Healthcare Locums relisted after investigation into suspected accounting irregularities; shares down 90%
Shares in AIM-listed Healthcare Locums were re-admitted to trading today after being suspended in January 2011, when “serious accounting regularities” were “brought to the attention to the Board”. The shares resumed trading 90% down on their pre-suspension price – the company having been rescued by a controversial debt-for-equity swap involving major shareholders.
The principal interest of the company’s debt-for-equity swap circular is that it sets out the various accounting irregularities found by the company’s internal investigation – they comprise a text-book example of how to “improve” accounts:
Revenue recognition –
“In reporting results for earlier years the Group recognised revenue of £0.9 million in 2008 in relation to sales in the US, although none of the revenue had yet been invoiced. In 2009 a further £3.1 million of revenue was recognised in advance of invoice date as the Previous Directors assessed that the appropriate milestones had been reached to recognise revenue in accordance with IAS 18 “Revenue”. None of the revenue was invoiced in 2009. The Board has reviewed the Group’s accounting policy for revenue recognition in this area and determined that it is more appropriate to recognise this revenue only when it is invoiced. The impact before tax of this restatement is to reduce net assets at 31 December 2009 by £4.0 million.”
Impairment -
“Software development costs had been capitalised and were still on the balance sheet even though the assets were no longer being used by the business. The Board has made the appropriate impairment. The impact before tax of this restatement is to reduce net assets at 31 December 2009 by £5.4 million.”
Capitalisation of costs -
“In previous years, the Group capitalised costs associated with the development of an international candidate database. The judgement surrounding the appropriateness of that treatment was disclosed as a ‘critical judgement’ in prior Annual Reports. The costs capitalised included the costs of collecting information in connection with identified candidates…the costs of collecting information in connection with identified candidates do not in themselves result in obtaining legal control over the individual candidates and as such the costs are indistinguishable from the costs of developing the business as a whole. Consequently, the Board wrote off such costs as incurred, rather than capitalise them. The impact before tax of this restatement is to reduce net assets at 31 December 2009 by £4.8 million.”
Release of sales credits to income -
“Sales ledger credits arise as a result of unintentional overpayments by customers. The Group previously accounted for such overpayments by reflecting a liability that represented the Directors’ assessment of the likely amount due to be returned to customers based on historical levels of credits actually redeemed over a 12 month period. The remainder of the credits were released to income. Following a review of the sales ledger credits released to income, the Directors believe it would be more appropriate to reinstate these amounts as liabilities of the Group and only to release such credits to income after the Statute of Limitations (six years) renders the amount irredeemable or earlier only if appropriate to derecognise in accordance with IAS 39. The impact before tax of this restatement is to reduce net assets at 31 December 2009 by £3.3 million.”
Invoice discounting -
“During 2010 the Group had an invoice discounting facility with Barclays Bank, under which it could borrow against certain unpaid customer invoices. On a number of occasions the Group used the facility inappropriately by double counting certain invoices and by borrowing against fictitious invoices. The Group discontinued all its invoice discounting facilities in December 2010.”
Operating costs classed as one-off costs –
“Costs had been allocated incorrectly to reorganisation costs in the monthly management accounts during 2010, thereby overstating Adjusted Profit from operations.”
Failure to accrue costs -
“…the Directors have undertaken a review of the level of accruals at 31 December 2008 and 31 December 2009. The Group had accounted for various costs for commissions and bonus expenses for employees and Directors in the year in which they were paid, rather than accruing them based upon the activities and performance of the year for which the incentives arose. The Directors have reviewed this practice and restated the prior year accounts by accruing costs in the year to which they relate. The impact before tax of this restatement is to reduce net assets at 31 December 2009 by£1.8 million.”
With the result that -
“As a result of the matters described above, a number of disciplinary hearings have been held with the outcome that certain Previous Directors and other staff were either dismissed or chose to resign. The Board is currently considering with its legal advisers how best to progress any claims that the Company may be able to bring in connection with the matters described above.”
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