Accounting review update, Trading update and Restructuring
M&C Saatchi today announces that, following the findings of an independent review by PwC, the Company will make adjustments of £11.6 million to its results, to be apportioned between its 2018 and 2019 financial results. The Company also provides an update on the actions that have been taken to strengthen its financial systems and controls.
Separately, M&C Saatchi announces an update on its current trading and expectations for the full year 2019. Underlying profit before tax, before exceptional costs, is expected to be significantly below the levels expected at the time of the Company's interim results due to weaker than expected trading in the final quarter of the year and higher than expected central costs.
In addition, the Company is restructuring its UK office to improve performance and position the division for long-term growth.
Accounting review update
As announced on 12 August 2019 the Group initiated an internal accounting review of several of the Company's UK subsidiaries. As announced in the interim results for the six months ending 30 June 2019, released on 24 September 2019, the Company engaged PwC's Forensic Services group to perform an independent review of the issues identified by the internal review and referred to in the 12 August 2019 announcement.
Following the independent review, the Company has revised upwards the total value of the previously disclosed adjustments by £1.15m compared to the levels outlined in the Company's interim results. In addition to this, PwC has identified other areas which were more judgemental in nature and went beyond those items announced on 12 August 2019. Subsequent work has been undertaken in these areas by the Company to form a view, and the Company now considers that further adjustments related to these areas should be made. These additional items total £2.65m. The inclusion of these items brings the total proposed adjustment to £11.60m. This is summarised in the table below.
|
Adjustment proposed in 24th September 2019 announcement (£) |
Movement in adjustment post PwC review (£) |
Updated adjustment by Company on 3rd December 2019 (£) |
Specific items |
6,400,000 |
2,469,487 |
8,869,487 |
Fixed Assets |
1,400,000 |
1,331,394 |
2,731,394 |
Total before tax |
7,800,000 |
3,800,881 |
11,600,881 |
Of the total proposed adjustments, £9.55m is considered to relate to 2018 and will be treated as a prior period adjustment, and £2.05m to 2019 and will be treated as an exceptional item (relating to the UK office fixed assets). The proposed adjustments are unaudited, but have been discussed with PwC auditors in advance of the 2019 audit. Final confirmation of the quantum and the apportionment between the years 2018 and 2019 is subject to completion of the 2019 audit, expected in March 2020.
Separately and in relation to 2018, PwC has identified that the 2018 half year reported profit was adjusted by approximately £6.4m. Such adjustments may have occurred in half year reports since 2014. However, the Company notes that in each of those years the full year audits conducted by the previous auditor, had clean full year audit opinions.
The proposed adjustments are stated before deduction of corporation tax. Depending on the extent to which corporation tax is applied to the Fixed Assets adjustment, the net after tax charge from the adjustments is likely to be reduced by £1.7m - £2.2m. The Company estimates the accounting and legal fees associated with this review will be approximately £1m, this amount to be treated as an additional exceptional charge in the 2019 results.
Led by the new Group Finance Director and overseen by the Group's audit committee, the Company is taking action to prevent the incidents that resulted in the above accounting misstatements from re-occurring. The measures include:
1. Reorganising the Group finance function incorporating Group Financial Control, Financial Analysis, Treasury, Company Secretarial and Legal, and Internal Audit;
2. Creating new standardised Company accounting policies and procedures to be applied consistently across all companies in the group;
3. Introducing tighter control and greater focus on cash and cash management; and
4. Implementation of an Oracle cloud-based accounting and forecasting system to be deployed across the worldwide group, replacing the many different accounting systems currently operating across the world. The platform is now fully operational in the UK and is expected to be live in all major markets by Q1 2021.
The Group's audit committee has been appointed to oversee the implementation of the work that will be undertaken to strengthen the Group's financial controls and the associated recommendations made by PwC.
2019 Trading Update
As announced in the Company's interim results, a very significant proportion of the Company's profit arises in the final quarter of the year. However, the Company's underlying profit before tax, before taking into consideration exceptional costs, (including restatements arising from the PwC review noted above), is now expected to be significantly lower than expected at the time of the interim results announcement. Furthermore, the Company has incurred significant additional central costs in its UK business.
As a result, the Board expects underlying profit before tax for the full year 2019 to be between 22% - 27% below 2018 on a like for like basis, excluding the impact of Walker Media profits in 2018, with the broad range taking into account the fact that December is a key trading month for the Company. As stated in its 2019 interim results, 2019 Full Year earnings and EPS are projected to show a relatively greater decline than profit before tax as a result of the changing composition of profits, with a greater share of the Company's profits currently being made by those companies with a higher proportion of non-controlling interests and operating in higher tax rate jurisdictions
The Company expects to have approximately £5m net cash at 31 December 2019.
Restructuring
The Company also announces that it is restructuring its UK office. Management estimates that the restructuring will result in an exceptional charge of £2.5m for the financial year ending 31 December 2019, but is expected to generate annual savings of approximately £6m in 2020 and onwards.
Appointment of auditors
The Company also announces the appointment of PwC as auditors to the Company.
2020 Outlook
The Company expects modest growth in adjusted Profit before Tax in full year 2020.
David Kershaw CEO commented:
"This restatement of our numbers and the reduction in forecasts make for very difficult reading - both for us as a management team and for all of our stakeholders. The only positives that we can offer are that a robust review has been undertaken and we have, under our new Group Finance Director, started implementing processes and procedures to prevent such issues arising again.
"The trading performance in the second half of this year is disappointing. However our operating businesses remain strong, creative and competitive and we expect that, when combined with the impact of our restructuring coming through, we will have a stronger trading performance in 2020."
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For further information please call:
M&C Saatchi +44 (0)20-7543-4500
David Kershaw, Mickey Kalifa
Tulchan Communications +44 (0)20-7353-4200
Tom Murray
Numis Securities +44 (0)20-7260-1000
Nick Westlake, Hugo Rubinstein, NOMAD
Charles Farquhar, Corporate Broking
