20th Feb 2023 12:19
(Alliance News) - Darktrace PLC's decision to turn to Ernst & Young LLP to probe its accounting practices is somewhat belated, analysts said on Monday, as the cybersecurity firm defends itself in the face of a short-seller attack.
Darktrace on Monday said that as a "sign of confidence" in its financial processes, it has brought in accountants E&Y to conduct a third-party probe.
The Cambridge, England-based cybersecurity firm recently received scrutiny from short-seller Quintessential Capital Management, which criticised Darktrace's management and said it is "sceptical" about its growth figures in a 69-page long report.
Quintessential said it found "numerous transactions" in the run-up to Darktrace's initial public offering which involved simulated or anticipated sales to phantom end-users, meaning ones that do not actually exist.
Back in May 2022, the Telegraph reported that Darktrace's strategy chief was part of a group of executives who helped to misrepresent the success of software company Autonomy, which was acquired by Hewlett-Packard in 2011.
On Monday, Darktrace said: "The board and management are confident that Darktrace's independently audited public company financial statements fairly represent Darktrace's financial position and results. The board and management stand firmly behind the statement made on 1 February 2023 and E&Y believe it appropriate to demonstrate that by commissioning an independent review."
However, Darktrace's statement on February 1 had not specifically answered any of the 20 questions asked by Quintessential in a response to a previous Darktrace release, in which Darktrace had said it had full confidence in its accounting practices.
The questions included whether Darktrace booked a sale to Italian car maker Maserati Spa in July 2020; the nature of the company's relationship with Dominican Republic-based IT company Multicomputos SRL; and whether Darktrace sold anything to "suspected shell company" Alfatrade & Services Ltd, which officially is a supplier of clean energy products.
"Better late than never. While its first response to criticisms aired by short seller Quintessential Capital Management was a boiler plate rejection, Darktrace shows it is now taking concerns over its accounting seriously by bringing in a third-party auditor to conduct a review," said AJ Bell Investment Director Russ Mould.
"The appointment of E&Y will do little to quieten the bears in the short term but assuming said review gives Darktrace a clean bill of health it would at least allow the AI-driven cybersecurity firm some breathing space to re-establish some credibility with the market."
Darktrace is due to report interim results on March 8. The company said it does not expect to be in a position to update on the E&Y probe at the time and but will present the investigations findings "once it is complete".
Chair Gordon Hurst said: "The board believes fully in the robustness of Darktrace's financial processes and controls. As a sign of that confidence, we have commissioned this independent third-party review by E&Y. We look forward to the outcome of this review."
Darktrace shares were 1.3% higher at 266.10 pence each in London on Monday early afternoon. The stock is down 20% over the past year.
Darktrace's initial public offering was back in April of 2021, debuting at 250p, so shares are up just 6% since then.
By Sophie Rose, Alliance News reporter and Tom Budszus, Alliance News reporter
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