Darktrace has employed the services of accounting firm EY to conduct an audit of the cyber security company’s finances following a damaging report into alleged irregularities in financial reports.
The company said it commissioned the audit to allay investor fears that it had misrepresented finances in a recent earnings report.
A report published last month by Quintessential Capital Management (QCM) cast doubt on earnings reports and drew comparisons between the firm and failed software startup, Autonomy.
Cambridge-based Autonomy was co-founded by Mike Lynch, a founding partner in Darktrace, and later sold to US tech giant HP in a deal worth $11 billion (£9.14 billion). HP launched a multi-year lawsuit regarding the sale after the company was found to have “artificially inflated” reported revenue.
In its report, QCM said it was “deeply sceptical” of Darktrace's financial statements and issued a warning that the firm’s “sales, margins, and growth rates may be overstated and close to a sharp correction”.
Much of this report centred around claims that Darktrace had conducted “channel stuffing”, a deceptive business practice used to inflate sales and earnings figures.
This typically involves sending retailers along a company’s distribution channel more products than they are capable of selling to end-users or consumers.
QCM said it detected “numerous transactions” in the period leading to Darktrace’s IPO which appeared to involve “simulated or anticipated sales to phantom end-users through a network of resellers”.
“Darktrace seems to have repeatedly used marketing activities to channel funds back into its partners as payment for apparently fictitious purchases,” QCM said in its report.
“These alleged channel stuffing and round-tripping activities seem to have even involved shell companies in offshore jurisdictions manned by individuals with ties to organised crime, money laundering, and fraud.”
Shares at Darktrace plunged up to 10% in the wake of QCM’s report last month, and the company strongly denied the investment firm’s claims.
Speaking at the time, Darktrace chief executive Poppy Gustafsson pushed back on the QCM report, insisting that it made “unfounded inferences” about the company.
“We embrace the scrutiny of the public markets,” she said. “However, it is also important to refute any unfounded inferences about the listed business we are today and push back in the strongest terms on any suggestions that this is a business that is not being run with the greatest integrity.”
Financial processes audit
Darktrace chairman Gordon Hurst said the review examined the company’s “key financial processes and controls” and seeks to calm doubts over alleged financial irregularities.
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“The board believes fully in the robustness of Darktrace’s financial processes and controls,” he said. “As a sign of that confidence, we have commissioned this independent third-party review. We look forward to the outcome of this review.”
Darktrace said it will “report the key findings of the E&Y review once it is complete.”
QCM said it welcomed the move in a statement online and will await the results of the audit in due course.
“We welcome Darktrace’s decision to initiate an independent review of its finances. We hope that such review will be of sufficient granularity, scepticism, and impartiality to provide insights about the dubious transactions we flagged in our report,” the company tweeted.
