M&C Saatchi hikes accounting misstatement to £11.6m
4 Dec 2019
M&C Saatchi is to make £11.6m of adjustments to its 2018 and 2019 financial results, and has appointed PwC to take over from KPMG as the advertising agency’s external auditor
4 Dec 2019
The company initiated an internal accounting review of several of its UK subsidiaries in August, following a report by KPMG which flagged up concerns about accounting controls across the group.
This review, and subsequent work by PwC, has found that the misstatements may stretch back up to four years.
Initially, M&C Saatchi said it planned to take one-off exceptional charge of £6.4m to its 2019 results, as well as a £1.4m charge related to fixed assets in connection with refurbishment of the UK office.
Following an independent forensic review conducted by PwC, the total value of the previously disclosed adjustments was increased by £1.15m, with PwC identifying other areas which needed investigation.
As a result, M&C Saatchi now says additional items totalling £2.65m have been identified, bringing the total proposed adjustment to £11.6m to be apportioned between its 2018 and 2019 financial results.
Of the total proposed adjustments, £9.55m is considered to relate to 2018 and will be treated as a prior period adjustment, and £2.05m to 2019 and will be treated as an exceptional item (relating to the UK office fixed assets).
The advertising agency says the proposed adjustments are unaudited, but have been discussed with PwC auditors in advance of the 2019 audit. Final confirmation of the quantum and the apportionment between the years 2018 and 2019 is subject to completion of the 2019 audit, expected in March 2020.
Separately and in relation to year end 2018, PwC has identified that the 2018 half year reported profit was adjusted by approximately £6.4m.
M&C Saatchi stated that such adjustments may have occurred in half year reports since 2014. However, it noted that in each of those years the full year audits conducted by the previous auditor, KPMG, had clean full year audit opinions.
The proposed adjustments are stated before deduction of corporation tax. Depending on the extent to which corporation tax is applied to the fixed assets adjustment, the company says the net after tax charge from the adjustments is likely to be reduced by between £1.7m and £2.2m. it estimates the accounting and legal fees associated with this review will be approximately £1m, this amount to be treated as an additional exceptional charge in the 2019 results.
M&C Saatchi, which has a new group finance director, Mickey Kalifa, outlined actions to prevent a recurrence of the accounting misstatements. The measures include reorganising the group finance function, creating new standardised company accounting policies and procedures to be applied consistently across all companies in the group; and introducing tighter control and greater focus on cash and cash management.
In addition, the company is to implement an Oracle cloud-based accounting and forecasting system to be deployed across the worldwide group, replacing the many different accounting systems currently operating across the world. The platform is now fully operational in the UK and is expected to be live in all major markets by Q1 2021.
Separately, M&C Saatchi announced an update on its current trading and expectations for the full year 2019. Underlying profit before tax, before exceptional costs, is expected to be significantly below the levels expected at the time of the company's interim results due to weaker than expected trading in the final quarter of the year and higher than expected central costs.
In addition, the company is restructuring its UK office to improve performance and position the division for long-term growth. This is expected to result in an exceptional charge of £2.5m for the financial year ending 31 December 2019, but is expected to generate annual savings of approximately £6m in 2020 and onwards.
As a result, the board expects underlying profit before tax for the full year 2019 to be between 22% - 27% below 2018 on a like for like basis, with the broad range taking into account the fact that December is a key trading month for the company.
David Kershaw, M&C Saatchi CEO, said: ‘This restatement of our numbers and the reduction in forecasts make for very difficult reading - both for us as a management team and for all of our stakeholders.
‘The only positives that we can offer are that a robust review has been undertaken and we have, under our new group finance director, started implementing processes and procedures to prevent such issues arising again.’
The company also confirmed the appointment of PwC as external auditors replacing KPMG.
KPMG was first appointed as M&C Saatchi auditor for the financial year ended 31 December 2012. According to the 2018 annual report, the firm was paid a total of £838,000 for the year, made up of £768,000 in audit fees and £70,000 for other services.
Current chair of the M&C Saatchi audit committee is Sir Michael Peat, who was a partner at KPMG from 1985 to 1993 before joining the Royal Household, where he held senior finance roles including director of finance and property services, keeper of the privy purse and treasurer to The Queen.
The audit committee is made up of three non-executive directors, Michael Dobbs, Lorna Tilbian and Michael Peat, while finance director Kalifa and the external auditors also attend meetings as appropriate.
Lord Dobbs, best known as the author of House of Card, is an active member of the House of Lords. He was special adviser to Margaret Thatcher and spent time at ad agency Saatchi & Saatchi in the late 19890s before returning to the Conservative Party as Thatcher's chief-of-staff and then deputy chairman under John Major.
Tilbian is an experienced media analyst and was head of the media sector and a main board member at Numis Corporation for over 10 years. She is a also a non-executive director at Rightmove, Jupiter UK Growth Investment Trust, ProVen VCT and Finsbury Growth & Income Trust.