Stuart Evans, commercial litigation partner at BLM discusses the forensic probe into Ted Baker’s accounts
Stuart Evans, commercial litigation partner at BLM comments on Ted Bake's overvaluation of stock
"Ted Baker’s overvaluation of stock – by some £20m - £25m – is a result of its balance sheet being significantly overstated. The information contained in its accounts will have been supplied by the company and reviewed by its auditors prior to publication, so many observers have understandably wondered how an accounting error of this magnitude could have occurred.
While an investigation by Freshfields Bruckhaus Deringer and additional independent accountants is underway, we’ll have to wait and see the precise detail of the mistake in this case. However, slip ups on stock valuation can occur – though not often on this scale. Retailers may have raw material or works in progress that aren’t yet finished, or it may have old stock that hasn’t been written down. This can lead to mix-ups in the valuation, where retail price is applied rather than the base cost of the item. In Ted Baker’s case, the suggestion is that the stock simply doesn’t exist. It may well be down to double counting or something less explicable.
It’s another blow to the Ted Baker brand image, especially unwelcome in the run up to Christmas when retailers must fight tooth-and-nail to win consumer spend. Reports are that shares have also tumbled, and the issue of overstatement, which was raised in a previous annual report, could be a boil that needs to be lanced to restore investor confidence.
Ted Baker must be acutely mindful of investors, who may be considering potential claims together with the FCA, which administered an investor compensation scheme for Tesco share and bondholders, after the grocer misled investors about the value of these. If this turns out to be more than an inadvertent error, then the SFO may get involved as well. All of these things will carry heavy professional costs. The company has said in its preliminary analysis that there will be no cash impact as this relates to prior years, so we will have to see if the subsequent investigation bears this out.
An investigation will also seek to get to the bottom of the matter and see if there is anything else in Ted Baker’s financial reporting that is bubbling under the surface. It would be less than ideal for Ted Baker to provide what it hopes to be a definitive report saying that all has been uncovered and fixed, ideally with no impact on the bottom line, only to see another issue rear its head."
If you/your business is/are affected by any of the issues raised in this blog and you wish to have a confidential discussion with Stuart Evans, then please do not hesitate to get in touch with Stuart or indeed other members of BLM's Commercial Advisory team.