Bosses at Ted Baker have uncovered that the fashion brand’s inventory has been overstated by between £20 million and £25 million, the company has said.
The board has brought in lawyers and independent accountants to assess the issue, which the company insisted will have no cash impact and only relates to previous years.
Freshfields Bruckhaus Deringer will now undertake a comprehensive review of the issue, reporting back to independent director Sharon Baylay, a marketing executive who joined the board of Ted Baker last year.
Shares plunged 52p to 345.6p in early trading on Monday.
The company added: “All costs and fees associated with completing the independent review will be expensed in the period incurred and clearly identified as such.”
Analysts suggested the move is the first significant step taken by new finance chief Rachel Osborne, who joined from Debenhams in October, to get to grips with the company’s accounts.
Retail analysts at Liberum said: “Today’s latest news from Ted Baker, regarding the overstatement of last year’s inventory value, is less than ideal.
“In our view, it is indicative to some degree of the very early-stage work that the new and highly regarded CFO, Rachel Osborne, is undertaking.”
Ted Baker has been rocked by the high-profile scandal of founder and former chief executive Ray Kelvin’s departure following allegations of inappropriate behaviour and unwanted sexual advances in the workplace. Mr Kelvin has denied any wrongdoing.
But the announcement that inventory was overstated is the first significant questioning of the company’s accounts, which had been compiled since 2014 by former finance chief Charles Anderson, who now has the same role at Mulberry.
The company added: “Ted Baker is committed to ensuring the independent review is completed in an efficient and transparent manner and will update the market as appropriate. Whilst the review is ongoing, the company will not comment further.”
Auditors at KPMG had already raised the issue of overstating the company’s assets in its last annual report.
Under a section titled “Significant Issues”, the company’s audit committee said it had “received and reviewed reports from management and the external auditors setting out the significant issues in relation to the financial statements for the period which related to the carrying value of inventory and the carrying value of retail fixed assets (being leasehold improvements and fixtures and fittings)”.
Auditors uncovered mis-statements but said they were too small to affect the financial statements.
The annual report added: “The audit committee is also satisfied that the significant assumptions used for determining the value of assets and liabilities have been appropriately scrutinised, challenged and are sufficiently robust.”
Inventories can be difficult to calculate accurately, because they depend on the value of the goods being sold, among other valuations. Poor sales can impact the value as products are discounted.
In the last annual report, inventories increased in value by £38.6 million to £225.8 million, although the company said this was due to buying back its No Ordinary Shoes licence, earlier phasing of stock deliveries and movement in exchange rates.