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EY praised for calling out De La Rue’s troubles | accountingweb

EY praised for calling out De La Rue’s troubles


Currency maker De La Rue has taken issue with EY’s assertion its repeated profit warnings are a sign of trouble, prompting business experts to question what is gained from criticising a sceptical auditor.

30th Nov 2022
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Banknote printer De La Rue has warned on profits for the third time in 10 months while hitting out at its auditor EY for flagging “material uncertainty” about the company in its accounts.

Shares in the 201-year old currency maker dropped 23% after it said adjusted operating profits for the full year are likely to be between £30m and £33m, down from £36m in the year to 26 March 2022.

De La Rue has swung into a loss on a statutory basis, as the termination of a contract with a paper business resulted in one-off charges of almost £20m, putting the company into the red.

The auditors fight back

The ongoing woes prompted auditor EY to warn of a “severe but plausible downside scenario” in which De La Rue breached its debt covenant. “Therefore, there is a material uncertainty that may cast significant doubt on the group’s ability to continue as a going concern,” EY said.

Chief executive Clive Vacher told the Financial Times that the board “strongly disagreed” and that the auditor’s analysis was “neither plausible nor realistic”.

Vacher argued that its banks had recently signed an extension of this debt with the covenants unchanged. “We are therefore surprised that our auditors, Ernst & Young, have chosen to flag potential concern with our interest covenant next financial year.” 

In a statement, EY said: “We do not comment on the companies we audit. Our priority continues to be the delivery of high-quality audits.”

Struggling business

De La Rue appointed EY its auditor in June 2017 as it fought to turn around a struggling money-printing and authentication business that had dropped out of the FTSE 100.

EY, like its rivals at the top of the audit market, has been criticised heavily to the point of government intervention in recent years over weaknesses in financial reporting that led to corporate collapses. Critics have said the firms are too close to the businesses they audit, as this relationship often leads to more lucrative consulting work for other parts of their own operation.

As a result, the Big Four have been cutting back on work involving risky clients and refusing to take certain jobs. Regulators have also told the firms to take a more aggressive stance and show greater scepticism when reviewing the books of potentially failing businesses.

Many commentators have said more businesses should listen to their auditors, particularly in the current economic climate and particularly when their financials look as delicate as De La Rue’s. Alistair Osborne of The Times said EY had a right to be cautious about the banknote maker given the multiple profit warnings and downward spiral of operating profits.

“Plenty of companies get into fights with activist investors, but how many throw in a punch-up with the auditors?” Osborne said, adding that De La Rue had nothing to gain from its current combative stance.

“Nice to see an audit firm sticking to its guns and being prepared to go public with an opinion that may well get them fired,” said Mike Bath, partner at James Cowper Kreston.

Accountancy expert Nigel Reynolds, of Reynolds & Co said it was “good to see the auditors finally doing their job and not caving to pressure”.

“The pandemic has resulted in more and more businesses not accepting cash. This will result in less money being printed so De La Rue’s business will have to change to survive,” he added.

Calls for resignation

The group’s leadership has also picked a fight with its second-largest shareholder, the activist fund Crystal Amber, which issued a strongly worded statement demanding De La Rue chair Kevin Loosemore “fall on his sword immediately”.

De La Rue’s shares have tumbled more than 50% this year and 60% since Loosemore took over as chairman in October 2019.

In an open letter to De La Rue, Crystal Amber said the group was “cannibalising the traditional banknote business”, because polymer products last far longer than paper notes.

De La Rue’s board expressed its “disappointment” in the remarks given the “overwhelming support” received from shareholders for his re-election this summer.

Management believes that a turnaround is imminent, and that the next financial year will be a “big milestone” for De La Rue. Vacher stressed the group’s commitment to free cashflow in 2024, and forecast better earnings before interest, taxes, depreciation, and amortization (EBITDA).



Replies (2)

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By Hugo Fair
30th Nov 2022 15:44

"In a statement, EY said: “We do not comment on the companies we audit. Our priority continues to be the delivery of high-quality audits.”" ... well there's smug and there's nauseatingly smug.

Nothing wrong with their angle on De La Rue (as reported here), but they need a new PR guru.

Thanks (1)
By flightdeck
01st Dec 2022 11:53

Have I got this right?

"We do not comment on the companies we audit" while at the same time warning of a “severe but plausible downside scenario".

So ... you will comment about the company's state but will not comment upon the comment?

Thanks (1)