Steadying the ship

WHEN ACCOUNTING STANDARDS Board member Ken Lever joined outsourcing company Xchanging as CFO last October, he couldn’t have imagined he would be almost immediately thrown into an accounting controversy and be left to defend the actions undertaken by the company before his arrival.

What happened?

Earlier this month Xchanging – which provides procurement, accounting, human resources and technology services to the banking, insurance, manufacturing, retail and real estate industries – saw its share price plummet 52% after announcing a profits warning, a £100m goodwill writedown and the immediate departure of chief executive David Andrews.

Dividends were scrapped after the company admitted it would miss its lower-end profits target of £55.5m following what some analysts claim was a “disastrous” acquisition of outsourcer Cambridge Solutions. It also highlighted concerns investors had about the transparency and aggressiveness of Xchanging’s accounting policies, especially around the Cambridge purchase.

Back last August, chief executive Andrews was forced to attack what he called “completely baseless rumours circulating in the market” about the way Xchanging had accounted for the acquisition of Cambridge and the subsequent restructuring costs, provisioning and cash conversion.

These rumours had caused a 40% drop in the share price and the company summoned analysts to a conference call to set the record straight. It claimed the company’s accounts had been approved by auditor PwC and that cashflow had been hit by restructuring costs.

This month’s announcement, and especially the £100m goodwill writedown attributed to the Cambridge purchase, brought these concerns back into the market. With Andrews gone, it was left to new CFO Lever to defend the company.
“The constant reference to aggressive accounting is very unfair. It’s extremely misleading,” he said. “It’s important we don’t make a crisis out of a drama.”

What happens next?

Investors remain unconvinced by these assertions, if the share price is to be believed, and Lever will need to draw on his vast experience to restore confidence in the company and possibly redraw how the company treats its accounts.

After all, it wouldn’t do for a member of the ASB – a group dedicated to setting standards for good accountancy practice across all UK companies – to have the company he works for repeatedly in the headlines for poor accounting.

Lever was appointed to the ASB when then chairman Sir Christopher Hogg lauded his “long experience in financial reporting” and “high level of expertise”. At the time he was CFO and senior vice-president at Switzerland-based memory company Numonyx BV, a role he took on after parting ways with engineering group Tomkins.

He also has to his name a bunch of heavy-hitting non-executive and external roles – including audit committee chair at Wolsey, Vega and iSoft, seats on the large business advisory board at HM Revenue & Customs and the financial reporting committee for the Hundred Group of FDs.

Many of his previous roles were a turnaround job comprising integrating purchased businesses, restructuring and managing change. This should make him ideally placed to sort out the mess surrounding Xchanging.

In an interview with sister publication Financial Director after his appointment, Lever said the main role of the FD is to be in a position to make sure everyone in the business understands the importance of creating value over time and to ensure the processes are in place to influence management to look at the right things – and make the right decisions.

“The centre of my agenda is to get businesses to focus on the things that create value and not to get bogged down on accounting issues,” he said. “A business must create value over time and to improve intrinsic value.”

Cashflow is the key, he believes. “A lot of businesses see cash as an afterthought. There is a tendency to get sidetracked by accounting metrics,” he says. “What you measure is what you get. If you focus on the wrong metrics, you won’t get the delivery of the value you want.”

On his appointment at Xchanging, Lever said the business needed to import experience to help with its development as a listed company and to make sure its strategic focus is where it needs to be. If Lever is to sweep away the concerns the market has about the busi­ness he will need to implement some of these meas­ures quickly. Xchanging, the company that sponsors the Oxford and Cambridge Boat Race, doesn’t need to sink under a tide of bad publicity.

Related reading