Raymond Nethercott pleaded guilty to two charges of misleading company auditors in breach of provisions in the Companies Act 1985. He was sentenced to nine months imprisonment suspended for two years and ordered to pay £15,000 prosecution costs.
In passing sentence Judge Michael O’Sullivan took into account a £775,000 claim Nethercott had paid in full to Allied Carpets in an earlier legal case; and his seven-year disqualification as a director by the DTI in July 2001.
DTI investigators found that Nethercott had falsely represented to the company auditors that the sales figures in accounting records were true. ‘This gave an untrue picture of the state of the company’s finances and profits,’ according to a statement issued by the DTI yesterday.
The company used an accounting practice known as ‘pre-despatching’ in its accounting records between 1992 and 1998. The practice involved early – and inappropriate – recognition of sales income at the half-year and year end and was deliberately concealed from the company’s auditors.
This discovery led to the enforced resignation of John Pout as the company?%s finance director. Pout was disqualified for as a director for six years.
Then auditor Arthur Andersen calculated that the accounting irregularities meant that Allied Carpets was overstating sales by more than £6m and boosting profits by more than £2m over the period of the irregularity.
As a result of the misleading accounts, shares in Allied Carpets were suspended.
Nethercott’s prosecution is the first under Section 389A of the 1985 Companies Act. It states that auditors have a right of access at all times to a company’s books and are entitled to require information and explanations as they think necessary for the performance of their duties.
Speaking after yesterday’s ruling, Consumer Affairs and Competition Minister Melanie Johnson said: ‘Investors and markets depend on the integrity of reports by directors and auditors. The DTI takes such issues very seriously and we will not hesitate to enforce the law in cases like this where the public is at risk.’
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