The situation surrounding ASX-listed legal eagle Slater & Gordon Limited (ASX: SGH) has gone from bad to worse today after the company announced ASIC will now look at its business.
Slater & Gordon's shares were hammered last week after it was confirmed that the UK's financial watchdog, the Financial Conduct Authority (FCA), would run an investigation into the activities of UK-based Quindell Plc. Slater & Gordon acquired the Professional Services Division (PSD) from Quindell earlier this year for approximately $1.2 billion – a deal that had many investors scratching their heads at the time.
Although it remains unclear how that investigation could impact Slater & Gordon itself, that news was topped this morning when Slater & Gordon released yet another market update, confirming that Australia's own financial watchdog, the Australian Securities and Investments Commission, would run a probe into its relationship with audit partner, Pitcher Partners.
The shares crumbled more than 26%, wiping more than $400 million from the company's share market valuation. The stock has now lost 43% of its price since Tuesday last week, and 54% since the shares peaked at $8.07 in April this year.
In today's update, Slater & Gordon said that it was notified by Pitcher Partners on Friday that ASIC intended to raise some queries directly with the company, to which Slater & Gordon confirmed it would fully cooperate.
It said: "The Company and PP have commenced a detailed analysis of the financial information to be provided to ASIC. In the course of that initial analysis, a consolidation error… in the reporting of the historical UK cashflows has been identified. The Company has been advised by its auditors that the usual way of dealing with such an error is a note affixed to the FY15 Financial Statements."
Slater & Gordon will work with Ernst & Young to independently assess the company's responses to ASIC's queries, which it hopes to resolve as soon as possible.
Should you buy Slater & Gordon?
Anyone could look at the flogging Slater & Gordon's shares have received over the last week and proclaim that the stock has been oversold. While that might be the case, there is simply no way of knowing the extent of the damage that could be inflicted on the business, or if further errors will be uncovered.
Investors also need to question the company's decision to acquire the PSD division from Quindell Plc. While it may help the company to bolster its position in the UK market, there are still some big questions that remain unanswered regarding the acquisition which I would want clarification on prior to wading into Slater & Gordon's shares.
As such, I would suggest investors steer clear of Slater & Gordon for now until the situation (and the potential impact on Slater & Gordon) becomes much clearer. Luckily, there are plenty of other great bargains to take advantage of given the market's recent volatility which I believe are presenting as even greater value today.
