The struggling fashion chain Ted Baker has warned that it overestimated the value of its stock and appointed a law firm to carry out a comprehensive review.

The retailer, which has a new finance director, estimates that the value of the inventory held on its balance sheet has been overstated by 20m to 25m, based on preliminary analysis. The error relates to previous years and will have no effect on its financial position this year.

Ted Baker has called in the London law firm Freshfields Bruckhaus Deringer to investigate further, and will also be appointing independent accountants. They will report to a subcommittee, chaired by its independent director Sharon Baylay.

Shares in Ted Baker initially tumbled 15% on the news but later cut the loss to 8.5%, at 363.82p. A year ago, they were changing hands at 15.50.

Ted Baker has had a torrid year after former and current staff accused its founder Ray Kelvin of a regime of "forced hugs" and harassment. He stood down as chief executive in March and was replaced by Lindsay Page. The firm's profits were hit by the 2m cost of an investigation and legal matters relating to the allegations.

The company has issued three profit warnings this year and dived to a first-half loss of 23m in October, its first in more than two decades. It blamed unseasonably warm September for slow trading at the start of the second half, as well as "distressed discounting" by rivals that forced it to cut prices. The firm also admitted to mistakes with its spring women's fashion ranges.

Investors will be hoping for more details of the investigation into the inventory blunder when Ted Baker releases a trading update on 11 December.

The company appointed Rachel Osborne as chief financial officer in September. She previously held the same role at Debenhams and Domino's Pizza. Osborne replaced Charles Anderson, who left after 17 years with Ted Baker to join Mulberry.

Julie Palmer, partner at corporate restructuring firm Begbies Traynor, said: "This news could hardly come at a worse time. Ahead of its results announcement next week and the busy period up to Christmas, retailers need to be squeaky clean to grab the attention of the next generation of consumers. The business has already suffered this year from the allegations of a 'forced hugging' culture at Ted Baker.

"Last year's positive results, when Ted Baker was hailed as one of the shining lights of the high street, seem a long way away now. The business appears to have done a U-turn in the wrong direction. While there still might be nothing wrong with the style of the brand, the issue is that its reputation keeps taking punches rather than dishing them out."

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