When Gavin James, FD of healthcare software provider iSoft, concluded an awkward investor briefing in June he must have felt that his year could not get any worse. He was wrong.

James, who only joined iSoft in April 2005, had just told City analysts how an accounting policy revamp would destroy £15m of iSoft’s 2006 revenues and wipe the same off profits. Just six weeks earlier, the City had been told to expect revenues of £210m-215m and pre-tax profits of £17m-22m for the year to end-April 2006. The results were due as Financial Director was going to press.

As James stumbled through embarrassing explanations, iSoft’s chief executive, Tim Whiston, sat still without saying a word. Whiston, a former iSoft FD himself, was one of three KPMG alumni who created iSoft after undertaking an MBO of the business from the Big Four firm. A year ago, Whiston had trumpeted that he was “delighted” with iSoft’s performance and said, “There is still more growth out there”.

The accounting overhaul at iSoft followed a string of profit warnings. Analysts had found that iSoft, one of the major providers of software for the NHS’s £6.2bn National Programme for IT, was recognising profits from contracts even though actual payments for projects were only due in over two years’ time. It was also running a £70m off-balance sheet credit facility, arranged by providing letters of credit for customer pre-payments.

Negative impact

Five days after the briefing, Whiston stood down as chief exec, saying that his presence had become “a source of negative speculation”. Whiston was replaced by chairman John Weston, who would fill both roles until a replacement was found.

Working with a make-shift chief executive, however, has turned out to be the least of James’s concerns.

The accounting policy change has placed iSoft’s banking covenants under heavy strain and James is still involved in frantic negotiations with iSoft’s banks. The deadlock forced iSoft to delay the release of its 2006 final results twice.

The company had until the end of August to close the talks. If it had failed to hit this deadline, its shares, which have already plummeted by almost 90% since the start of the year, would have been suspended from the London Stock Exchange.

On top of the banking discussions, James is also in the midst of an internal investigation into accounting irregularities. After the accounting policy change, iSoft’s auditors Deloitte, which replaced RSM Robson Rhodes in 2005, went back through previous financial statements to align earlier numbers with the new accounting policy. The firm has raised concerns over potential accounting irregularities stretching back to 2004. The issues raised by Deloitte have led to a formal investigation into the matter and brought about the suspension of another iSoft founding member, commercial director Steve Graham.

Under investigation

Regulators have also been circling iSoft. The FSA may well look into the matter as a number of iSoft executives sold shares worth millions of pounds during the period of alleged irregularities. The Financial Reporting Review Panel will also almost certainly be monitoring what has happened at iSoft, while the Public Accounts Committee has taken an interest in the matter because of iSoft’s involvement in the NHS IT programme.

Analysts believe that it may take years for iSoft to recover from the damage caused by its accounting policies.

The father of iSoft was former KPMG accountant Patrick Cryne, an art collector and Barnsley FC fanatic (he is a major shareholder in the club). In 1998, Cryne teamed up with colleagues Whiston and Graham to buy out a health consultancy from KPMG and form iSoft.

The MBO was worth just £12m, but within six years the Manchester-based IT group had won a £300m contract and pushed itself to the brink of the FTSE-100 with a market cap of £950m. It’s now £100m.

Cryne, Whiston and Graham became the poster boys of business in the North. Fawning interviews featured in the local press, while iSoft was named North-West business of the year and Cryne was named Ernst & Young’s technology and communications entrepreneur of the year.

Amid the glory and accolades, though, there was always uneasiness over iSoft’s accounting policies, despite the accounting background of the company’s founders. iSoft brushed off these fears as scaremongering, but when finance director John Whelan resigned in 2004, markets became increasingly nervous.

How well-founded those fears proved to be. Whelan was replaced by James who, since his appointment, has witnessed the departure of Cryne and Whiston, as well as the suspension of Graham.

With the banks banging on his door and the auditors uncovering one problem after another, entering the FTSE-100 and winning awards must seem like a distant dream for the iSoft FD.