Blacks has suffered a fall in sales

It found that for at least two financial years, earnings at Sandcity, which sells O'Neill branded boardwear, had been overstated by about �1m.

Darren Spurling, the managing director of Sandcity, has been suspended. The investigation is continuing.

In January, Blacks Leisure cut its profit target as boardwear sales fell.

Last December the firm appointed a new chief executive, Neil Gillis, to conduct a strategic review and revive the fortunes of the ailing business, which also trades as Millets and snow sports specialist Freespirit.

One of the issues at stake was to see whether Sandcity, which is based in Washington, Tyne & Wear, should be maintained as a separate entity.

Sandcity targets the same market as Freespirit, also owned by Blacks Leisure.

A review was conducted to see if the two should be merged, in a bid to cut the costs of the boardwear business.

The accounting discrepancies emerged as a result of the review.

Suspended

Blacks said that the group's expected profit before tax for this year and for next year are "likely to be approximately �1m lower than market estimates."

"Following the identification of these problems the board has taken action which it felt necessary in the circumstances and has suspended the managing director of the Sandcity subsidiary, Darren Spurling," it added.

Mr Spurling is a main board director of Blacks Leisure.

Blacks is now talking to employees of Sandcity about its plan to close the Washington headquarters and distribution centre, and combine the business with Freespirit in Northampton.