Construction and engineering asset manager Downer EDI [ASX:DOW] has highlighted ‘irregularities’ found in its accounts, which have spanned the last few years.
DOW also said it has had to cut its profit guidance for 2023.
This was reported as an ‘oversight’ by the Board and senior management, encouraging the group to launch a detailed investigation.
The DOW share price flopped 20% on the shocking news, to then be brought down 26% in the last week and more than 35% year to date.
Downer identifies accounting irregularities and launches investigation
The engineering firm stunned shareholders with its accounting revelation earlier today, admitting its own Board and senior management had not spotted these irregularities, which had occurred within its Australian Utilities business over several years.
This recurring misreporting incident has — so far in the company’s ongoing detailed investigations — shown an estimated history of overreported pre-tax earnings amounting to $30–40 million (as at the end of November this year).
This figure consists of an accumulation of errors that have transpired from September 2019 through November 2022.
Downer identified these irregularities within the company’s work in progress in its maintenance contracts.
DOW’s CEO and Managing Director — Grant Fenn — has reassured shareholders that the company is moving rapidly to address the issues and that both the financial and management capabilities of the business will be strengthened in the process.
The exact impact of these accounting issues on the company’s earnings is not yet known.
Downgraded profit guidance
If the blundered accounts were not enough to ruffle investors, then a profit downgrade to the company’s financial 2023 guidance may have salted the wound.
Back in August, the engineering corporation declared its expectation of 10–20% growth in underlying NPATA — if it did not have to deal with any disruptions caused by COVID-19, weather, labour shortages, and any other unforeseeable disruptions that might arise.
This may have been jinxed forecasting, as challenging weather conditions, labour, supplies, and rising costs have all hindered progress in the first quarter.
Upon closer trading analysis, the group noted, ‘it has become clear that the guidance is now unlikely to be met.’
Aside from costs accrued in today’s accounting revelation, Downer now expects underlying FY23 NPATA to be $210–230 million — that is, again, if no further disruptions arise.
Mr Fenn said:
‘Although the business has a general skew to the second-half, we think that the challenge for the last seven months of FY23 has become too large.
‘Our Road Services and Utilities businesses have been heavily impacted by weather and all businesses have been battling with staff shortages and supply chain issues. These issues are dissipating but not in time for 2023 earnings.’
The company plans to provide another update at its half-year results presentation in February.
Fenn will be retiring in February, and his successor has been named Peter Tompkins, the company’s current COO, as announced earlier this month.
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