SGH - Slater and Gordon

[skc]

As they say, bad news come in 3's, but rarely in the same week.

So ASIC is looking, and we are still waiting on QPP's account. Then SGH really didn't help its own course by disclosing a "consolidation error" on cash flow. It's a 25% dent on confidence when confidence is already low... and on the most sensitive item at present, and on one of the worst days of for the overall market.

A perfect storm (in a pretty large tea cup).

 

[skyQuake]

As they say, bad news come in 3's, but rarely in the same week.

So ASIC is looking, and we are still waiting on QPP's account. Then SGH really didn't help its own course by disclosing a "consolidation error" on cash flow. It's a 25% dent on confidence when confidence is already low... and on the most sensitive item at present, and on one of the worst days of for the overall market.

A perfect storm (in a pretty large tea cup).

Plus everyone is looking for anything with even a hint of European exposure

 

[skc]

Plus everyone is looking for anything with even a hint of European exposure

UK earnings a bit better than Euro though.

I am holding shorts on MQA but that hasn't underperform by anything meaningfully.

 

[ROE]

Over the years I learned there are always more than one cockroaches in the kitchen.

 

[McLovin]

As they say, bad news come in 3's, but rarely in the same week.

So ASIC is looking, and we are still waiting on QPP's account. Then SGH really didn't help its own course by disclosing a "consolidation error" on cash flow. It's a 25% dent on confidence when confidence is already low... and on the most sensitive item at present, and on one of the worst days of for the overall market.

A perfect storm (in a pretty large tea cup).

The one that concerns me is the accounting irregularity. There might be nothing to it, but to be prodded so gently (ASIC only started last Wednesday) and already be coming up with two "mistakes" doesn't really bode well, imo.

Horrific day to announce all this too. Where are the PR people when you need them!

 

[skc]

The one that concerns me is the accounting irregularity. There might be nothing to it, but to be prodded so gently (ASIC only started last Wednesday) and already be coming up with two "mistakes" doesn't really bode well, imo.

Horrific day to announce all this too. Where are the PR people when you need them!

I love how SGH is still saying "It doesn't matter the number of QPP, because we did our own DD using our own accounting policies". It's pretty clear that the market has moved on to question SGH's own accounting policies.

If we look at what we know is real... that's $54m in operating cashflow in FY14, QPP most likely has $0 cash flow (if not negative), and SGH has $545m in debt (including new debt) and only $16m in cash (as of 31 Dec). They would have spent some chunky cash on acquisiton - accountants, lawyers and bankers etc (so probably most of the op cashflow in H1/15). We already hear that QPP isn't bring in cash until H2... Does SGH have a cash squeeze? And how do they cope if they do? The equity market is closed to them for now you'd think.

And why suddenly the ASIC probe? Did the UK regulator ask ASIC some questions? Notably, SGH is the only other major listed law firm in the world (SHJ and IMF locally are being punished as well). It wouldn't surprise me if the UK FCA started all this.

Moral of the less... If you buy $hit, you get smelly. Can't avoid it.

Over the years I learned there are always more than one cockroaches in the kitchen.

+1. I need to have my pest control guy came in the 2nd time last week...

 

[McLovin]

I love how SGH is still saying "It doesn't matter the number of QPP, because we did our own DD using our own accounting policies". It's pretty clear that the market has moved on to question SGH's own accounting policies.

VGI's April presentation included two slides that focused on "cash receipts and cash payments being overstated" and claimed there was an unexplained variance of $88 million to $98 million evident on the receipts side in the past two financial years, and a $78 million and $82 million variance evident on the payments side.

"If 'receipts from customers' is inflated, we believe that cash 'payments to suppliers and employees' would also need to be inflated for the cash flow statement to reconcile with the other financial statements," the presentation said.

http://www.afr.com/business/legal/h...es-in-slater--gordons-kitchen-20150629-gi0o47

Roll up business and now some dodgy accounting. I wouldn't touch this with a barge pole. Let's see how this plays out.

 

[lemongrass1]

Damn, I wish I'd waited until Monday to buy.

The one that concerns me is the accounting irregularity. There might be nothing to it, but to be prodded so gently (ASIC only started last Wednesday) and already be coming up with two "mistakes" doesn't really bode well, imo.

