Cyber firm Darktrace hires EY for review of finances

02 March 2023 2 min. read
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Cybersecurity firm Darktrace has appointed auditing firm EY to review its key financial processes and controls. The move comes after a short seller accused the company of skewing its financial numbers.

Founded in 2013, Darktrace is a British-American information technology company that specialises in cyber-defence. The company is headquartered in Cambridge and San Francisco – while it is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.

Despite booming demand for cyber-security services at present, the confidence of investors in Darktrace was rocked recently, when its financial processes were called into question. A 70-page report in January 2023 saw New York-based Quintessential Capital Management (QCM) state it was "deeply skeptical about the validity of Darktrace's financial statements”, after it investigated Darktrace’s business model and selling practices.

Cyber firm Darktrace hires EY for review of finances

QCM also alleged that it had uncovered flaws in Darktrace’s accounting, including “round-tripping” and “channel stuffing” practices that seek to inflate revenue, adding it believed sales and growth rates may have been overstated. In a bid to calm investor panic after the accusations, Darktrace has tapped Big Four audit and advisory firm EY for an independent investigation.

A statement from Gordon Hurst, Chair of Darktrace’s board, read, “The Board believes fully in the robustness of Darktrace’s financial processes and controls. As a sign of that confidence, we have commissioned this independent third-party review by EY. We look forward to the outcome of this review.”

Once it has completed its review, EY will report to the Chair of Darktrace’s audit and risk committee, Paul Harrison. According to the firm, it is unlikely to be in a position to update markets on the review by the time of its first-half earnings report in March, and didn’t provide a timeline or when it would release the findings.

Even so, investment sentiment seems to have responded positively to the news. Darktrace shares reportedly rose more than 2% after EY’s involvement was confirmed – helping share performance for 2023 to have still increased by 4% overall, in spite of a steep drop in late January.

Darktrace is backed by Mike Lynch, the British tech entrepreneur who was ruled by a British judge to have masterminded an elaborate fraud when he sold his company Autonomy in 2011. Lynch denied the charges. However, Deloitte and two of its former Partners, Richard Knights and Nigel Mercer, has since been stung with fines following that deal – with regulators finding they all failed to sufficiently contest Autonomy’s accounting, as well as the disclosure of its purchases and sales of computer hardware.