Datalex debacle likely to result in official probes
Dublin-based travel software company confirms there have been 'significant accounting irregularities' at firm
Datalex faces the prospect of intense scrutiny from outside agencies, including the Office of the Director of Corporate Enforcement, after it confirmed that "significant accounting irregularities" at the travel software firm were the "underlying cause" for a shock misstatement of revenue and earnings for the first half of 2018.
Accounting firm PwC, drafted in by Datalex to review its procedures in the wake of the revelations last January, said in its report that recognition of the software company's service revenue for the first six months of last year "was not in line with the group's accounting policy and was materially overstated".
Shares in the group, which plunged in January when the issues first came to light, tumbled as much as 11pc yesterday, valuing it at €57.2m, compared to €190m before the crisis emerged.
Datalex chairman and shareholder Paschal Taggart said yesterday that the events of recent weeks "have been distressing for the shareholders, directors and for all the company's stakeholders".
The company's single biggest shareholder is billionaire financier Dermot Desmond.
Earlier this month, his IIU investment vehicle shored up the software company's balance sheet via a €3.8m share placing that boosted IIU's holding to 29.9pc, and by providing a €6.1m secured loan facility to the group, which still has to be approved by shareholders.
The report by PwC into the events at Datalex found that the group had failed to apply the international IRFS 15 accounting standard "appropriately" to its results for the first half of 2018. That standard deals with how revenue from contracts with customers is accounted for. The review also found that there were "material weaknesses" in Datalex's internal control environment.
"The group's accounting process in this area has been largely manual, and dependent on individual judgement, and not subject to internal audit oversight," the PwC review concluded.
The misstated revenue and earnings for the first half of 2018 related to the accelerated revenue recognition associated with a significant customer deployment of one of Datalex's systems, understood to be with German airline Lufthansa.
Datalex, whose CEO is Aidan Brogan, said the PwC report found that there had been a "failure by the group to track sufficiently operational and financial performance on the deployment and to retain sufficient supporting documentation of accounting entries".
The report found that Datalex had incorrectly recognised about $3.5m (€3.1m) of service revenue associated with the Lufthansa deployment in the first six months of 2018, which has subsequently been corrected by the group.
It also noted that about $2.9m (€2.5m) of other services and platform revenue was incorrectly recognised in the period, of which $700,000 is not recoverable. The balance will be recognised in respect of the second half of 2018, or in the 2019 financial year.
Datalex plans to publish its 2018 results next month. The firm also said that it has hired PwC to undertake a follow-up to its review in order to scrutinise Datalex's internal controls and processes "in order to identify areas for improvement".