Memorandum submitted by Ian Griffiths
and Simon Bowers, The Guardian
INTRODUCTION
We thought it might be of assistance to the
Committee to set out below a summary of our investigation into
the affairs of iSoft over the last two years. We make no point
other than to point out that iSoft is the main software supplier
in three of the five regions covered by the National Programme.
BACKGROUND
The Guardian began examining iSoft's
accounting practices in early summer 2004. It saw confidential
reports and papers which suggested the company's conduct had the
effect of misleading the stock market. The investigation uncovered
evidence that questionable accounting could be traced back to
2002 and that the company's non-executive directors past and present
were called on to deflect questions about the company's accounting.
In July 2004 The Guardian discovered
that an iSoft director had been re-elected to the board—despite
the fact that he has been suspended from duty without the stock
market being informed. This prompted Paul Farrelly, MP for Newcastle-under-Lyme,
to ask the Department of Health a number of Parliamentary Questions.
One Question asked: "if the Department will ask Accenture
to report on the (a) financial standing and (b) accounting treatment
of revenues and profits at iSoft." John Hutton, then health
minister, replied that there were no plans to seek any such report
on issues which were a matter between iSoft and its auditors.
In autumn 2004 iSoft secured a court order preventing
The Guardian or Ian Griffiths from publishing the findings
of the investigation into the company's accounting.
In January 2006 iSoft issued a profits warning.
In June 2006 iSoft changed its accounting policy on income recognition
and issued another profits warning. A week later its chief executive
left. In August 2006 the company said it had uncovered accounting
irregularities. Later that month iSoft announced a £344 million
loss for the year to April 2006. In September Accenture said it
was quitting the National Programme. In October iSoft put itself
up for sale. iSoft is now being investigated by the Financial
Services Authority and the accountancy profession's disciplinary
body. In late October the order gagging The Guardian and
Ian Griffiths was lifted.
INVESTIGATION FINDINGS
iSoft added £30 million to its revenues
in 2004 in a move that had the effect of misleading the stock
market.
Questionable accounting at iSoft can be traced
back to 2002.
The investigation suggests that the company's
non-executive directors past and present were called on to deflect
questions about the company's accounting.
For two years, iSoft claimed information The
Guardian had found relating to £30 million in revenues
came from confidential company papers containing errors that were
later corrected but now iSoft's new management conceded the information
in the original documents seen by The Guardian was accurate.
The £30 million figure was much higher
than investors had expected. The glowing full-year results reported
in June 2004 pushed iSoft shares to a new high of 446p. A week
later five directors and a company founder sold shares worth £44
million.
In June 2004 a reliable source told The Guardian
that in its accounts for the year ending April 2004 iSoft was
recognising £30 million of payments from Accenture and CSC,
who were implementing the NHS's £6.2 billion technology overhaul,
the National Programme for Information Technology (NPfIT). This
was designed to radically enhance the NHS's technology in three
of England's five regions and iSoft was the main software supplier.
The source said: "There was a £30
million gap which had to be filled to meeting City expectations.
So they went for recognition of the contracts, take £18 million
from Accenture and £12 million from CSC."
The Guardian was then sent a copy of
the minutes of the iSoft audit committee meeting held on 15 June
2004 to discuss the 2004 audit and the accounts.
The minutes said: "The external auditors
[Robson Rhodes] then reported on the UK trading entities. In the
case of the LSP contracts, £30 million of the £120 million
licence revenue had been recognised."
iSoft told The Guardian in October 2006:
"The company recognised approximately £30 million of
revenues from the National Programme in the financial year ended
30 April 2004 under the accounting policy for revenue recognition
that was in force."
The audit committee minutes were included in
papers for the board meeting held immediately after the iSoft
annual meeting in July 2004.
An iSoft spokesman said on 5 August 2004: "We
suggest that The Guardian may be being referred to a simplistic
confidential third-party summary of the results of an individual
business unit that was responsible for both delivery of new system
deliverables under the NPfIT plus other contractual deliveries
completed prior to the rollout of the new NPfITsystem."
The spokesman said the minutes contained a drafting
error. This was confirmed by iSoft lawyers, who said the minutes
would be corrected when the audit committee next met later in
the year. The company offered no explanation about why such a
fundamental error had not been spotted before the minutes were
circulated to the board.
Sir Digby Jones, a former iSoft non-executive
director and former director general of the CBI who attended the
audit committee on 15 June, instructed the company's lawyers to
write to The Guardian on 11 August 2004 answering questions put
to him about the minutes. They said: "He [Sir Digby Jones]
is satisfied that there was no confusion over the matter internally,
but there was an error in preparation of the draft minutes."
On 12 August 2004 Eurfyl ap Gwilym, then chairman
of the audit committee who still sits as the non-executive director
heading iSoft's remuneration committee, filed a witness statement
saying the reference to £30 million of LSP revenue in the
minutes was inaccurate. He said: "I can confirm in my capacity
as chairman of the audit committee that I will propose formally
to the audit committee when it next meets that this error in the
minutes be corrected to read, `in respect of new system deliveries
completes as part of the P1R1 [the first phase of the NPfIT] contractual
deliveries, £5.8 million was recognised in the year. Other
revenues were generated in the year from deliveries of existing
products and services totally £24.5 million. These other
deliveries predated P1R1 and were contractually differentiated
from the P1R1 new NPfIT system rollout.'
In October 2006 iSoft conceded the original
minutes seen by The Guardian were entirely accurate. Director
of communications John White repeatedly confirmed to us that changes
had been made to the relevant passage, but that they did not amount
to a correction.
iSoft has used controversial accounting procedures
to book revenues before being paid on subsequent occasions. In
2005 the company booked a cash advance from the Department of
Health of £58 million, helping it to meeting City expectations.
Earlier this year, a similar upfront government cash amount was
paid to the company—though it was not as much as iSoft had
been banking on.
Sir Digby was also called upon to assist iSoft
executives to resolve a serious accounting problem relating to
a bad debt. On 31 October 2002, iSoft signed a licensing agreement
with Gleneagles Healthcare, a Philippines company, which agreed
to pay about £2 million for the right to distribute iSoft
products in the region. The deal was never announced publicly
even though the one-off payment to iSoft represented more than
50% of the company's net profits for the half-yearly to 31 October
2002.
But iSoft was never paid by Gleneagles, a company
only incorporated in July 2000 with net assets of just £15,000
at the end of 2001. The bad debt came to light in late summer
2003 when a due diligence report was commissioned from the accountants
Deloitte Touche by the board of Torex, a rival software company,
ahead of recommending a merger with iSoft to its shareholders.
The report said: "This debtor arose during the financial
year to 30 April 2003. Collection must be questionable although
Tim Whiston is confident that payment will be received. No provision
has been made against this debt."
So concerned was the Torex board by the Philippines
debt that it commissioned its own investigation into Gleneagles
Healthcare. The report questioned Gleneagles' credentials and
the Torex board considered calling off the merger with iSoft.
The deal was only rescued when the Torex board
sought personal assurances in September 2003 from Sir Digby, then
iSoft's senior independent non-executive director. He conducted
his own review of the Gleneagles transaction and concluded that
it had been properly accounted for.
In October 2006 Sir Digby recalled the approach,
which was made through Torex's financial advisers. He said that
he had received personal assurances from iSoft executive directors
both privately and later at a formal board meeting that the debt
had been provided for.
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