Downer EDI punished for overstating up to $40m in earnings

Engineering and construction firm Downer EDI has been punished by the market after the ASX-listed company said it was investigating whether fraud is behind the “accounting irregularities” that caused it to overstate profits by up to $40 million.

Downer’s shares plunged below 20 per cent, wiping half a billion dollars of its value, after the company revealed it had been accounting for revenue on a power maintenance contract that was never paid, for work that wasn’t delivered, over a three-year period.

They closed down 20.42 per cent at $3.82 - their lowest level in more than two years.

Downer boss Grant Fenn.Credit: Louise Kennerley

The accounting shock was accompanied by Downer saying it was unlikely to meet the full-year profit guidance it issued in August because of difficult weather conditions and elevated costs in both Australia’s East Coast and New Zealand.

The company on Thursday said a detailed investigation into why it overstated its pre-tax earnings by $30 million to $40 million over the course of four financial years is ongoing and is being treated with the highest priority. It is still figuring out the impact on earnings.

Chief executive Grant Fenn, who is set to step down in February 2023, sought to reassure investors on a conference call that the irregularities in Downer’s systems, which erroneously recognised revenue for maintenance work that had not yet started, were not systemic.

The historical misreporting of revenue and work in progress between September 2019 and November 2022 was in an energy maintenance contract for an Australian power client worth about $170 million in annual revenue.

The company is not sure if the irregularities are the result of human error or are fraud related.

“Misrepresentation of the contract performance is something we take very seriously and we are looking at very closely. Whether that meets the legal definition of fraud is something we will be investigating,” Fenn said.

The manager who was in charge of the contract for the undisclosed client had left the company and other people were now in charge, Fenn said.

“Although the business has a general skew to the second-half, we think the challenge for the last seven months of [financial year 2023] has become too large,” Mr Fenn said.

Excluding the impact of the accounting irregularities, Downer now expects underlying profit for the year to be between $210 million and $230 million assuming there is no further impact on earnings from COVID-19, weather, labour shortages or other disruptions.

The difficult weather conditions and rising costs have hit most of its businesses during the first quarter in Australia’s eastern states. “Very few of our businesses [are] unaffected,” he said.

“Our Road Services and Utilities businesses have been heavily impacted by weather and all businesses have been battling with staff shortages and supply chain issues. These issues are dissipating but not in time for 2023 earnings.”

With AAP

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