EY resigns after issuing disclaimer on Datalex accounts

Auditors at EY have refused to give an opinion on the financial statements of Irish travel software firm Datalex, which disclosed ‘significant accounting irregularities’ earlier this year, and have reported the company to the regulator for failure to keep adequate accounting records

In a statement to the stock exchange Datalex said EY had notified the Registrar of Companies that the company has failed to comply with sections 281 and 282 of the Companies Act legislation to keep adequate accounting records in 2018.

Failure to maintain proper books is regarded as a category 2 offence under the Companies Act. It is potentially a criminal offence, with fines of up to €50,000 and up to five years in prison for extreme cases.

Datalex said: ‘The company takes its legal and corporate governance responsibilities very seriously and seeks to comply at all times with all relevant laws and regulations.

‘The company has expended significant effort over the course of 2019 in the taking of corrective actions to address the shortcomings identified by the independent review of accounting issues (conducted by PwC in conjunction with the company’s legal advisers).’

PwC’s review in March of this year concluded that the group’s revenue, adjusted EBITDA and profit for the half year ended 30 June 2018 were misstated. It found that Datalex had failed to apply IFRS 15 appropriately and had incorrectly recognised approximately $3.5m (£2.7m) of services.

Now EY has said in the 2018 annual report that it has been unable to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements.

Auditor issues - four matters

EY, which was appointed as Datalex’s external auditor in 2017, said it had identified four matters of particular concern.

Firstly, as the firm was unable to ascertain the appropriateness of the group’s cash flow forecasts, and due to the multiple material uncertainties to the consolidated financial statements, it was not able to obtain sufficient appropriate audit evidence to support the assumption that the group and company will continue as a going concern.

Secondly, because of  the material breakdown in internal control during the period under audit, EY  had been unable to get adequate responses to various inquiries for information and documentation from management.

A third area of uncertainty related to Datalex’s implementation of IFRS 15, Revenue from Contracts with Customers, and revenue recognition.

EY said it lacked the necessary information to assess whether disclosures on deferred contract fulfilment and contract acquisition costs of $11.5m (£9.3m) and $800,000 (£649,000) at 31 December 2018, and $9.5m and $600,000 at 1 January 2018 (the latter being the date of transition to IFRS 15), had been recognised in accordance with IFRS 15. 

Finally, EY also had concerns about how Datalex reported impairments of product development costs, intercompany receivables and investment in subsidiary.  An impairment charge of $20m was recorded at 31 December 2018 to impair product development intangible fixed assets to nil, while  an impairment charge of $2.9m and $48.7m was also recorded to impair the company’s intercompany receivables and investment in subsidiary to nil.

EY said it was unable to determine the appropriateness of the carrying amount of the related assets and liabilities as a result of the multiple material uncertainties, while it found that $12.4m of R&D costs had not been accounted for in a way in which met the group’s agreed accounting policies. 

Sean Corkery, Datalex acting chairman and interim CEO, said: ‘In our statement to the market on 27 March 2019, we outlined the breakdown in internal controls and accounting irregularities uncovered following a detailed investigation of the facts.

‘As a result of such a breakdown in controls and accounting irregularities, the audit process has proven to be particularly onerous, consuming a considerable amount of work and resources to bring it to a conclusion.

‘The effect has been that valuable resources have been diverted to investigating the past rather than helping to enhance the internal control environment and to appraise current business performance and its future prospects.

‘The disclaimed audit opinion stems from two primary sources - the breakdown in internal controls and the accounting irregularities. An additional contributing factor has been the lack of preparation for the implementation of the new accounting standard IFRS 15, which for Datalex had major implications due to the complexity of certain contractual relationships.

‘Since January the board and group management have put extensive time and effort into facilitating the audit and the provision of all possible information to the auditors.’

In the annual report, EY auditors said they had told the audit committee it was resigning as Datalex auditor.

EY declined to comment.

Pat Sweet

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