Slater & Gordon rejects claims it manipulated accounts
Slater & Gordon managing director Andrew Grech. Picture: Britta Campion
Source: News Corp Australia
Slater & Gordon managing director Andrew Grech has hit back at critics, accusing them of running a campaign “by a series of whispers” and calling claims the company had manipulated its accounts “absurd”.
Mr Grech, in his first public comments aimed at hedge funds that have engaged in a short-selling campaign, admitted the company had “kicked a few own goals” with a number of errors in its accounts earlier this year, but said the fundamentals of the business were intact.
Slater & Gordon’s management will today face investors at the company’s annual general meeting for the first time since revelations that the Australian Securities & Investments Commission was probing the company’s accounts sent the share price crashing.
The stock was trading yesterday at $3.05, down 12c, less than half of its March peak of $7.85.
The law firm has been the target of short sellers since its $1.23 billion acquisition of British-based Quindell’s professional services division, since renamed Slater Gordon Solutions.
Several hedge funds have taken positions against the company, claiming organic growth in revenue was lacking, work-in-progress was not being converted into cashflow and acquisition accounting was aggressive.
Mr Grech said allegations the company was overvaluing its work-in-progress accounts, likely the focus of ASIC’s inquiries, was “demonstrably not true”.
“Their other thesis was that we weren’t generating cashflow from the business, and that’s demonstrably not true,” he said.
“Cashflow has gone up and down, and acquisition activity does interrupt it, but it’s actually demonstrably not true to say that cashflow wasn’t being delivered from work in progress.
“This idea that the work in progress is some sort of ‘trust me’ accounting is just absurd, it just doesn’t make any sense, and I don’t know a single investor that I’ve spoken to who, when you talk them through, having an issue with the work-in-progress valuation at all.”
Mr Grech said allegations of accounting manipulations were “very serious”.
“I wish they’d make it publicly so it’s actionable, might buy myself a new home out of it,” he said. “But they don’t, of course. They do it by a series of whispers, and when you invite them, as we have VGI (hedge fund), to come and talk to us, they run a mile because they actually don’t want to have the data that proves them wrong for obvious reasons, so they can go along creating these intrigues where there are much simpler explanations.
“In a business you do get lumpiness, there’s no hiding from that. But that’s not because people are trying to manipulate it. That would involve us having been in a 15-year conspiracy with Pitcher Partners and now Ernst & Young ... maybe I’m just a smart, devious guy, but I don’t fancy myself as much of a mastermind.”
When contacted by
The Australian, VGI Partners declined to comment. But a spokesman said: “We’re confident of the analysis the VGI investment team has done to date and we will review all new information as it comes to hand. As Warren Buffett famously says, there is always more than one cockroach in the kitchen.”
Slater & Gordon yesterday announced a new chief financial officer, appointing Bryce Houghton, formerly of Navitas, following the departure of Wayne Brown.
Accounting issues first surfaced during the Quindell deal, with that company — which is planning to rebrand as Watchstone — already facing a number of accountancy issues, under investigation by Britain’s Serious Fraud Office.
Quindell stands accused of aggressive revenue recognition policies, as well as applying incorrect accounting treatments to related-party acquisitions, including Himex and Ingenie, which were purchased from associates of the company’s founder, Rob Terry.
Mr Grech said the first he had read in detail about Quindell was a report released by Gotham City Research, a New York hedge fund that made serious allegations about the company’s accounting practices.
“I agreed with it, that’s why I didn’t touch it, because I thought their work-in-progress recognition was just crazy land and so we stayed away from it for that reason,” Mr Grech said.
“When it became clear there was an opportunity just to take out the professional services and the legal services part of it, if you’re only buying that part of the business you don’t buy the listed entity pregnant with those accounting problems, you get the opportunity to apply your own accounting standards to it, so we saw that as quite an opportunity.”
Slater & Gordon, at the time of the deal, said it had conducted extensive due-diligence and investigated Quindell’s case book, assisted by Ernst & Young, pushing down the acquisition price from earlier reported figures of nearly £1bn ($2.13bn).
Mr Grech said concerns expressed to him by investors were not about the company’s business model, but instead about whether the Quindell acquisition was too big and too soon.
“Our investors I think are very comfortable with the business model because it’s proven that it works. I think what they are concerned about is whether we have bitten off more than we can chew and whether we can deliver the synergy benefits of scale,” he said.
“What people are waiting for is to see whether we can prove that we’re not just an acquisition business, that we’re also a business that can grow organically and deliver earnings growth.
“We’ve done that before. But it’s masked quite a bit by the acquisition, and it’s understandable that people would be sceptical. So we have to prove that, and we will.”
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