to take reasonable care to ensure that its systems and controls were capable of providing it with information for the market that was accurate, complete and not misleading constitutes a serious breach of the listing rules."
In what was the watchdog's first public censure of a listed company since it was given legal teeth to police the City in December 2001, SFI was castigated for presenting investors with an "overstated and over-optimistic" view of its financial results for more than two years. It said SFI, which confessed to the existence of a £20m accounting black hole in November 2002, had only escaped a "significant financial penalty" because of its parlous financial state.
The company, which also owns the Bar Med and Litten Tree pub brands and the For Your Eyes Only lapdancing chain, said it acknowledged the FSA's report "with concern". It is fighting for its financial life and recently admitted that the investments of ordinary shareholders had been completely wiped out.
Stuart Lawson, the recently appointed executive chairman who used to run the Alldays retail chain, has warned that "neither current nor projected trading is sufficient" for the company to repay debts of some £160m.
Although the watchdog cleared SFI of deliberately misleading the market, it painted a damning picture of an overstretched accounts department that was unable to keep up with commission-hungry managers who pressured the finance department into using dubious means to maximise profits during the peak of the group's expansion.
"There was little focus on the balance sheet and, due to time pressure, reconciliation of the balance sheet accounts was not always down to a sufficient level of detail," the FSA report found. It blamed the group's aggressive rollout programme, which saw it expand from 24 outlets in 1996 to 186 by 2002. "[This] placed strains on SFI's finance department and accounting systems [resulting in] mispostings, missing accounting entries and the postponement of certain tasks, particularly the reconciliation of individual accounts."
SFI, whose founder and then chairman Tony Hill quit when the accounting discrepancies were unearthed, is thought to be considering whether to take action against its then auditors, Clark Whitehill, who remained employed by SFI until September 2003.
Despite stock market concerns - voiced by Douglas Jack, an analyst at WestLB Panmure - at the state of SFI's finances in September 2002, the company did not issue a profit warning until the following month. This was just three months after its preliminary results statement painted an upbeat picture of financial health.
At the time of its financial results statement SFI's shares traded at 179p, but crashed to just 26p after the profit warning. They have since been de-listed.
Yesterday's FSA report revealed that the same results statement had overstated the company's profits before tax by £6.1m and its net assets by £23m. The correct figures should have been £19.5m and £85.5m respectively.