Downer EDI replaces team behind $22.2m accounting blunder as it slashes profit guidance

The engineering group has replaced the team behind a $22m accounting blunder as it slashes its guidance for the second time since December amid wet weather and labour shortages.

Investors dumped Downer EDI after the engineering group replaced the utilities management team responsible for a $22m contract blunder and slashed its annual guidance for a second time as interim earnings dropped 21 per cent.

The historical accounting irregularities first flagged in December resulted in $22.2m in overstated post-tax earnings between April 2020 and June 20, 2022.

The ongoing misreporting of revenue and work in progress was on a $170m contract with a power company struck in July 2019. It was for the supply of maintenance, new connections, faults and capital works services applying a schedule of agreed prices for each service type.

Downer shares plunged 24 per cent to a three-year low of $3.02 on Monday amid a broader market falls.

The near three-month investigation found that misreporting of revenue was the result of misapplication of Downer’s revenue recognition policy. Outgoing chief executive Grant Fenn had not ruled out fraudulent activity when he first announced the mishap in December.

The team had incorrectly assumed that work orders were completed at the end of each month and that costs incurred in excess of the scheduled billable amount related to variations bill able to the customer.

The misreporting of the contract earnings since inception resulted in the contract’s underlying poor performance, including its deteriorating performance over time, remaining unidentified. “Downer is heavily focused on the remediation of the contract and a detailed recovery plan is now being actioned,” the company said in a statement.

“The new contract management team, along with external business improvement specialists, are working closely with our operations teams and customer to improve contract performance.”

The engineering company said it will restate comparative financial information to incorporate the correction in underlying results. This has seen the restated prior period post-tax earnings reduced by $3.2m.

It comes as Downer slashed its annual profit guidance for the second time since December as a result of unprecedented wet weather including the New Zealand floods, labour shortages and losses from the overstated contract.

The engineering group said profit after tax guidance would be between $170m and $190m, down from its $210m to $230m range released in December.

In August, Downer had said it expected 10-20 per cent growth in profit for the current financial year — assuming no material Covid-19, weather, labour shortages or other disruptions.

That would have represented an upswing of up to $45m, to $270.3m, from the $225.3m booked in the 2022 financial year.

Downer booked underlying earnings of $18.16m for the six months to December 31, down 21 per cent from a year earlier. Net profit was also down 21 per cent to $68.1m, although revenue was up 2.5 per cent to $5.71bn.

UBS analyst Nathan Reilly said Downer’s update was “disappointing” with interim profit, dividend and EBITDA all substantially missing expectations.

“Weak cash flow performance, increased leverage and a reduced dividend will further disappoint the market,” he said.

Total expenses increased by 3.3 per cent, or $178.2m, compared to the prior corresponding period.

Downer slashed its dividend to 5c a share from 12c a year earlier, which will be paid on April 11.