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Redcentric – “Accounting misstatements” announcement. Uh Oh…

By Steve Moore | Monday 7 November 2016

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

“Redcentric plc (RCN), a leading UK IT managed services provider, announces that an internal review by the company's audit committee in relation to the interim results for the six months ended 30 September 2016 has discovered misstated accounting balances in the group's balance sheet”. Uh-oh.

The announcement goes on to note likely “write down in historic profits… from the information available to date that the impact of correcting these cumulative historic accounting misstatements would result in a need to reduce net assets by at least £10 million”. And it gets worse, with it added that previously stated underlying net debt position is now believed to be “materially higher than as reported” and a resultant “recalculation of the banking financial covenants, which will take some time to complete”.

This saw the company serve notice on, and place on ‘garden leave’, its CFO Tim Coleman – though he “resigned with immediate effect as a director of the company on 6 November”.

It is now believed that net debt at the half year was approximately £30 million, though a now “forensic review” will delay publication of originally 14th November-scheduled interim results. The company seeks to reassure that “current indications are that all issues relate to prior periods. New business sales and recognition of those sales into revenue over the six months ended 30 September 2016 have been in line with management's expectations… Management's focus remains on working with our motivated staff to provide critical IT services to our customers”.

Hmmm. At this stage though a forensic review has only been “commenced” - and surely the issue will take management focus. With also a combination now of financial control/review questions and balance sheet and financial covenants uncertainty, it is little surprise to see the shares currently crashing lower. This currently looks a mess fit only for the bargepole list.

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