Revealed: Cobham accounting scandal was caused by 'culture of fear'

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The accounting scandal that has rocked defence giant Cobham was driven by a “fear-based” culture, and only emerged after whistle-blowers lifted the lid. 

Cobham Wireless, the unit which forced the firm into a rights issue in April, had an undesirable “subculture” of fear which became the “norm” within parts of the Stevenage-based division, according to an internal memo seen by the Standard.  

The Ministry of Defence supplier bought the $1.5 billion US wireless giant Aeroflex in 2014 and merged it into its smaller wireless unit, but the tie-up sparked complexity and confusion among staff, which it partly blamed for  the problems.  

“We must acknowledge that our business unit has grown from two SMEs to a relatively large and complex business which needs a more mature approach,” the memo said. The scandal has been felt at the coalface, with up to 80 Wireless staff due to be made redundant as Cobham seeks to take £30 million of costs out the business. 

Cobham has proposed to make 45 staff redundant from its wireless-testing service TeraVM, cutting the team to 28 staff. A further 35 staff across the Wireless unit have also been told they are at risk of redundancy.

Dozens of employees across the business have been attending internal workshops since April for Cobham’s ethical standards programme, called Spirit, according to the memo. 

The wrongdoing was only brought to light after staff phoned Cobham’s ethics hotline to raise concerns over irregularities and compliance issues at the division. 

The company has overhauled management at the division since the findings came to light. The unit’s vice-president of finance Derek Smith and operations vice-president David Orgill have left. 

The firm was forced to go cap in hand to investors for the emergency cash boost in April after the shocker at its wireless unit pushed it towards a bank loan breach. It took a £9 million operating charge related to the issue. 

At the time, the firm said publicly it had unearthed “operational issues”. 

Today Cobham said there had been strong demand for the £506.7 million rights issue, which was launched after poor trading and the accounting scandal forced it to issue a profit warning. 

Bankers Bank of America Merrill Lynch and Jefferies have been left with just 2.8% of the shares, which they can sell on at a later date. Investors will get one share for every two they own.

Cobham declined to comment.

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June 17, 2016 |
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