- Cybersecurity firm calls in EY to review its accounts and processes
- Company has been accused of outright fraud by short seller
- Darktrace shares recovered quickly after original sell-off
What should a company do when it is targeted by short sellers? Obviously, the answer will depend on whether the alleged skeletons in the closet are there or not, but assuming the latter, usher in an independent auditor to take a long hard look at your accounts.
Cybersecurity firm Darktrace (DARK) has called in audit firm EY in response to stinging criticism of the business and its financials by short seller Quintessential Capital Management in late January.
STOCK UP 28% IN FEBRUARY
‘Appointing an independent to review financial processes after such allegations is very unusual, and we struggle to remember a recent example like this in the tech segment of the LSE,’ said Tom Kennedy, analyst at research firm Megabuyte.
Darktrace saw its share price fall nearly 20% in the immediate aftermath of QCM’s report, yet the stock has recovered quickly. During February to date, Darktrace stock has rallied more than 28% to 269.6p.
‘Better late than never,’ said AJ Bell’s investment director, Russ Mould, who complained that Darktrace could have announced third party intervention in the first place, rather than offering a ‘boiler plate rejection’.
TAKING CONCERNS SERIOUSLY
Bringing in EY does at least show that the company’s board is ‘now taking concerns over its accounting seriously,’ said Mould. And so it should, accusations of outright fraud should never be taken lightly.
‘We wonder if management are behind the decision to get a third-party in, or if it may even be the non-executive directors flexing their muscles in order to bring some stability back in the interest of shareholders,’ said Megabuyte’s Kennedy.
Assuming the review gives Darktrace a clean bill of health it would at least allow the AI-driven cybersecurity firm some breathing space to re-establish some credibility with the market.
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Steven Frazer) and the editor (James Crux) own shares in AJ Bell.
