The FSA takes a case against former directors for misleading statements.
It was the sort of announcement that investors dread: "The Board ... has received information suggesting possible accounting irregularities affecting revenue recognition ...and has therefore commissioned an investigation".
That was from iSoft in July 2006. The developer of software for the health sector was once a high-flier of the stock market, but even before this announcement a string of profit warnings had already taken some of the wind out of its sails. A potentially lucrative contract with the NHS, however, meant there was still something to play for.
FSA investigation
A few weeks after the bombshell, the company reported itself to the FSA, which commenced a formal investigation.
I was reminded of this story last week after the FSA reported that it was taking criminal proceedings against four former directors of the company, for conspiring to make misleading statements. In the meantime, the company has been taken over by an Australian business.
Buyer beware
The problem relates to revenues being booked before the work had been done, which is one of the oldest tricks in the book. But we also have to consider the extent to which investors could have been expected to spot any sleight of hand.
I've had a look at the accounts for the years in question, and I have to admit that I wouldn't have spotted it. Net cash inflow from operating activities was well in excess of operating profit -- if it wasn't, I'd have had cause to be more suspicious of the profit figure. So this serves as a sobering reminder to investors that stock-picking is a dangerous business, and that events can upset even the most carefully constructed investment cases.
I'm not a forensic accountant, so I may be missing some of the clues, but then neither are the bulk of private investors. We rely on the authorities to come down heavily on any wrongdoing or deception.
It remains to be seen whether any guilt attaches to these directors, of course, but investors will be watching the case with interest.
More: The FSA Is Getting Tough
