Darktrace taps EY to review 'financial controls' amid short-seller pressure

By Scott Kanowsky

Investing.com -- Shares in Darktrace (LON:DARK) rose by as much as 3% on Monday after the cyber security firm announced that it had hired Ernst & Young to conduct an independent review of its internal financial reporting operations.

In a statement, Darktrace said that the consultancy will look into its "key financial processes and controls" following a report from short-seller Quintessential Capital Management last month that alleged potential accounting errors at the U.K.-based company. Quintessential noted possible issues with Darktrace's contracts with resellers and customers that largely pre-date its 2021 public listing.

Darktrace denied the allegations in the "strongest terms" at the time, and reiterated this sentiment again today.

"The Board believes fully in the robustness of Darktrace's financial processes and controls. As a sign of that confidence, we have commissioned this independent third-party review by EY. We look forward to the outcome of this review," said Darktrace chair Gordon Hurst.

The company added that it will unveil the findings of the EY review once it is complete. It also does not expect to provide any update on the matter when it posts its half-year results on March 8, but backed its guidance for six-month revenue of at least $258 million and adjusted core earnings margin "at or above the top end" of a range of 15% to 18%.

In a tweet, Quintessential said it welcomed the EY review and hopes that it "will be of sufficient granularity, skepticism and impartiality to provide insights about the dubious transactions we flagged in our report."

Quintessential did not appear on a list of short position holders in Darktrace on Friday, according to data provided by the U.K. Financial Conduct Authority. The FCA does not require positions under 0.5% to be publicly disclosed. The New York-based hedge fund previously scaled back its short position in Darktrace to 0.38% on Thursday, down from 1.3% on January 30, the data showed.

Analysts at Jefferies, who serve as Darktrace's joint house broker with Berenberg, called the decision to bring on EY a "sensible step toward putting quality of earnings issues to bed."