Ted Baker hires specialists to probe balance sheet bungleby
The fashion industry is notorious for inflating the prices of its goods, but designer brand Ted Baker has a special case to answer after overstating between £20m and £25m of its stock.
After discovering it had overvalued its inventory by eight figures, top fashion brand Ted Baker has enlisted magic circle law firm Freshfields and a set of independent accountants to get to the bottom of the balance sheet wrangle.
The investigative team will report to a sub-committee chaired by independent director Sharon Baylay.
It is the second time Ted Baker has brought in the external investigators this year after founder Ray Kelvin was sacked as chief executive in March following a ‘forced hugging’ scandal in the wake of the #MeToo harassment revelations.
The firm believes this accounting error will have “no cash impact” and expects the findings to relate to practices from previous years.
“£25m is a large number to be out in your figures and calls into question the robustness of the underlying accounting and monitoring systems,” said Karen McLellan, managing director at chartered accountants Haines Watts Hereford. “A stock valuation is established, primarily, as the amount of actual stock held at a value per item.”
A big discrepancy means one of these elements is incorrect, she said.
The information contained will have been supplied by the company and reviewed by its auditors prior to publication, added Stuart Evans, commercial litigation partner at law firm BLM.
All this leaves observers to consider how an error of this magnitude could have occurred.
“Slip-ups on stock valuation can occur – though not often on this scale,” Evans said. “Retailers may have raw material or works in progress that aren’t yet finished, or it may have old stock that hasn’t been written down. This can lead to mix-ups in the valuation, where retail price is applied rather than the base cost of the item.”
The suggestion the stock isn’t actually there, as Ted Baker has hinted at, may suggest widespread theft, double-counting or something less explicable.
“Did the stock actually exist? It seems such a basic question but a very pertinent one,” said McLellan. “Given the size and geographical spread of Ted Baker it is likely that a computerised inventory system covering a number of locations was used, but this should always be checked back to periodic physical stock checks to verify the accuracy of the records and to account for such items as theft.”
In the fashion industry, changing tastes and seasons often render stock obsolete, which can lead to cases where items held are near worthless, but overstated in value, experts said.
“In our experience, errors like this creep in because of poor business intelligence capabilities: essentially not keeping on top of core data in a business and not having the analytical systems to govern correctly,” added Adam Hadley, chief executive of data science consultancy QuantSpark.
Excuses wearing thin
The business must also be acutely mindful of investors, who may be considering potential claims, and finance watchdog the Financial Conduct Authority (FCA). The regulator administered an investor compensation scheme for Tesco share and bondholders after the grocer misled investors about their value.
“If this turns out to be more than an inadvertent error, then the Serious Fraud Office may also get involved as well,” Evans said. “All of these things will carry heavy professional costs. The company has said in its preliminary analysis that there will be no cash impact as this relates to prior years, so we will have to see if the subsequent investigation bears this out.”
A forensic probe may also shake out other irregularities that could be bubbling under the surface of Ted Baker’s accounts, experts said.
“It would be less than ideal for Ted Baker to provide what it hopes to be a definitive report saying that all has been uncovered and fixed, ideally with no impact on the bottom line, only to see another issue rear its head,” said Evans. “It is another blow to the Ted Baker brand image, especially unwelcome in the run-up to Christmas when retailers must fight tooth-and-nail to win consumer spend,” said Evans.
The issue of overstatement, which was raised in a previous annual report, could be a boil that needs to be lanced to restore investor confidence, said Evans. The firm’s stock price dropped 11.5% when the news broke on Monday.