Select Committee on Public Accounts Minutes of Evidence

Memorandum submitted by Ian Griffiths and Simon Bowers, The Guardian


  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.


  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.


  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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Prepared 17 April 2007