Darktrace (LON: DARK) (FRA: 7TJ) (OTCPK: DRKTF) shares are up 20% this morning. The DARK share price rise is driven by a report from the accountants Ernst & Young into accusations - allegations perhaps - that Darktrace has been overstating certain aspects of its accounts. It's all been a bit dark (aha) with people detecting traces (aha, aha) of the behaviour which caused such alleged problems at Autonomy. That this has now all been put to bed, thoroughly disproven, is what has led to the share price jump. Or at least some will be convinced by this new report. There are always some who simply won;t believe any set of evidence.
As we've said before about Darktrace: “Of course, the other issue for Darktrace shares is as we've explained elsewhere. There's still market concern about how aggressive they're being at revenue recognition. Now, whether this concern should exist or not is another matter. But it is out there. There are still court cases going on about Mike Lynch's earlier adventure, Autonomy. There have been claims that this hard charging method of revenue recognition was also extant at Darktrace. The company says that was all sorted out before the flotation - even if it ever happened which it didn't.”
But however much it was protested that such issues simply didn't exist - and if they had they were already sorted out - the mutterings in the corners of the marketplace continued.
Darktrace share price from London Stock Exchange
The main line from this new report: “Neither Management, nor the Board consider EY's report to have any impact on Darktrace's previously filed public company financial statements nor to change their belief that those financial statements fairly represent Darktrace's financial position and results. In addition, Grant Thornton's audit opinions for prior years remain unchanged and the audit for FY23 is in progress.” Obviously, any detailed examination of a company's books is going to reveal an area or two where matters could be improved - accounting is an art, not a science. But the report seems to find nothing beyond that.
So, does that put the issue to bed then? Could be, yes. But as we've also said about Darktrace: “The other issue is that problem over Autonomy and Mike Lynch. The slight worry on the market being that Autonomy was - to be kind about it - accused of being aggressive in revenue recognition. Mike Lynch has now been extradited to the US to stand trial on charges stemming from the HP takeover. The worry has long been, well, given that Lynch was a founder at Darktrace, are they also - umm - aggressive on revenue recognition. All the specific examples used the company says were sorted out before flotation. And maybe they all were. But reputations don't necessarily depend upon facts. So, perhaps that reputation - or worry - is lifting. Now that Lynch is extradited and there's little prospect of a trial for months and months at least, there might well not be any news to worry people on the point.”
The share price isn't really driven by what the report says. It's driven by how many believe what the report says. That is, changes in the Darktrace share price are going to be driven by changes in beliefs, not changes in something as mere as facts.