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As it finally finds an auditor, will confidence return for Sports Direct shares?

Karl Loomes
Two colleagues working on new global financial strategy plan using tablet and laptop.

I have said it before, but it is a very bad sign when as a company, you can’t find somebody who is willing to take your money. This is the situation Sports Direct (LSE: SPD) has found itself in over the past few months, with the ‘Big Four’ accountancy firms and smaller shops alike all refusing to become its official auditor.

It is with some relief then, no doubt, that RSM, the country’s seventh largest audit firm, said it would be willing to vet its books. The change of accountant became necessary when Grant Thornton resigned from the position in August, following the last-minute discovery of a €674m tax bill.

Good news, bad news

The appointing of RSM is certainly of benefit for Sports Direct and its shareholders. Under financial regulations, without an auditor to file independent annual reports, the UK government may have been forced to intervene.

We could also perhaps expect the new auditor to make a ‘clean sweep’ of the numbers in its first report, and so we investors should get to see the latest and most accurate reflection of its position (in normal circumstances, one would always expect this, of course).

Don’t get me wrong, this isn’t to suggest in any way that the previous auditor or Sports Direct are purposefully trying to fudge the numbers, but if a €674m bill can be found at the last minute, I for one welcome a new set of eyes.

Last month I analysed some of the company’s numbers using the Altman Z-Score, a credit strength test of sorts, and it came in at what you might call the borderline. I will be curious to see how its latest figures fare when they are released.

Controversy and acquisitions

Much of Sports Direct’s financial problems stem from its disastrous acquisition of House of Fraser. That move saw its share price fall 60% since its peak in August 2015. Just recently, there was talk that Mike Ashley would be acquiring Goals Soccer Centres – a company that has seen more than its fair share of controversy.

Earlier this month this potential deal was not only taken off the table, but Sports Direct come out lambasting the company, saying that the Goals board’s failure to engage with the deal “leads Sports Direct to conclude that the behaviour of the Goals board, and its apparent failure to spot and deal with the issues, amounts to incredible incompetence and ignorance, wilful or otherwise”.

This perhaps hints at another problem Sports Direct suffers from – the image and perceived attitude, rightly or wrongly, of Mike Ashley. As both figurehead and CEO of Sports Direct, to like or dislike him and his strategies is in many ways to like or dislike the company itself.

Not exactly a shrinking violet, Ashley gets headlines, and often for less than positive reasons. Controversy over his management style and public concern surrounding conditions for Sports Direct employees, often weigh on investors’ minds.

No doubt this latest appointment, finally, of RSM as an auditor is good news for shareholders, but personally I am going to wait and see what they actually report on before being tempted by Sports Direct shares.

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Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019