Storytelling with Audit Analytics Europe

Posted by Jessica McKeon - Feb 23, 2021

This analysis was originally posted by Audit Analytics.

As the Audit Analytics Europe databases continue to grow in breadth and depth, we watch some interesting stories unfold. For example, AIM-listed London-based advertising agency M&C Saatchi [LON:SAA] has faced a few challenges in the past year and a half.  

AIM-listed, London-based Europe company, M&C Saatchi logo

From 1 October 2020 to 7 December 2020, the Company’s trading was suspended due to late publication of the December 2019 Annual Report. The delay was the result of an extremely costly and complex audit to address a significant number of issues in historical financial statements. Chief Executive Officer, David Kershaw, wrote that “2019 was the unhappiest year in the Company’s 25 year history.”   

In 2017, the group posted a headline profit of £27.7 million. In 2018, they reported a 4.3% increase to £32.3 million. By the end of 2019, this important benchmark was down to just £18 million after being forced to make a massive £14 million adjustment to the historical financial statements. 

Let’s follow M&C Saatchi’s story through the data available in the Audit Analytics Europe database. 

2018 Key Audit Matter 

M&C Saatchi’s 2018 opinion included a key audit matter related to risk of material misstatement of revenue recognition. KPMG – M&C Saatchi’s auditor at the time – concluded their assessment of the KAM by saying that the Group’s judgment was “slightly optimistic…and significant errors were corrected…approaching materiality, for which we have reported an audit difference.” Revenue recognition KAMs are common, but the need to correct significant errors and existence of weaknesses in the design of revenue recognition controls are major red flags.

2019 Restatement  

In a press release dated 12 August 2019, the company announced that it had taken an exceptional charge of £6.4 to the 2019 results as a result of an internal review that addressed KPMG’s concerns “mostly relating to the timing of revenue recognition and incorrect accounting of some assets and liabilities.” In the end, the final adjustment as reported in the 2019 Annual Report reduced net income by £28.6 million. 

2019 Auditor Change 

As noted in our Europe Auditor Changes database, KPMG announced their resignation on 20 September 2019, just one month after the initial announcement of the adjustments, stating that “we were unable to agree a satisfactory commercial outcome for the 2018 audit to compensate KPMG for the additional work….in relation to revenue recognition and employee incentive schemes which we referenced in our independent auditor’s report.” 

At this point, the Company announced a tender for a new auditor and on 24 September, hired PricewaterhouseCoopers to succeed KPMG and to conduct a forensic audit into the 2018 and prior financial statements.  

2019 Qualified/ Disclaimer of Opinion and Going Concern Modification

PwC issued a disclaimer of opinion, meaning they could not obtain sufficient audit evidence to opine on “the group’s loss and cash flows.” Because of the lack of information, they went on to qualify their opinion. They stated that because they could not verify the 2018 year-end balances, they could not vouch for the comparability of the 2019 financial statements. In effect, the financial statements could not be relied upon. PwC also added that a material uncertainty related to going concern exists. The Big Four firm based the going concern on uncertainty as to whether the Group and Company could meet their financial covenants as well as the external market conditions that could impact demand.

2019 Audit Fees

While KPMG resigned because they could not agree on satisfactory compensation for the additional work, PwC was able to pocket £3.9 million in audit and other services for their work on the 2019 audit. Audit services comprised £3.2 million and other services included £0.7 million dedicated to the forensic audit. In 2018, for both audit and other services, KPMG earned just £0.8 million in total. 

2021 A New Chapter 

M&C Saatchi is optimistic that their story will have a happy ending. The 2019 Finance Director’s Review by newly appointed Director Mickey Kalifa, states, 

“Given the scale of the accounting issues identified last year, the Company’s new auditors, PricewaterhouseCoopers LLP, have conducted an extensive and detailed audit of 2019. Following the completion of the audit of 2019 and having now identified the material historical accounting errors, the Company is finally able to draw a line underneath these events and move forward with confidence.”

Following the publication of the 2019 report, founders Kershaw, CEO, and Jeremy Sinclair, Chairman, stepped down to allow the company to begin a new chapter. A new executive team, including CEO Moray MacLennan and Chairman Gareth Davis will lead the company into 2021. 

This analysis uses data from the Europe databases, powered by Audit Analytics.

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