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SIG to restate profits after accounting irregularities
SIG was under the cosh on Thursday after the building materials group said it has overstated profits for FY2016 and for the years prior to this after a whistleblower revealed irregularities in its accounts.
"Following a whistleblowing allegation of potential accounting irregularity at SIG Distribution, the core insulation and interiors business in the UK, the group, with support from its external auditors Deloitte and from KPMG, has conducted a forensic review of the recoverability of a number of balances recognised at 31 December 2016 in relation to rebates and other potential recoveries from suppliers."
The review found that profit for the year to the end of December 2016 was overstated by up to £3.7m, with a further overstatement of around £0.4m for profit relating to years before 2016. In addition, profit for the first half of 2017 was overstated by up to £2.5m.
SIG said it plans to restate these prior year financial statements and has hired KPMG to conduct a detailed review of financial reporting controls at the SIGD division to confirm the accounting treatment of other material items at 31 December 2017, prior to finalising the year end results.
The company, which said some of the accounts were overstated intentionally, has suspended a number of individuals. They are being placed under disciplinary investigation into the circumstances surrounding the accounting for these balances and the cash overstatement disclosed in the trading update issued on 9 January 2018.
As the overstatements relate to 2016 and prior years, and to an overstatement in the first half of 2017 which has been reversed in the second, expectations for underlying profitability for the year ended 31 December 2017 remain unchanged.
Canaccord Genuity said that confirmation of expectations for FY2017 underlying profitability "will not help the credibility or confidence in the financials and is likely to have a negative impact on the rating of the shares, at least in the near term".
"Clearly, management is taking swift action to deal with these issues, but the recent announcements do highlight the fact the turnaround will not be a smooth journey. It also implies that the magnitude of the turnaround is greater than previously expected, given the implied lower starting point in terms of profits and higher net debt. Execution of the turnaround and reaching the recently stated targets remain the key issues for the investment case, but announcements like these highlight the challenges facing management. We await further clarification and reassurance around the financials at the upcoming results."
Shore Capital said: "Our first take is a) the issue is contained in one division (SIGD) and we believe is due to malpractice by a few individuals at SIG head office who have now been dealt with, b) the impact on the shares should in theory be contained as guidance for FY2017 has been re-iterated by management, c) credit should be given to the current management team for unearthing these issues."
At 1015 GMT, the shares were down 5.2% to 154.20p.