Horrific day to announce all this too. Where are the PR people when you need them!

Yeah, it's no good. To be fair the error had no net effect.

I still think a 43% drop over an inconsequential error and a routine ASIC investigation is excessive.

 

[lemongrass1]

http://www.afr.com/business/legal/h...es-in-slater--gordons-kitchen-20150629-gi0o47

Roll up business and now some dodgy accounting. I wouldn't touch this with a barge pole. Let's see how this plays out.

There are no allegations of dodgy accounting by SGH?

 

[Rainman]

"It's highly unusual to see an accidental mis-statement in the cash receipts from customers that coincidentally is the exact same number as the mis-statement in the cash payments," Douglas Tynan, a partner at VGI, told the Financial Review.

That is the heart of the issue: how do you misstate cash receipts? Either you received a certain sum of cash or you didn't. The cashflow statements are the place where you're supposed to go when you want to test the quality of the income statements.

 

[skc]

Yeah, it's no good. To be fair the error had no net effect.

I still think a 43% drop over an inconsequential error and a routine ASIC investigation is excessive.

Get on with the program!

The ASIC investigation is no longer routine. That was Thursday in SGH's words. Today it's a proper ASIC probe.

This article suggests that the sloppy accounting may be deliberate. It does explain why it was discovered ever so quickly.

But there could very well be a link between cash flow discrepancies and WIP accounting. A higher cash receipts balance would have the effect of overstating the extent to which Slater is converting both WIP and receivables into dollars. VGI has suggested as much. To neutralise this impact on the net cash position, cash payments would need to be inflated by the same amount, the presentation suggested.

This would add weight to a theory that the errors revealed by the company on Monday, may reflect more than bad arithmetic and sloppy accounting. That will be one of several questions that will be posed to the company as it prepares to front investors, defend its accounting policies under queries from regulators and a faces up to a confrontation with hedge funds rarely seen in Australian finance.

http://www.afr.com/markets/equity-markets/between-the-lines-of-slater--gordons-books-20150629-gi0slg

 

[Rainman]

... This article suggests that the sloppy accounting may be deliberate...

Unless one is innumerate, I don't see how a misstatement of cash receipts can be anything other than deliberate.

Why are errors in financial reports always to the favour of the reporting entity's financial performance and never to its disfavour?

 

[skc]

Unless one is innumerate, I don't see how a misstatement of cash receipts can be anything other than deliberate.

Why are errors in financial reports always to the favour of the reporting entity's financial performance and never to its disfavour?

Well... I don't consider myself innumerate, but I have incorrectly reported receipts in my BAS by including the GST which telling them it's net of GST.

Thankfully I am not a billion dollar law firm and my accountant corrected it for me before my market capitalisation crashed by 40%.

But for a billion dollar law firm? I guess you could potentially blame that work experience student who did the spreadsheet on his first day...

 

[Rainman]

I don't hold SGH shares, so I have never read its financial reports and do not know how it accounts for revenue.

But if I was asked to take guess, I would say that, as a plaintiff law firm, it would recognise revenue whenever it has settled a legal claim and has signed the relevant legal instrument that gives effect to the settlement. The legal instrument will be either a deed of release and/or a consent judgment which is then filed in court and disposes of the legal proceedings. Both instruments would provide for a date by which payment of the settlement sum and SGH's costs are required to be paid. The counterparty, i.e. the defendant to the claim, would normally ultimately be an insurer or a large corporation, so the prospect of SGH not ultimately getting its legal costs is negligible. However, it would be a fairly common occurrence for the payment date to come and go and for SGH (and its client) to be still waiting for the cash to be deposited into their accounts.

The other way that SGH would recognise revenue is whenever court proceedings have proceeded to judgment and judgment has been handed down in favour of SGH's client along with costs.

In both cases, the costs that SGH bills its client for and the costs that it ultimately receives from the insurer/defendant (which become SGH's cash receipts) will almost never be the same. This is because, once a claim has been settled or has gone to judgment and SGH's client has been awarded damages plus legal costs, the costs that SGH has actually billed will then be the subject of further argy-bargy between SGH and the insurer/defendant. If they can't agree on the amount of costs which are to be recovered, the dispute will proceed to costs assessment. Costs assessors generally strip out the fat from lawyers' billed fees, so that most plaintiff lawyers try to avoid the process if they can.

