Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

RSM Tenon Group PLC's Investors Could Have Anticipated Its Accounting Problems

U.K. regulators are investigating the global accounting firm PricewaterhouseCoopers (PwC) for its audits of RSM Tenon Group PLC (TNO)'s financial statements for the years ended June 30, 2011 and 2010. Back then, RSM Tenon's investors could have found warnings of problems that continued in the London-based tax and advisory firm's documentation.

The U.K. Accountancy & Actuarial Discipline Board said Monday that it is examining the "preparation, approval and review of financial information in connection with the admission of RSM Tenon Group plc to the main market of the London Stock Exchange and the acquisition of RSM Bentley Jennison."

GMI Ratings doesn't rate PwC, as the private company doesn't trade on a public stock exchange. But RSM Tenon's financial statements reflect an AGR score of 21 as of this June, indicating higher accounting and governance risk than 79% of comparable companies. The score has improved only slightly since June 2010, when it was a 4.

RSM Tenon and Tenon Audit Limited said on December 30, 2009 that they completed their acquisition of the professional services firm RSM Bentley Jennison for £76.3 million, after raising £40 million through the issue of 88.89 million shares to fund the transaction, according to the website In the period ended December 31, 2009, RSM Tenon said it had paid £125.5 million above book value for its acquisitions, or more than 49% of its total assets. This had raised a red flag at the time, given that such estimations of assets can turn out wrong and later need revision. RSM Tenon's score has improved since in part because the company's goodwill declined to £75.6 million as of December 31, 2011, or nearly 36% of total assets.

In another sign of potential problems, RSM Tenon said on October 18, 2011 that its finance director since March 2008, Russell McBurnie, stepped down from the board. While he remained with the group to ensure proper handover and to implement "certain ongoing projects," Adrian Gardner became CFO with immediate effect.

The accounting firm said months later that it cost $16.8 million to produce its goods in the period ended December 31, 2011, or only 7% of its total revenue versus the industry median of more than 65%. Either the company was more operationally efficient than its competitors, or certain expenses were being excluded from its costs. Meanwhile the trailing twelve-month average of RSM Tenon's "other operating expense" - a catch-all category that stock analysts do not typically ask for details about - amounted to $114.9 million as of the period ended December 31, 2011, or more than 37% of the trailing twelve-month average of RSM Tenon's total operating expense. In the period ended June 30, 2011, other operating expense had only been $40.7 million, or more than 17% of total operating expenses.

In January this year RSM Tenon announced that it might have to restate its financial results for the year ended June 30, 2011 as a prior year adjustment and to incur additional charges in the six months to December 31, 2011. RSM Tenon also said its board chairman Bob Morton and CEO Andy Raynor had stepped down immediately. On February 15 the company said it appointed the former CEO of Matrix Group Chris Merry as its new CEO, and Adrian Martin, the chair of RSM's audit, renumeration and nomination committees as of April 2010, as its non-executive board chairman.

On February 29 the new team said they had adjusted prior year accounts in a way that reduced pre-tax profit by £12.1 million, and changes included the downward revision of RSM Tenon's goodwill by £60.7 million. They also said the company failed to take "full advantage" of the potential restructuring, cost savings and efficiency synergies following its acquisitions of RSM Bentley Jennison and certain assets of Vantis Plc acquired in June 2010 for around £4,911,000. As a result, they plan to cut the company's headcount by around 10% and to consolidate some offices, resulting in employment cost savings of approximately £14 million annually.

The board is "confident" of the company's "ability to implement robust and accurate financial reporting controls and procedures for the future," RSM Tenon said in its filing this February. And Chairman Martin promised that RSM Tenon's executive team is "fully focused on restoring the business to profitability."

Region: Western Europe
Sector: Industrials
Industry: Business Support / Supplies
Market Cap: GBP 20.2mm (Nano Cap)
ESG Rating: N/A
AGR: 21

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am a corporate governance specialist.