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Darktrace calls in EY to review its finances after accusations of fraudulent accounting

Mike Lynch, former chief executive officer of Autonomy Corp., arrives at court - Simon Dawson/Bloomberg
Mike Lynch, former chief executive officer of Autonomy Corp., arrives at court - Simon Dawson/Bloomberg

Darktrace has called in specialist accountants at EY to review its finances following allegations of accounting fraud made by a US short-seller.

The cyber security company has hired the “Big Four” accountant to carry out “an additional independent third-party review of its key financial processes and controls” after allegations of impropriety wiped a quarter of a billion pounds from its valuation.

New York short-seller Quintessential Capital Management (QCM) published a 70-page dossier on Darktrace at the start of the month, alleging the company artificially inflated its reported sales and profits. QCM founder Gabriel Grego highlighted deals struck in Italy with reseller companies he alleged could not be found at their registered addresses.

Darktrace has denied the allegations. The company said on Monday it had “confidence” in its public accounts, which are audited by Grant Thornton, but believed an independent review was “appropriate.”

Shares rose 2.74pc on Monday morning on news of the review. The stock price is now 28pc above the low point reached after the accounting fraud allegations first became public three weeks ago.

Since then, Darktrace has announced a £75m buyback fund to prop up its share price. The company has spent £7.6m so far.

QCM has reduced its short position in Darktrace to 0.38pc, according to filings, down from 1.3pc the day before its accusations were public.

QCM's allegations have echoes of the fraudulent practices uncovered at Autonomy, a business founded and run by Darktrace's co-founder Mike Lynch.

The High Court ruled last year that Mr Lynch had committed fraud when he sold his previous business. That case is valued at £3.3bn and the final damages judgment is pending.

Hewlett Packard bought Autonomy in 2011 for $11bn. A year after the buyout it wrote Autonomy’s value down by $8.8bn and sued Mr Lynch, alleging he and others had falsely inflated the value of the company using accounting trickery.

Last year the High Court found in HP’s favour during a record-breaking £3.3bn civil fraud trial. Mr Lynch, who is also fending off criminal charges in the US over the sale, intends to appeal.

Autonomy's former chief finance officer Sushovan Hussain is currently serving five years in US jail after being found guilty of fraud in connection to the sale to HP.

Mr Lynch set up Darktrace after the Autonomy sale. It employs a number of ex-Autonomy staff in senior management positions.

Mr Lynch is no longer involved in Darktrace's operations but retains a significant shareholding in the business. He and his wife Angela Bacares own over 11pc of the company.

Gordon Hurst, Darktrace’s chairman, 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.”