The Accountant's Trap

Three months ago Connaught, a construction company, was in the FTSE 250 with a market capitalisation of over £600m. Now it has collapsed, its shares are worthless and the administrators are picking through the books to see what can be salvaged. Many private investors who piled in towards the end to pick up cheap shares in this once strong company have lost their money. The firm’s founder, Mark Tincknell also bought more shares earlier this year in confidence that he could turn the company around. This was a company founded by hard working people who brought in external experts and became caught in the accountant’s trap of massaging the figures instead of running the company.

Connaught was a family firm started by Bill and son Mark Tincknell in 1982 with £10,000 of their own money and operated from a shed. Their expertise was in construction and repair. They did not have business training and employed business professionals as the company grew. In 1998 it floated on the AIM with a £14m market value. Under the continued leadership of Mark Tincknell as chief executive the turnover grew to £300m with profits of £20m. Mark may have left it the experts to put together the accounts but he was driving the business he knew, repairing properties.

In 2004, Mark Tincknell stepped down and handed control to a business professional. Turnover took off and debt jumped from zero to £200m. Loading the company with debt is what the accountants and financiers like because of the tax advantages. According to the Sunday Times, these figures were further pumped by my capitalising bid costs. This means that the money that is spent preparing a tender is shown as an asset on the accounts. This is an accountant’s wheeze that can reflect reality if the bid is ongoing and there is a good chance of the company securing the contract. If the contract has gone elsewhere then this is a loss and should be shown as such in the accounts.

I make the assumption that as the company grew it could afford more expensive advisors and employ more business savvy executives. The result: a pumped up set of figures totally removed from the business reality.

It is a sobering thought that Connaught would be worth more today if the founders had kept operating from their shed rather than hand control to the accountants and business professionals.

I suggest that there are three lessons to draw from this:
1. Business leaders should focus on running a sound core business.
2. Listen to accountants but do not let them take control.
3. Complicated accounting to massage the figures and pump the share price are skilful dodges. The more expensive the advisor the more wary you need to be of the advice.