PwC review finds ‘significant’ accounting irregularities at Datalex
Irish travel software company Datalex has revealed a string of ‘significant accounting irregularities’, after it asked PwC to conduct an independent review of accounting issues relating to revenue recognition and the application of IFRS 15, which were first identified in January
29 Mar 2019
In its January trading update, Datalex revised previously published guidance for the financial year ended 31 December 2018, indicating a shortfall in the group’s previously anticipated services revenue and changes in the timing of recognition of certain other contracted revenue.
The January trading update also noted that the group’s revenue, adjusted EBITDA and profit for the half year ended 30 June 2018 may have been misstated, principally due to the accelerated recognition of revenue associated with a significant customer deployment.
PwC’s review has concluded that the group’s revenue, adjusted EBITDA and profit for the half year ended 30 June 2018 were misstated, and has confirmed that the group’s recognition of services revenue for the half year ended 30 June 2018 was not in line with its accounting policy and was materially overstated.
The review found that Datalex failed to apply IFRS 15 appropriately in its results for the half year ended 30 June 2018, and the group incorrectly recognised approximately $3.5m (£2.7m) of services revenue associated with the significant customer deployment in its results for the half year ended 30 June 2018.
This deployment is a fixed fee contract and initial estimates of time to completion were significantly underestimated, with estimates of time to completion significantly increased over the period resulting in a reduction of percentage of completion (POC) for the 2018 financial year.
The review identified approximately $2.9m of other services and platform revenue that was incorrectly recognised in H1 2018, of which around $700,000 has been determined not to be recoverable, with the balance being revenue that will be recognised in H2 2018 or in the 2019 financial year.
Overall, Datalex said PwC identified ‘significant accounting irregularities during the period as the underlying cause for the group’s overstatement of revenues, noting material weaknesses in the internal control environment; the group’s accounting process in this area has been largely manual, and dependent on individual judgement, and not subject to internal audit oversight; and there has been a failure by the group to track sufficiently operational and financial performance on the deployment and to retain sufficient supporting documentation for accounting entries.’
The review also confirmed that the board was not informed of these revenue recognition issues until January 2019.
In its update, Datalex said the implementation in 2018 of the new revenue standard IFRS 15 is complex with significant judgments impacting the timing of when revenue is recognised.
The 2018 guidance announced in the January trading update was prepared on the basis of IAS 18, being the basis on which revenue was recognised by the group in 2017, before any impact of IFRS 15.
The company said it will continue to undertake a detailed review of its FY 2018 outcome and the transition to IFRS 15 until finalisation of the FY 2018 annual accounts and audit, which is targeted to conclude in April 2019.
Datalex is to restate its results for the six-month period to 30 June 2018 and present the restated results along with its results for the six month period to 30 June 2019 in H2 2019.
The company has also asked PwC to conduct a follow-up review of the group’s internal controls and processes in order to identify areas for improvement, saying it had already begun a transformative change programme which has included the implementation of a number of urgent measures to enhance internal controls.
In addition, a process has commenced to procure an outsourced internal audit service. The process to identify and appoint a new CFO is underway and an announcement will be made in due course. CFO Donal Rooney announced last month he was stepping down, after joining the company in December.
Paschal Taggart, Datalex chairman, said: ‘The review has confirmed accounting irregularities and material historical internal system and control failures. These are now being addressed and the board is committed to implementing all necessary improvements.
‘We have said that 2019 will be a year of transition but the fundamentals of the business remain strong and we remain confident in Datalex’s future growth.’
Datalex's customers include Aer Lingus, Jet Blue, Swiss, Philippine Airlines, West Air, SAS and Air Malta.
Report by Pat Sweet