Revenue Recognition in Minds + Machines

Yesterday I talked about preventing fraud in accounts and the revised standard set by the FRC for the auditing of accounts. The standard actually highlights a common problem area in company accounts. Namely the question of revenue recognition. It can be easy to fabricate revenue even if somewhat more difficult to create the cash that normally flows from revenue.

But not always as one can see in the announcement today from Minds + Machines Group (MXX). It says that the board has concluded that cash of £1.125 million that was received in connection with a specific contract and £938,000 of revenue in FY 2019 was incorrectly recognised in the accounts. In reality the cash received was an advance from the customer against future end-user sales and should have been treated as a deposit.

There were also two other contracts where receipts were incorrectly categorised as revenue. Both the CEO and CFO have resigned with immediate effect.

Comment: these are of course pretty basic accounting errors which any director of a public company should be aware of. In addition the auditors (Mazars) failed to pick up the issue. These were substantial contracts in relation to the overall revenue of the company so surely should have been reviewed in detail?

These failings may not have been deliberate fraud but they just demonstrate how it’s so easy for investors to be misled by false accounting. Not a company I have ever held fortunately.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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