How to handle a (potential) scandal

How to handle a (potential) scandal
Hint: sometimes, you can’t.
Gemma Boothroyd
March 31, 2022

Faking it ‘til you’re making it doesn’t always work as planned.

Regardless of the ultimate reason behind Sir Martin Sorrell’s S4 Capital’s delayed set of results, the firm will likely have a big price to pay. And even if they don’t, the firm’s still going to need to recoup the £950m wiped from its market cap this morning.

The first red flag came earlier in March when S4 announced its annual report wouldn’t be released on time. S4’s auditor, PwC, needed a bit longer to wrap up its assessment. 

That delayed release date came and went, and S4 asked for another extension until 31 March. S4 pointed its finger at omicron, blaming the Covid variant for hitting PwC’s “travel and resource allocation” and leading to further delays.

Yesterday, the second flag started waving. S4 asked investors for a bit more time, though this time, it didn’t even bother with an excuse or timeline for when PwC will wrap things up. 

Investors don’t like delays, and they certainly don’t like uncertainty. And S4’s share price plummeted today out of fear of what PWC might have uncovered.

Past performance is not a reliable indicator of future returns.

Spot the drop. Source: Freetrade, as at 31 March 2022. 

Discrete calendar year performance

Discrete calendar year performance
Investment 2017-18 2018-19 2019-20 2020-21 2021-22
S4 Capital -30.2% 17.9% 18.2%232.9%-42.9%

Source: FE as at 30 March 2022. Basis: in local currency terms with income reinvested.

PWC’s bean counters might just be taking their time, but it’s probably not a good sign when an accounting firm asks for not one, but two extensions.

In 2019, M&C Saatchi came under fire after £11.4m in accounting errors were revealed. Its share price took a big dive after the ad agency admitted it inflated revenue figures. 

Past performance is not a reliable indicator of future returns.

Source: Freetrade, as at 31 March 2022. 

The firm has struggled to recoup in the aftermath, with its revenue failing to get back up to 2019’s audited levels (let alone the inflated ones). Saatchi’s share price hasn’t come remotely close to recovering. 

This is where PR scandals tend to differ from accounting mishaps. 

Volkswagen’s share price hasn’t merely recovered from its diesel gate emissions drama - it managed to reach all-time highs in the years since. Ironically, its hastened foray into electric vehicles in the wake of the debacle actually lent VW a big helping hand. 

Past performance is not a reliable indicator of future returns.

Accounting scandals hit differently. They feel much more alarming because they can leave investors feeling cheated of their money - not knowing what or who to trust. 

Investors don’t get to take a peek inside the filing cabinets of the firms they invest in. They need to be able to rely on the numbers they’re given and the people at the helm reporting those figures. Frankly, there’s not much else they can base a decision on.

So sorry, Sorrel. But regardless of what’s eventually revealed in S4’s results, investors have lost some trust. And if history’s any indication, it’ll be a long road ahead to regain that. 

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