Morrison responds to Michael West, page-6

Thanks for your reply. In summary, yes, WIP is growing, but not by that much when you consider the facts. The tables in the report are misleading, or not correct, as they don't understand how disbursements work (plus other tables are using data without considering the relationship to each other, and coming to a wrong conclusion). The number of employees at SHJ is growing and the practice is growing along with it. So you would expect WIP to grow? The WIP per employee actually stable (or even reducing) over the past few years. Revenue can be billed and not collected for several years, so when a company is growing each year, you would expect there to be a a certain amount of disconnect between reported revenue and cash received.

In more detail.....

"To distill Wests article, I would summarise it as follows: SHOW ME THE MONEY & over a lengthy period of time, SHJ cannot. There is a massive disparity between reported profits and Operational Cash Flow. Why? Because the bloated asset called Work in Progress continues to grow year on year. Indeed, SHJ have been caught short on the WIP/client Costs in the past (2016) as has other legal practices."
The author (or Simon West) uses words like "questionable", "dubious" and phrases like "it is apparent", without actually showing clearly why WIP is an issue or coming up with real evidence that there is an issue. It is also worth noting that Simon Morrison returned as Managing Director and CEO at the end of 2016. There is not a "massive disparity" that you mention, and spending 10 mintues looking at their accounts would see the authors flaws. This is where the author just gets it wrong. They present Table 1, which has various profits, then net cash from operations, then the last column is accurals. In a regular business there may be some value ot this table. With Shine, this table has limited use at best and outright misleading at worst. The explanation given in this section is very difficult to understand as they make a few different statements, but don't actually tell you anything. I also don't think that the author understands how deferred income tax and tax losses that Shine has in Income Tax Losses (see Section 5 in the SHJ FY22 Annual Report). They keep using the phrase "it is apparent", but neglect to say why this is even relevant or a bad thing. Comparing profit to operating cash flow is just not really showing anything useful.

" I know from my early days as an accountant in private practice that the WIP ledger can contain some awful crap, which is ultimately written off. "
A legal practice is a bit different to an accounting practice in the way the business works and how the work is billed. Plus that is the point of the WIP - to go through it and write-off "awful crap" at the end of each period. As someone with accounting experience, you should be able to go through the Simon West article and see the flaws in it. Or alternatively, clearly explain to me why you agree with it.

Table 1. Talks about taxable profit and accounting profits, while never really talking about taxable losses carried forward or how the deferred tax effects this. Comes up with an "Accruals" column, that has no real meaning and if anyone can explain its relevance, I am happy to listen.
Table 2. Quality of Sales. Simple accounting rules regarding revenue recognition and cash flow explain why this table is not useful in analysis.
Table 3. WIP. Includes disbursements without acknowledging that disbursements are not part of Customer Receipts. It also assumes revenue one year is fully collected the next year, which is clearly not the case.
Table 4. WIP and Turnover. The practice is growing and the areas of the practice are changing. From 2017 to 2022 the ratio, according to the table went from .75 to .67, which I don't find to be particularly interesting. Also, they say the WIP has increased by neglect to mention the size of the the practice during the same period.
Table 5. Bad and Doubtful Debts. I couldn't find where they got these figures from. But they are almost not even material with their 2022 figure being 2.5%. They fail to say why this deserves its own table and commentary.

"The challenge is simply this: Will the WIP Balance as stated in the accounts be recovered over time? Check the annual balances of WIP and you will find it is an ever increasing vortex.
when will this paper asset called WIP reverse by it converting to the one solid asset we can rely upon - CASH!"
WIP increasing is not a bad thing. There won't be one magic day when the WIP goes down significantly. The WIP is, by definition, amounts that will be recovered over time. But that time, according to Simon Morrison, is up to 6 years in some cases. The report gave no solid evidence to doubt there is any major issue. WIP for 2022 was 1.56x FY22 Revenue. This has trended down slightly since FY20.

"so issues 2 through 8 as listed by you are still in play. Show Me The Cash will resolve them"
Just to be clear to those reading, I only listed the "red flags" that Simon West listed.
If you are expecting cash receipts to resolve this, then you should bother waiting. This is not something that will ever be cleared and there will be no "show me the cash" moment. So given this fact, your problems with WIP and SHJ will not be resolved.

We all agree that this is the major area of risk, but just because it is an area of risk that doesn't mean there is something wrong in what SHJ is doing in its reporting. I am happy to have someone expand on the "red flags" raised by Simon West and explain why we should be more concerned. All of the above doesn't mean that things cannot go wrong, but just because WIP is increasing, doesn't mean there is a problem.