Blacks Leisure is subject to searching questions after disclosing a £2m accounting failure.

Investigators from auditors BDO Stoy Hayward are continuing to examine the group after the problems emerged in subsidiary Sandcity.

CFO Keith Fleming became interim CEO of the company after a profits collapse last year but his position is in jeopardy after the massive black hole came to light. He is yet to receive the public backing of current CEO Neil Gillis who is already on the warpath after suspending one senior manager in the wake of the scandal.

The problems arose in Blacks’ Sandcity subsidiary, which operates the O’Neill’s surfwear brand. Accounting failures spread across ‘at least the two financial years ending February 2008’, mean that that Sandcity’s performance has been overstated by £2m, Blacks said.

The black hole was only exposed because the company was conducting a feasibility study on merging two of its divisions. BDO were then brought in to examine the nature and scale of the accounting flaws and found that the performance of Sandcity had been artificially boosted by £2m.

Sandcity’s problems have had other damaging knock on-effects. Blacks profits for the financial years to February 2008/09 will be £1m lower than expected. Its budgets for the new financial year have also been knocked off kilter and will now have to be cut by £1m.

The problems will cap off a turbulent period for Fleming. He took over as interim chief executive after former CEO Russell Hardy was booted out when profits nosedived from a forecasted £21m to £100,000 last year.

The irregularities are so serious that the company has stopped short of guaranteeing the group’s long-term prospects.

‘The recovery plan for the group is unaffected by these developments and the board remain convinced that the medium-term prospects for Blacks Leisure remain healthy.’
‘[BDO’s] investigations are continuing,’ the company added.