Quindell (LSE: QPP) announced this morning that an independent review into the firm’s accounting policies by auditors PwC was taking longer than expected, and should now be completed “in the next few weeks”.
Although the firm did provide some new information, it was hard to draw any meaningful conclusions — except that the firm appears keen to delay any bad news as long as possible.
Markets appeared to agree with my view, as Quindell shares moved lower when trading started this morning.
It’s too complicated
Quindell says that the independent review is taking longer than originally expected because of the high level of corporate activity in the Group.
Translated, I’d say this means that PwC is finding it very difficult to untangle the complex web of share-only acquisitions which lay behind much of Quindell’s explosive growth.
Were they good value and correctly accounted for? We don’t yet know, but clearly the answer isn’t straightforward.
Revenue under consideration
The big question for Quindell shareholders is whether the firm’s revenue recognition accounting policy is valid, or not. A large proportion of the firm’s reported revenues are accrued — that is to say they are booked as revenue before they are actually invoiced and paid to Quindell.
Although this is common practice for legal services firms, Quindell has been accused of having an overly aggressive approach to revenue recognition. The risk, for investors, is that PwC will recommend writing off some previously recognised revenue and profits: this is one reason why Quindell trades on a forecast P/E of 1.5.
Today, the firm said that it had received advice from PwC relating to revenue recognition, which was being “further considered”, and that “no conclusions have been reached”.
To me, it sounds like they’re simply delaying the inevitable for as long as possible.
Slimming down
Quindell’s management are going to make an effort to streamline the business. The firm said this morning that going forward, the firm will be structured into two divisions, Professional Services and Technology, and that other non-core businesses and assets would be disposed of where possible.
Quindell also reiterated that discussions with Australian firm Slater & Gordon, relating to the possible sale of the professional services division, were ongoing, although there’s no certainty an offer will be made.
In my view, the whole Quindell situation is now so uncertain that I would not want to be long or short of the shares.