The designer clothing retailer appointed Deloitte to carry out an independent review after uncovering an accounting error of £25m in overstated stock in its end of year accounts to 31 January, 2019.
However, it has now confirmed a much larger problem than initially thought, resulting in a 25% inventory write-down.
It is the latest blow for the troubled company, which issued four profit warnings in 2019.
“Ironically, the inventory mountain at Ted Baker is referred to as a £58m hole,” said Ian Smith, finance director and general manager at automated accounts payable and document management software provider Invu. “I would suggest it is not such a surprise that they have an inventory management issue.”
The accounts have showed a deterioration, Smith said, in the finished goods stock turnover ratio since the year ending January 2016, resulting in £51m of extra inventory.
Finished goods inventory is the number of manufactured products in stock that are available for customers to buy. The finished goods inventory formula is used to calculate the value of such goods for sale.
According to the Ted Baker accounts, finished goods increased by £99m between January 2016 (£117m) and 2019 (£216m). Using the finished goods turnover ratio of cost of sales divided by finished goods for 2016, the finished goods inventory should have increased to £165m in 2019, due to the growth of the business, but the extra £51m suggests a major problem, Smith said.
“In the ‘all you can eat’ buffet of risk disclosures identified on pages 20 to 24, I see no mention of inventory obsolescence,” said Smith. “Surely this is a significant risk in the luxury clothing market, when so much finished goods inventory is held? There may of course be hidden somewhere in the 123 pages of the annual report a mention of the inventory issue, but who has the energy to read all the ballast that surrounds the facts?”
Another concern is the highly material overstatement was apparently not identified by either management or the auditors, added Gavin Pearson, partner and forensic accountant at Quantuma.
“Not only does it cast doubt over the systems and controls in place at Ted Baker - particularly following a previous stock theft issue some years ago - it also may give concerns over the company’s underlying business strategy, given that on the face of it, it is holding stock where its net realisable value is less than its cost, ie it appears to be selling stock for less than it purchased them,” he said.
Although the release does not refer to any other issues being immediately identified by the investigation, it may not be the end of the problems for the company or its investors, which have endured a brutal year said Pearson.
Last month the company appointed a specialist team to report to a sub-committee chaired by independent director Sharon Baylay, as it tries to repair its reputation following a damaging year of business and company culture failings.
Founder Ray Kelvin resigned in March 2019 following a series of allegations that he inappropriately “hugged” members of staff - which he denies. In December, Kelvin’s replacement also resigned along with the company executive chairman after the firm issued a fourth profit warning of the year.
“The High Street is currently a volatile place for retailers at present who are facing significant financial pressures,” said Stephen Young, partner at Keystone Law. “In that market, it is essential for directors and stakeholders of a business to know that their accounts represent a true and fair view of their financial position.”
Ted Baker’s misrepresentation of stock will have meant that the business’ profitability would have been overstated, and affect the value of its share price on the London Stock Exchange.
“It’s not the first time an accounting error of this kind has been discovered in the retail sector, with businesses such as Superdry and Patisserie Valerie suffering similar issues in recent years,” said Young. “It is essential for both the board and stakeholders that the error which has been discovered is rectified quickly so the board can make fully informed decisions on the basis of accurate financial information”
Replies (9)
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At 25% difference then the auditors were clearly asleep on the job. This isn't a tweak to a spreadsheet for slow moving stock etc but a massive difference.
Were they even on the job?
It's no wonder Auditors get a bad name.
Probably not! This isn't really even Accountancy is it? It doesn't take an Accountant to look at a pile of stock and then start asking how much can we sell it for? It looks like Stock was missed off the audit this year again lol!
LOL, no process can be that bad, this is deliberate.
I hold no brief for auditors but one can see that they might not be able to see a stock difference even of such enormous proportions. When such large numbers are being dealt with it is difficult to see quite how they can be audited. I can recall stock audits in my training days and they were largely a bit of a joke. You couldn't physically check many items and often those that could be checked depended upon product knowledge which we often didn't have. So I suppose it all went technical and we know what that means.
Like MTD - HMRC will believe that the stuff they receive will be more accurate because it is 'digital all the way', but in reality the reverse is the case because where people don't understand the systems they take the easiest option which is often wrong and once done who is going to be dredging through the reams of electronic data to find an error they don't know about. GIGO as they used to say but that is all forgotten nowadays. It is easy to see with HMRC who used to have local people who understood accounts and would look at what came in and actually engage their brains. But now, so they say, stuff is analysed by computer and the Computer screams and shouts where something is amiss. Fantastic but untrue - it just doesn't - at least judging by the few numbers of enquiry cases which all now seem to arise from missing bank interest or something similar.
Does the HMRC function as a tax collector? Not very well as they are too busy sorting out the errors their computers make.
So perhaps one is being harsh with auditors, perhaps it is just a job which can no longer be done efficiently and accurately given the size and spread of the organizations involved.
To my simple mind it requires a more continuous involvement by the audit firms in the nuts and bolts of their clients' accounting structures. The existing system just doesn't work and I don't think it can in very large organisations. Mind you, to be fair, I wouldn't touch an audit like that with a 40ft bargepole so perhaps I'm not the one to judge.
To my mind, there are clearly two culprits here, the finance director/senior financial management and the auditors. The finance director for not asking the right questions and not proactively managing the business systems. In my early professional days, I have witnessed many an FD and Financial Controller who failed in this regard being sacked.
The auditors clearly have seriously failed here. It costs nothing to ask a question and probe into the numbers. Again, in my experience as a senior finance manager of a high tech manufacturing company, I was often required to explain inventory systems and the results they produced to our auditors - they asked the right questions. To my mind, it appears this audit has simply been a tick box exercise.
to me when i was articled in 73-78 auditing was all about procedures and there were no computers. this was wrong and has never really gone away. start with the BS at the year end and work backwards first from that date before moving forward. it is alleged that in the case of PV they moved cheques between the companies which inflated the year end balance but these were reduced when the cheques bounced shortly after, very basic, so much for a review of PBSE. Sending out trainees without any experience and charging them out at over £100 is simply racketeering and its about time the pen pushers at the Institutes got to grip with these matters. but then again i have a tendency to go soft
Where ever you see a set of accounts with a large amount of stock/WIP take those figures with a large pinch of salt because experience tells you that is the figure that is "flexed" to make the accounts look like the management wants....
Not a good decade for Ted Baker's auditors. In 2018 the FRC fined them GBP3 million firmwide and GBP80,000 for the engagement partner, due to misconduct in respect of independence issues. And now this...Frankly reviews of slow moving and/or seasonal stocks are all part of Auditing 101. So what went wrong? We don't have all the facts yet, but this really doesn't look too good at first pass. I will be interested to learn more.