The Webjet Limited (ASX: WEB) share price has fallen 14% to $10.76 in the past 5 days, as the market comes to terms with the company's disagreement with its auditor.
Despite previously signing off on the way that Webjet accounted for its Thomas Cook agreement, auditor BDO has subsequently decided that the agreement needs to be accounted for in a different way.
Without getting into the technical details, if Webjet chose to change its accounting to the new way, Webjet's stated earnings before interest, tax, depreciation and amortisation (EBITDA) would be A$11.5 million lower. Webjet would also have to de-recognise an intangible asset of $32.7 million on its balance sheet.
However, Webjet has received advice from two other 'Big 4' accounting firms which support the way that the company has accounted for the Thomas Cook agreement. Despite presenting at least one of these opinions to BDO, BDO continues to disagree.
As a result, Webjet expects that its audit will be 'qualified', that is, that BDO will register its thoughts on the matter as part of its audit report. Webjet reports that there were no other audit matters that came to its attention.
A storm in a teacup
While $11.5 million in EBITDA sounds like a lot, it is important to note that the accounting issues "relate to technical matters only and do not affect the quantum or timing of the management fee payments to be made by Thomas Cook to Webjet under the Contract."
That is, there is no change to the actual operations of Webjet's businesses, which remain profitable and are performing well.
Webjet has elected to continue accounting for the agreement in the same way, which avoids a confusing restatement of the accounts. In general, I thought that the quality of Webjet's disclosure here was very high, including explaining the impact of the changes if they were made. Webjet reports on 31 August and we'll have full coverage of its results at that time.
Still, based on the announcement I'd be inclined to view today's falling share price as a possible opportunity, not a warning sign.
