Mayfield Childcare confirms investigation into alleged accounting anomalies and misappropriation of funds

Mayfield Childcare Ltd have confirmed that trading in its shares was halted at its request due to the discovery of potentially incorrect accounting treatment of certain items and misappropriation of company funds by a former employee.

 

The halt was called after specialist consultants KordaMentha delivered an interim independent forensic accountants report into the matter in which it confirmed the apparent misappropriations. 

 

As per the company’s statement the following information is known:

 

What happened?

 

Mayfield discovered potentially incorrect accounting treatment of certain items and potential misappropriation of company funds by a former employee. 

 

How were the irregularities discovered?

 

During the preparation of the 2023 CAPEX budget a review of historical payments to suppliers was conducted during which the irregularities were identified. 

 

What were the irregularities? 

 

The irregularities identified by KordaMentha, who had been called into investigate, fell into two categories:

 

1. The payment of invoices by Mayfield for goods and services that had been invoiced to Mayfield but it transpired that the goods and services had not actually been incurred by Mayfield or its child care centres 
2. The payment of invoices for goods or services rendered at non Mayfield centres out of advanced payments made by Mayfield to suppliers

 

Who was responsible for them?

 

The only reference to an individual is an “employee” who is no longer with the company. 

 

Have they been contacted?

 

Yes, and Mayfield noted that their initial response has been “to the company’s satisfaction.”

 

How much were the total misappropriations in dollar terms?

 

We do not know precisely at this stage however we do know that Mayfield has stated the misappropriations are not expected to have a “material impact” on the Company’s accounts. 

 

What exactly does “material impact” mean?

 

In accounting terms, a “material impact” is one where an unexpected financial occurrence is sufficiently large to alter the behaviour of someone who is using financial statements for a specific purpose. 

 

So for example, an unexpected cancellation of a major contract, and its financial consequences, would be considered an occurrence that would have a “material impact” on a Company’s financial statements. 

 

Accounting firms, when creating accounts, usually identify a dollar value that is considered to be the threshold that determines whether a financial loss is deemed material or not material. 

 

Different accounting firms use different methods to calculate materiality but as a rule of thumb materiality can sometimes be defined as one per cent of revenue, five per cent of pre-tax income or 0.5 per cent of total assets. 

 

So as an example and to provide some context for value, for Mayfield, which generated around $70 million of revenue in 2022, using the materiality threshold of one per cent of revenue suggests a materiality threshold of $700,000 or using the pre tax profits threshold around $330,000. 

 

If these were hypothetically the case, then the losses identified by the investigation could amount to a number up to but not including $700,000 if the revenue method was used or up to $330,000 if the pre tax profits method was used, which provide some sense of the potential financial impact of the alleged irregularities. 

 

What is the company’s overall position on the irregularities?

 

In its 2022 Financial Statements in note 12 of the accounts the company stated that:

 

• The amount of funds that is subject of the investigation is not sufficient to impact day to day activities of the company
• The independent forensic investigation remains incomplete but is ongoing; and
• The board expects a final report from the independent investigator in the near term

 

What happens next?

 

The company has confirmed that KordaMentha will continue their investigation with a final report expected in several weeks time. If a further announcement is needed Mayfield has agreed to provide one. 

In the meantime, the Group has released its 2022 financial statements which can be found here.