Tony Hill, chairman of pubs and strip clubs venture SFI, has resigned after the group revealed it had overstated the value of its balance sheet by around £20 million – an 'enormous sum for a company of this size' according to one City analyst. Ben Cobley reports on a scandal that will probably leave shareholders with nothing and could have serious implications for other present and past board members.

In this morning's statement, SFI - which operates well-regarded chains such as Slug & Lettuce and the Litten Tree, as well as the sleazy FYEO strip joints - said that a review being carried out by new finance director Tim Andrews had already reached 'a number of material conclusions'.

That the group had been 'over-optimistic' about its financial position had already become obvious following a profit warning on 21 October.

But the real scandal concerns what the group terms 'a significant over-statement of current assets and under-statement of liabilities', to an amount, which the board believes 'is likely to exceed £20 million'. As Old Mutual Securities's hospitality analyst Greg Feehely points out, this is 'an enormous sum for a company of this size.'

SFI reported that it had £26 million of current assets at 31 May's last financial reckoning – most of it in the form of drinks, debtors and cash, in addition to fixed assets of £212.4 million.

Following today's announcement Feehely admits that 'the market has been misled', adding for good measure that a lot of previous market suspicion of the company 'was down to Tony Hill, who the market didn't trust... he had to go.' But he says that 'I wouldn't tarnish the current finance director Tim Andrews, who has only just arrived and is looking to clean all this up.'

Given that the 'accounting anomalies' have been built-up 'over a number of years', fingers could start pointing at Hill and former group finance directors James Kowszun, who held that position between October 2000 and May of this year (before joining Aim-listed Hartford as chief executive). Clive Eplett, who was finance director until September 2000 and managing director (development) until September 2001 could also be implicated.

Though Kowszun was not available for comment today, Eplett said that 'James and I were not of a mind where we felt we had to do any creative accounting...any suggestion that we have been up to any mischief we would find very offensive.' He adds that since he left the board in September 2001, the company has doubled in size, due to new openings and the acquisition of the Parisa bar chain.

Although the whole story has yet to unfold, it seems most likely that shareholders will receive nothing in return for their investments. Feehely reckons that SFI will pass into administration, weighed down by an estimated debt pile of £120-140 million. He points out that the sale of its various chains and sites should bring around £130 million.

Various market watchers expressed 'incredulity' and 'amazement' at the accounting mistakes, questioning how it is possible to overstate current assets 'by so much' - and to understate liabilities at all. The question, of course, is whether this was done with intent or whether it was the result of spectacular incompetence.

The company's auditor throughout all of this was accountancy firm Horwath Clark Whitehill. Its chief executive, David Furst, said he was 'surprised' when he heard the news and, as yet, hasn't been privy to all the details of the preliminary findings.

These should be forthcoming as the review goes on, with the assistance of accountants at PriceWaterhouseCoopers.