PwC fined and Partner banned from accounting over BHS audit

29 June 2018 Authored by Consultancy.uk

Following an investigation into the collapse of British retailer British Home Stores, PwC and a former Partner of the firm have been fined on the grounds of ‘misconduct’. Following the Financial Reporting Council’s decision, the Big Four firm has apologised, while claiming the auditing failures in question did not play a role in the demise of the doomed store.

The Financial Reporting Council (FRC) has banned the veteran PwC Partner who signed off on the accounts of collapsed retailer British Home Stores (BHS) from accounting. Steve Denison, who is also Non-Executive Chair at the famous Yorkshire County Cricket Club, admitted to allegations of misconduct over the 2014 audit at BHS and its holding company the Taveta Group, and will subsequently be unable to return to the profession for a period of 15 years.

Denison was the accountant to have signed off the BHS accounts as a going concern in 2015, just days before the firm, which was encumbered with a substantial pension deficit, was sold for £1. One year later, BHS had collapsed, resulting in the loss of 11,000 jobs. At the time, the failure of BHS was the biggest collapse in the British retail industry since the demise of Woolworths in 2008, and provoked intense scrutiny from politicians keen to avoid further collapses. Members of Parliament investigated how Sir Philip Green had been able to sell the business, with a pension gap of £571 million, to a company run by Dominic Chappell, someone with a litany of bankruptcies to his name, and no retail experience.

PwC fined and Partner banned from accounting over BHS audit

In February 2017, following sustained public criticism and a collapse in profits at Green’s remaining Arcadia Group retail company, the disgraced businessman agreed to pay £363 million toward a bail-out the pension scheme which left many long-term employees facing uncertainty in their old age, however MPs were left unsatisfied, calling for Green to put more towards the “inadequate” fee, which left a £208 million gap still to fill. His failure to do so led some to even call for his knighthood to be withdrawn.

Remarking when PwC was initially questioned about the audit in spring 2016, Steve Denison said that when he signed off on the work, “no deal had been done, so in the event a deal didn’t happen, then there was written confirmation of financial support from Tavata [BHS shareholder group]. In the event the deal did happen, that financial support would fall away and so other factors came into play such as the provision of additional cash resource for trading in the future.”

He added that he believed in either case there had been “no material uncertainty”, given that “the existing management team was trying to turn the business around, and had some success in driving costs down and reducing cash requirements, the cash requirements were lower than the losses shown, and there was a deal which would bring extra cash from the vendor and new cash from the purchaser.”

FRC fine

As well as banning Denison, who left PwC in June 2018 after more than three decades with the firm, the FRC fined him £325,000 and PwC £6.5 million. The FRC said both had admitted "misconduct", something which it has previously charged PwC with for its auditing work. Last year, the accounting watchdog stung PwC with £5 million fine on similar grounds for its role with collapsed outsourcer Connaught. At the time, this was the largest fine ever meted out by the FRC.

Issuing a statement on the news of its Partner’s ban, Big Four professional services giant PwC admitted there had been "serious shortcomings with this audit work". The company further commented, “We are sorry that our work fell well below the professional standards expected of us and that we demand of ourselves. At its core this is not a failure in our audit methodology, the methodology simply was not followed."

PwC also said that it had overhauled its monitoring procedures, although it was at pains to point out its belief that the audit failings "did not contribute to the collapse of BHS".

Since the sudden downfall of BHS, a number of major UK retailers have similarly hit the rocks. In 2018, Toys R Us and Maplin entered administration on the same day, while Poundworld followed later in the year. Several other brands have taken action via CVAs to reduce costs and stave off administration, including Prezzo and House of Fraser.

The news also comes as the FRC confirmed it has started looking into more Big Four audits. The watchdog censured KPMG for an "unacceptable decline" in the firm's auditing work, bringing 25% of its work under evaluation in an unprecedented move.

Meanwhile, the FRC has also commenced a probe into Deloitte’s 2015 and 2016 audits of SIG, an insulation and exteriors business which confessed in February it had repeatedly overstated its profits. The errors meant SIG’s overstated its full-year profits for 2016 by £3.7 million, with a further £2.5 million overstatement in the first half of 2017 and £0.4 million in overstatements relating to previous years.

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