Shares in carpet and flooring firm Victoria (VCP:AIM) have taken a beating just days after releasing its audited results for the year to the start of April.

Following a weak opening, down 4%, the shares continued to slide during the morning session to trade as much as 25% lower at 411.5p from last week’s close of 550p.

WHY ARE THE SHARES DOWN SHARPLY?

The full-year results showed a 43% increase in revenue to £1.46 billion thanks to acquisitions, with the firm trumpeting the fact volumes exceeded 200 million square metres or more than 29,500 football fields.

EBITDA (earnings before interest, tax, depreciation and amortisation) rose 20% to £196 million, and the company promised at least £20 million more in annual profits to come from the successful integration of its latest acquisitions.

Investors cheered the news at the time, sending the shares up 7% on the day to 624p, while analysts reiterated their positive views.

However, an article by FT Alphaville pointed out: ‘Those who actually bothered to read beyond those heady headline achievements soon noticed Victoria had not actually received a completely clean bill of health from its auditor’.

The auditor, Grant Thornton, had been unable to complete its work due to Victoria imposing a ‘limitation of scope’, and had therefore issued a qualified audit opinion.

The limitation concerned the accounts of Hanover Flooring Limited, a small regional distributor in Yorkshire whose trade, inventory and debtors were acquired by Victoria in January 2021.

Victoria admitted in its results ‘there have been some deficiencies in the control environment in this minor subsidiary and it has not maintained adequate and complete accounting records’, meaning ‘any further audit procedures by Grant Thornton will not provide them with sufficient and appropriate evidence to satisfy their concerns’.

A QUESTION OF SCOPE

Now that Victoria has published its annual report, Grant Thornton’s opinion on Hanover Flooring is available to read, including the fact that during its work it found ‘potential irregularities in respect of certain transactions’.

Having carried out an enhanced audit, but unable to convince Victoria to lift the limitation of scope, Grant Thornton concluded that while the initial amount which needed investigation at Hanover was £2.4 million, ‘these matters are qualitatively and quantitatively material to the group financial statements’.

The auditor added: ‘We were unable to reduce the risk of material fraud or error to an acceptable level and obtain sufficient and appropriate audit evidence for all Hanover balances and cannot conclude whether any irregularities have or have not taken place, other than those disclosed by management’.

In response to the FT Alphaville article, Victoria said: ‘There is no wrong-doing at Hanover and nor are the auditors alleging this. Hanover’s issue was predominantly one of having heightened financial risk due to inadequate accounting records — a situation that is regularly found when smaller businesses are acquired as their standard of financial controls and record keeping often don’t match the high levels we have across the rest of the group.’

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