M&C Saatchi has missed its 30 September deadline to complete the audit of its accounting errors for the 2019 financial year and so its shares will be temporarily suspended from tomorrow morning (1 October).
It expects to complete the audit in a "matter of weeks" and has released preliminary unaudited non-statutory results to provide shareholders with "as comprehensive and accurate a picture as possible".
The company announced this morning that the audit has taken longer than expected because it has wanted to conduct "significant testing" and due to the current Covid-19 working practices.
M&C Saatchi's share price dropped 5.7% to 54.32p when the stock market opened this morning, though later recovered to about 2% below yesterday's close.
So far the investigation has found that the company's accounting misstatements and adjustments have increased by £2.4m to £14m for past years.
The figure was previously reported as £11.6m in December 2019.
The company reported unaudited net revenue of £256.4m for 2019, up 2.4% year on year, and headline profit before tax of £18.3m, down 22%. These figures are used by the board to assess underlying profitability.
Unaudited statutory loss before tax is reported at £8.6m, 35.8% worse than the previous year's loss of £6.3m, because of the accounting adjustments.
M&C Saatchi had made a separate "adjustment" of £11.3m before tax because of a change in accounting rules for put options -- shares to which staff in subsidiary agencies are entitled to.
That £11.3m adjustment had "no impact on headline profit nor cash impact".
Taken together, including the misstatements and the put option adjustmentts, there was a total negative impact on statutory profit after tax of £25.8m.
When looking at the company's current performance, M&C Saatchi said that it is "encouraged by the resilience of the business, operationally and financially, in the face of the Covid-19 pandemic".
It explained that the business continues to trade profitably with "strong" new business and client retention. M&C Saatchi's half-year results will be announced in October.
Chief executive David Kershaw said: "2019 was the unhappiest year in the company's 25-year history. It would be a glaring oversight not to mention the accounting misstatements at the outset.
"These sent a tremendous shockwave throughout the market and the group itself, impacting the group's valuation and reputation amongst the investor community. We have left no stone unturned in ensuring that the group is back on a firm financial footing and never finds itself in this position again."
Since the accounting scandal came to light, M&C Saatchi has faced turmoil among its top leadership team. Lord Saatchi, one of the co-founders, quit in December along with the three other non-executive directors: Lord Dobbs, Sir Michael Peat and Lorna Tilbian.
The three other co-founders – chief executive David Kershaw, executive chairman Jeremy Sinclair and executive director Bill Muirhead – have had to rebuild the board and hire four non-executive directors.
'It’s frustrating about not being able to put the past to bed'
M&C Saatchi’s relatively small share-price drop was a sign that investors were braced for the news. Suspension of the shares is a rare move.
“It’s not good news that the shares are being suspended,” Kershaw admitted to Campaign, even though the accounts should be finally signed off by auditors in a matter of weeks. “It’s clearly not a situation you’d want to happen. I sympathise with shareholders. You don’t want to hold stock you can’t trade in.”
He said it would be “disingenuous” to blame the delays on Covid-19. “Given our history, it’s probably the most extensive audit anyone’s ever experienced,” he explained.
“It’s frustrating about not being able to put the past to bed. Unfortunately it takes up a huge amount of energy and bandwidth. I’d like the funeral of the 2018 debacle to be finally closed but it might take a few more weeks. Until we have signed off accounts, the past won’t be fully buried.”
Kershaw insisted M&C Saatchi’s position is financially sound: “In terms of the perception of the company, we’ve done better than we thought we’d do during Covid-19 and we’re in the best cash position we’ve been for a long time and the company is in good health and we’re restructuring.”
He admitted to Campaign the extra £2.4m in additional adjustments for past misstatements was “not great” but insisted they were “not unexpected”.
They cover a write-down of fixed assets and incorrect revenue recognition and incorrect reporting of tax in India, which applied to several UK subsidiaries – chiefly Lida, the CRM shop, which was folded into the main ad agency in January 2020.
Kershaw said: “You need to make a distinction between the £2.4m extra [for past misstatements], which is cash, and the other [new] adjustments, which are non-cash, which are a different [accounting] treatment of the put options [for agency staff in local agencies when they become entitled to shares]. The fact it is only £2.4m is less than the [stock] market thought it would be.”
Asked how the crisis has affected staff morale at the subsidiary agencies, Kershaw said the “performance of the companies has been heroic but I’m very well aware that it’s not helpful. I don’t think it’s been damaging to the business.”
But he conceded: “Who knows what opportunities we might have had that we haven’t. But you’ll never know what those were.” There has been past speculation that private equity or other investors could buy M&C Saatchi.
Kershaw said he “can’t comment” about whether he and the other co-founders, Jeremy Sinclair and Bill Muirhead, might step down from the board after 25 years, although "there's succession planning happening”.
M&C Saatchi’s value has slumped by 80% since the accounting problems emerged in August 2019.