Shareholders of embattled legal eagle Slater & Gordon Limited (ASX: SGH) have watched helplessly over the last week as their once high-flying company has crashed from the inside out.
The shares plunged to a seven-month low of $3.50 on Monday, before ending the day 25% lower at $3.78. That represents an agonising 42% plunge since last Tuesday, and a 53% decline since its all-time high of $8.07 in April this year. There are two major issues currently weighing on the market's sentiment.
Quindell Plc
First, it was announced last week that the UK's Financial Conduct Authority would look into the activities of Quindell Plc, relating to comments made by Quindell during 2013 and 2014.
Slater & Gordon acquired the Professional Services Division (PSD) from Quindell for approximately $1.2 billion earlier this year – a deal that had many investors scratching their heads at the time – and it remains unclear just how that investigation could impact Slater & Gordon.
In an update to the market, Slater & Gordon acknowledged the public's concerns in relation to the accounting policies of Quindell prior to the acquisition, while it also said: "As the acquisition of PSD was structured as an acquisition of the PSD entities rather than its parent entities, Slater and Gordon is confident that it has no liability in relation to the ongoing investigations relating to Quindell."
The market wasn't so confident, selling the stock off heavily as a result.
ASIC Investigation
Yesterday, the situation went from bad to worse for Slater & Gordon shareholders after it was revealed that Australia's own financial watchdog, the Australian Securities and Investments Commission (ASIC), would conduct its own investigation into Slater & Gordon's relationship with accounting partner Pitcher Partners.
The company said: "Since Wednesday 24 June Slater and Gordon (SGH) (Company) has engaged proactively with [ASIC] following ASIC's routine review of Pitcher Partners' (PP) audit process of the Company. The Company asked ASIC to raise with it any queries it had as expeditiously as possible. The Company advised ASIC that it would fully cooperate and was eager to resolve all ASIC queries as soon as reasonably possible."
So far, two errors have been found and if analysis undertaken by VGI Partners is anything to go buy, more could still be hiding under the surface.
More to come?
As highlighted by the Fairfax press, VGI Partners believes that the purpose of the 40-odd acquisitions undertaken by Slater & Gordon may have been more about covering up poor organic growth than expanding its global dominance.
As noted by VGI, companies that operate under the Work in Progress (WIP) accounting method, such as Slater & Gordon, can theoretically recognise earnings before the cash is actually received despite the high level of judgement that is required in determining the likelihood of ever receiving that cash. As Fairfax puts it, "when is a dollar a dollar?"
Whether or not there are more accounting errors to be found remains uncertain, but the market's confidence has clearly been shattered with many choosing not to wait around to find out. Of course, the timing of these developments couldn't have been worse given the market's enormous uncertainty regarding the Greece debt 'tragedy', which has dragged the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) deep into the red in recent days.