The net result of all this is that the gap between SGH's billed costs and the costs that it ultimately receives as cash receipts can suffer a considerable time lag and can be quite uncertain during that time. Further, because SGH operates on a no-win/no-fee basis, its clients are not required to make up the balance between SGH's billed costs and the costs that it ultimately receives as revenue.

I say all this because I can well see how the revenue recognition of any law practice is open to abuse unless the dominant mindset of the firm is one of conservatism in recognising revenue. If SGH recognised revenue at the settlement or judgment stage, that could potentially result in a large discrepancy when SGH's legal costs were ultimately paid.

 

[ROE]

Get on with the program!

The ASIC investigation is no longer routine. That was Thursday in SGH's words. Today it's a proper ASIC probe.

This article suggests that the sloppy accounting may be deliberate. It does explain why it was discovered ever so quickly.



http://www.afr.com/markets/equity-markets/between-the-lines-of-slater--gordons-books-20150629-gi0slg

Nasty, the selling was relentless this is more than just market panic, someone knows more than the average Joe about their books.

 

[lemongrass1]

Get on with the program!

The ASIC investigation is no longer routine. That was Thursday in SGH's words. Today it's a proper ASIC probe.

I don't know if you're aware of this but ASIC investigates A LOT of things, that does not mean there is any wrongoing by the company being investigated. And technically I think it's Pitcher Partners that is being investigated and ASIC is now just making direct inquiries with SGH about its relationship with PP.

Anyway, only time will tell whether there's something to find. Looking forward to seeing how this all plays out.

 

[ROE]

I don't know if you're aware of this but ASIC investigates A LOT of things, that does not mean there is any wrongoing by the company being investigated. And technically I think it's Pitcher Partners that is being investigated and ASIC is now just making direct inquiries with SGH about its relationship with PP.

Anyway, only time will tell whether there's something to find. Looking forward to seeing how this all plays out.

huh? don't you read the company admission? they inaccurately reporting revenue from UK for three years
the thing about inflated figures if you been in the market long enough, it need to be inflated else where in the book to balance the figure, the more you look the more you find.

Inaccurate revenue reporting isn't wrong doing? what universe are you live in? it certain isn't in the stock market universe

at this state we don't know what is going on with SGH, but if history is a guide there will be more revelation soon.

 

[McLovin]

I don't know if you're aware of this but ASIC investigates A LOT of things, that does not mean there is any wrongoing by the company being investigated. And technically I think it's Pitcher Partners that is being investigated and ASIC is now just making direct inquiries with SGH about its relationship with PP.

Anyway, only time will tell whether there's something to find. Looking forward to seeing how this all plays out.

Hmmm...hedge fund questions, among other matters, the cash receipts/cash payments in the cash flow statement back in April. ASIC launches investigation in late June and four days later SGH "discovers" it overstated casg receipts and payments. Maybe it was a mistake, but did they not know about this back in April? It just seems a little too convenient to find this error so quickly when pressed. And that's assuming it was a genuine mistake.

Like skc said, it's not very reassuring when these guys take over a huge peer with significant accounting issues but say "don't worry, we used our own accounting methodology".

 

[notting]

Inaccurate revenue reporting isn't wrong doing? what universe are you live in? it certain isn't in the stock market universe

Yeah, but perhaps they were just letting common sense prevail even though it was, technically false accounting, as it came to - net net nothing. Who cares? - a neurotic market.

 

[skc]

Yeah, but perhaps they were just letting common sense prevail even though it was, technically false accounting, as it came to - net net nothing. Who cares? - a neurotic market.

It may be net-net nothing... but it still matters.

If I was analysing the company, I would care about the WIP to cash receipt conversion ratio. And this "error' boost that. And when I look at the high cash outflow in payments, I'd think may be there's some fact in the expense side that could be trimmed.

So even though it is net-net it does have an actual impact on company's valuation.

But that changes valuation on the margin. It's now all about if everything else in the accounts can be trusted, and what QPP comes up with. If QPP's review by a Big4 comes up with something that is very different to what SGH uses (not what SGH used on the DD, but what SGH uses on its own book), then there would be some pretty big implications here.