The FCA will review the accuracy of the company's announcements made between 6 March 2018 and 24 October 2018 and whether these announcements accurately reflected its financial status. 

Yü said in a statement: ‘The group plans to work collaboratively with and cooperate fully with the FCA in its enquiries.’

The company said PwC’s review, ordered in the wake of the initial discovery, had identified the underlying cause for the level of corrections as being centred around material weaknesses in key internal systems and controls across the customer to invoicing and cash cycle.

It now expects a further reduction in profitability of between £2.75m and £3.25m due to additional decline in gross margin achieved across the group's contract portfolio, and additional balance sheet corrections.

PwC’s work included reviewing trade debtors and billing data from 2014 to the end of November 2018, as well as an assessment of material risks and the effectiveness of internal controls. The firm also looked at the new internal controls and accounting processes now being utilised by the group in relation to bad debt provisioning and accrued income recognition.

The review concluded the group's internal controls were inadequate, including a failure to perform certain key financial reconciliations, incorrect management of systems, and poor data quality resulting from complex and manual ledger processes. Where controls were in place they tended to be informal and therefore applied inconsistently. 

New accounting processes have now been implemented in relation to estimating levels of accrued income and bad debt provisioning. While these are more in line with industry norms, the review noted they require embedding, monitoring and revision over time to evaluate their appropriateness.

Based on the findings of the review and the board's own internal analysis, the 2018 adjusted loss before tax of the Group now includes a £6.4m impairment of the 30 September 2018 balances of trade debtors (due to ledger reconciliation issues) and accrued income (due to a reassessment of the amount billable to customers).

There is also a £1.3m increase, from the £500,000 held at 31 December 2017, in the bad debt provision which is required at 30 September 2018, based on newly adopted internal accounting processes; and a further £1m related to accruals and fixed assets.

As a consequence of the corrections to the position at 30 September 2018, and based on new financial analysis, the board has reassessed the group's underlying profitability based on the contracts it has secured. 

As a result of this reassessment, the margins achieved across the contract book are significantly below the level previously expected. The gross margin now being recognised on existing contracts is leading to a greater dilution of the gross margin achieved across the contract book than previously anticipated, which will continue to dilute the gross margin percentage achievable in 2019 and, to a lesser extent, 2020.

Yü says PwC’s review indicated that the issues arose ‘due to a combination of factors’ which continue to be investigated by its audit committee. PwC has also been asked to follow up on its review in the first half of 2019 to ensure the appropriate actions have been implemented in relation to their key findings.

Yü is now forecasting adjusted loss before tax of between £7.35m and £7.85m for the year ended 31 December 2018. The group held £11m of cash at 30 November 2018 and continues to have no debt outstanding.

Ralph Cohen, Yü non-executive chairman, said: ‘The review has confirmed serious historic failures in the systems and processes within the group's finance function. These are now being addressed by our new chief financial officer, who is implementing all necessary improvements.

‘It will take time for these measures to produce their full results and for unsatisfactory sales contracts to time-expire. 

‘While the task ahead is daunting, I have every confidence that the entire Yü group team will face it with a determination to achieve the desired results and to restore the fortunes of the company.’

Report by Pat Sweet