Warring firms cast shadow over Sanctuary’s recovery

A clash between Baker Tilly and a Big Four firm over the state of the music
label Sanctuary Group’s accounts has thrown the company’s recovery plans into
further confusion.

Sanctuary, which has some of the biggest acts in the music business on its
books, has been plagued by accounting problems since October, when it warned
that it was facing a serious loss of capital because of aggressive accounting.
The fall-out between the two accounting firms will come as a further blow to its
efforts to clear up the accounting problems.

Releasing final results this week, where the group reported a fivefold
increase in losses for 2005, Sanctuary CEO Andy Taylor revealed that Baker Tilly
would qualify its audit after what had been an ‘awful year’.

A senior source within Sanctuary, however, revealed that a Big Four firm
involved in the group’s recovery had disputed Baker Tilly’s opinion and would
have been happy to give the accounts a clean bill of health.

‘We have revised our accounting policies, but the auditors are still going to
qualify the accounts even though a Big Four firm was happy with them,’ the
source said.

The source would not name the Big Four firm involved in the disagreement. But
it is known that Ernst & Young was called in by Sanctuary’s bankers HBOS to
conduct a viability study of the group’s prospects.

A Baker Tilly spokesman said any decision to issue a qualified audit report
was ‘never taken lightly’, and that it was ‘inappropriate’ to express views on a
specific case through the media. E&Y would not comment.

The fall-out between the accounting firms came amid deep scepticism of
Sanctuary’s recovery strategy, governance and accounting.

The group, which includes Joss Stone and Beyonce among its clients, held no
analyst briefings on its recovery plans and still has former FD Mike Miller on
its board as corporate development director.

‘Sanctuary’s strategy and the financial controls that are part of that
strategy have to be questioned,’ said Bridgewell Securities analyst Patrick Yau.
‘There have been no analyst briefings, which arouses suspicion, and the same
team that led the company into this situation is still in place.’

Sanctuary reported a fall in revenues to £156m for the year ending 30
September 2005 from £167m in 2004. Pre-tax losses increased from £26.7m to
£143m. The figures for 2004 were restated, with turnover falling from £221m and
pre-tax losses increasing from £1.8m.

Sanctuary is on the brink of raising £110m through an equity financing led by
Evolution Securities, and has had a £35m debt with Bank of Scotland cancelled.

The group has secured an additional £3m loan to cover immediate working
capital requirements.

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