S4 Capital axes bonuses and ex-CFO exits as fallout from audit woes continues

S4 Capital has axed annual bonuses for Sir Martin Sorrell and the other executive directors, and the company’s former chief financial officer has stepped down from the board as the fallout from its auditing problems continues.

Details about the decision to drop bonuses and the boardroom shake-up were revealed in the 2021 annual report, which was published as planned a day before The Sunday Times in London published an in-depth report into what it claimed was the accounting “chaos” at S4 Capital.

The company’s share price slumped by a third to £3.10 at the end of March after it postponed its annual results twice because PwC, the auditor, could not complete its work due to a series of audit problems. These included “control weaknesses, staff turnover and lack of detailed documentation”, largely at the MediaMonks content practice.

The delays were “embarrassing and unacceptable”, Sorrell admitted, when the company finally published its annual results and it had to cut its earnings before exceptional items (Ebitda) by up to 5% because of the audit delay, in addition to missing its annual profit margin target.

That has led Sorrell and the other executive directors, who also include Victor Knaap and Wesley ter Haar from MediaMonks, Pete Kim and Christopher Martin from Mighty Hive, Peter Rademaker, chief financial officer until December 2021, and Scott Spirit, to waive their bonuses.

“Both the [remuneration] committee [which is composed of non-executive directors] and the executive directors were disappointed that the Ebitda margin target was not achieved and, also acknowledging the delay in publication of the results, have agreed for 2021 that no bonus should be paid,” the annual report said.

Rademaker, who has been a non-executive director since January after handing over the CFO’s role to Mary Basterfield, has agreed to step down from the board at the annual general meeting. Rademaker had previously been CFO of MediaMonks.

Kim is also stepping down as an executive director from the board but staying as CEO of the media and data operation.

Spotlight on past practices

S4 Capital, which Sorrell founded in 2018 and has grown by merging with more than two dozen businesses, has vowed to implement tighter finance controls, particularly around revenue recognition.

However, The Sunday Times’ article has shone a fresh spotlight on the company’s past practices.

Under the headline, “How chaotic accounting engulfed Sir Martin Sorrell’s S4 Capital empire”, the newspaper claimed that the company’s “race to land ‘whopper’ clients [worth more than $20m in revenue] overwhelmed finance staff” and it quoted “multiple current and recently departed employees of the agency in four countries, who each described a business chasing growth that failed to install the proper controls and processes”.

MediaMonks used accounting software, called Exact, that “insiders argue is inadequate for a company of its size”, the article said.

In some cases, staff would end up editing a “PDF invoice”, rather than using the Exact system, which caused “chaos internally as staff scrambled to reconcile the sums on their system with the amounts clients had actually been billed”, according to The Sunday Times.

Sorrell told the newspaper that it was incorrect procedure to edit invoices in this way and that “anybody who did this was discouraged from doing so several years ago”. He added: “With the growth of the business, we continue to review software developments.”

S4 Capital’s share price fell about 6% to below £3 in trading on Monday morning, following The Sunday Times’ report.

S4 Capital declined to comment about the article or on its share price when approached by Campaign.

The annual report said the company plans to reappoint PwC as its auditor.

S4 Capital maintains that it is continuing to grow strongly, with like-for-like revenue growth of 25% expected this year, and MediaMonks won Social Media Agency of the Year at Campaign’s global Agency of the Year Awards last week.

Sorrell has a powerful hold over S4 Capital as he owns a controlling “B” share as well as a significant amount of ordinary shares, after investing more than £50m of his own money.

“The board has discussed the scope of my role and remains satisfied that it is appropriate for me to continue to act in a combined capacity as the executive chairman,” Sorrell wrote in the annual report, reiterating what he and the board have said previously.

He earned £203,000, including £100,000 in salary and £73,000 in taxable benefits, last year.

The financial scrutiny comes amid other changes at MediaMonks as several senior executives in Germany, Thomas Strerath and Till Eckel, are leaving.

(This article first appeared on Campaign UK)