Ted Baker to investigate £20m inventory overstatement
2 Dec 2019
Upmarket fashion brand Ted Baker is launching a review of its accounting methods after discovering the value of inventory held on its balance sheet has been overstated by some £20m
2 Dec 2019
In a regulatory announcement the company said: ‘Ted Baker has identified that the value of inventory held on its balance sheet has been overstated. Based on preliminary analysis, the board estimates an impact on value of £20m to £25m.
‘The board believes that any adjustment to inventory value will have no cash impact and will relate to prior years.’
Ted Baker’s auditor KPMG has been in place since 2001, and the audit was last put out to tender in 2012.
The retailer has appointed law firm Freshfields Bruckhaus Deringer, and says it will also be appointing independent accountants, to undertake a comprehensive review of this issue.
The review team will report to a sub-committee, chaired by independent director Sharon Baylay.
All costs and fees associated with completing the independent review will be expensed in the period incurred and clearly identified as such.
The statement concluded: ‘Ted Baker is committed to ensuring the independent review is completed in an efficient and transparent manner and will update the market as appropriate. Whilst the review is ongoing, the company will not comment further.’
In the significant issues section of Ted Baker’s 2019 annual report published in May it stated: ‘The directors have used their knowledge and experience of the fashion industry in determining the level and rates of provisioning required to calculate the appropriate inventory carrying values.
‘Inventory is carried in the financial statements at the lower of cost and net realisable value.
‘Sales in the fashion industry can be extremely volatile with consumer demand changing significantly based on current trends. As a result there is a risk that the cost of inventory exceeds its net realisable value.
‘Management calculates the inventory provision on the basis of the ageing profile of what is in stock. Provisions are considered on a seasonal basis taking into consideration the various channels that are available to the group to sell existing inventory and the estimated prices that can be achieved. Any changes to the prices that can be achieved could impact the provisions that are required to cover the risks associated with holding older season inventory.
‘Adjustments are made where appropriate based on directors’ knowledge and experience to calculate the appropriate inventory carrying values.
‘Management confirmed to the audit committee that there have been no significant changes to the approach used to estimate inventory provisions from the prior year.
‘The external auditors explained to the audit committee the work they had conducted during the year. On the basis of their audit work, the external auditors reported no inconsistencies or misstatements that were material in the context of the financial statements as a whole, and in the view of the audit committee this supports the appropriateness of the group’s methodology.’
Commenting on the Ted Baker situation, Steve Miley, a senior market analyst at asktraders.com said: ‘Today shares plunged by as much as 11.5% as investors react to a £25m overstatement of last year’s inventory. The latest fall comes after shares crashed 25% in early October, after announcing a £23m loss, including a £2m hit stemming from [former chief executive] Ray Kelvin’s misconduct allegations.
‘What is very clear is that Ted Baker needs to clean up its act. It’s worth noting these issues relate to a time when Ray Kelvin was at the helm. The share price has manged to pare some of today’s losses quickly (now down just 4.5%) on the hope that there are no more skeletons in the closet.’
Kelvin resigned in March this year following allegations of misconduct.
FRC investigation closed
In 2018, KPMG reached a settlement agreement with the Financial Reporting Council (FRC) in relation to a matter concerning the provision of non-audit services by KPMG to Ted Baker. Alongside their audit services in respect of the financial years ended 26 January 2013 and 25 January 2014, KPMG provided litigation support to the group relating to a commercial dispute.
The FRC gave KPMG a severe reprimand and a fine of £3m, discounted for settlement to £2.1m, over misconduct relating to the provision of expert witness services.
The audit committee noted the FRC’s clarification that this matter did not allege that KPMG was without integrity and objectivity.
The annual report went on to state: ‘As such, the audit committee took the view that KPMG could continue to act as an independent and effective auditor.’
KPMG has been approached for comment.