£14m black hole in accounts at Phoenix IT

Phoenix said it had uncovered accounting irregularities at its Servo division in Birstall over the past 18 months.

The discovery sent its shares down 36 per cent, a fall of 75.5p to 210.5p.

Phoenix said: “Certain control processes within the finance function at Servo Limited’s Birstall site in Leeds have been repeatedly and deliberately circum- vented.”

The company said that auditor PwC and legal firm Nabarro LLP had been appointed to carry out independent forensic investigations.

Phoenix declined to say whether the police have been called in.

It also declined to say whether the money was taken for personal gain or to boost the company’s accounts.

Phoenix said the accounting mis-statements were isolated to its Servo business, which it bought in 2006.

Phoenix now expects earnings before interest, taxes, depreciation and amortisation to be in the range of £38m to £44m for the year to March 31.

The market had pencilled in earnings of £48m.

Analyst George O’Connor, at Panmure Gordon, said: “For a company where credibility is already at a low ebb, this news will test investors’ patience.

“The news, which brings fresh downgrades, will act like a deadweight on the share price. The thought that this is likely to make the company attractive from an M&A perspective prompts our continued ‘hold’ recommendation on the stock.”

The accounting irregularities were discovered following organisational changes within the finance function and a number of internal reviews into working capital.

Phoenix said that at this point, no firm conclusions can be drawn as to the timeframe nor the results of the reviews.

The group said it has informed its banks and will keep them abreast of developments.

It said that based on the information to date, it believes that the group is, and will remain, in compliance with the covenants in its banking facilities.

It also believes that its net debt and working capital requirements can continue to be provided by the current facilities.

It said further updates will be provided when appropriate.

Analyst Will Wallis at Numis said: “Phoenix has uncovered substantial accounting irregularities. Uncertainty remains high, but we think it likely that recent underlying profitability has been considerably below stated figures.”

Numis has cut its pre-tax profit forecast by around 25 per cent.

Its profit forecast for the current year has been chopped from £28 to 21m and from £29m to £21m next year.

Analyst Julian Yates at Investec said: “The company has indicated that 2013 full year EBITDA could be in the £38m-£44m range and will depend on the outcome of the investigation, ie did the accounting entries lead to the P&L being overstated or was it more to hide cash moving out of the business?

“The lower end of the range could also allow for some modest impact to new business disruption.

“We place our forecasts at the lower end of the range with all details not yet being fully understood, and will update when more details are given.”

Servo hosts companies’ IT systems.

The division has a number of bases, but its finance department is based in Birstall.

Phoenix IT bought Birstall-based ICM Computer Group in 2007.

ICM and Servo were merged in 2011 to create a single source IT services provider.