Big Four firms wary of Sports Direct's hunt for new auditor

19 September 2018 Consultancy.uk

As competition rules have led to Grant Thornton having to stand aside as the auditor of Sports Direct, the retail group has been left struggling to replace the firm. While Sports Direct is said to have attempted to tap the Big Four with regards to the contract, at least three of the firms have reportedly declined to tender for the role.

As the company approaches the back-end of 2018, Sports Direct has found itself embattled on multiple fronts, despite continued success amid a turbulent UK retail sector. Billionaire founder and CEO Mike Ashley has come under pressure at the company, following accusations from the tycoon that shareholders “stabbed [him] in the back” by allegedly forcing his former Chairman to quit the firm. Sports Direct has also come under fire for its purchase of House of Fraser, which left the collapsed firm’s 10,000 member pension fund on the brink of collapse.

Now, Grant Thornton, Sports Direct’s long-time auditor, is having to stand aside, due to competition rules. Grant Thornton has held the role since before Sports Direct floated on the London Stock Exchange in 2007, while Phil Westerman, the Partner at Grant Thornton responsible for signing off Sports Direct's accounts, has himself undertaken the work for five years, meaning he is obliged to step aside to preserve the independence of the firm's work. The sudden development saw Sports Direct submit a request in its annual report published earlier this year for Westerman's term to “be extended by one year to cover the FY19 audit", while noting that it intended to appoint a successor by the end of 2018.

Big Four firms wary of Sports Direct's hunt for new auditor

The report added, "We have made the FRC aware of our intentions and have consulted with our major shareholders over the extension of his term, who have been supportive of this, subject to the necessary procedures to ensure this remains compliant with the Ethical Standard requirements."

However, while Sports Direct received overwhelming shareholder support for a resolution to extend Grant Thornton's term at its AGM in September, replacing the firm may be easier said than done. According to a report from Sky News, at least three of the world’s largest auditing and advisory firms have refused to tender for the audit of Sports Direct International.

Of the so-called Big Four, EY, KPMG and PwC have each ruled themselves out of the process, as a result of potential conflicts of interest and reputational issues which relate to the Sports Direct’s corporate governance, according to sources close to the story. Deloitte, the other member of the gang of four, is also thought to have opted not to participate in the process, however it remains unclear whether this is a definitive decision, as of yet.

The news comes as the Big Four comes under mounting scrutiny from the UK’s watchdog for auditors, the Financial Reporting Council (FRC), and with a proposed break-up of their UK wings still reportedly on the cards, any avoidable controversy from Sports Direct seems to have put them off the tendering process. In the meantime, the UK Government has tasked Sir John Kingman, the former Treasury mandarin, with the undertaking of a review of the FRC itself, while the competition watchdogs are also evaluating whether to launch a fresh probe into the industry.

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Champions League glory hard to buy for football’s economic elite

15 March 2019 Consultancy.uk

The thrills and spills of knock-out football can still be one of the sport’s great levelling forces, with the Champions League’s second round having shown that the biggest spenders aren’t always able to buy their way to glory. While a league format broadly favours the squad depth of the beautiful game’s richest teams, half of the tournament’s wealthier teams exited in the first one-on-one elimination round.

As the Champions League burst back into life in February, following an agonising winter break, only two of the 16 teams re-launching their Champions League last-16 bid were from outside the so-called Big Five football leagues. With the exceptions of Portuguese champions FC Porto and Dutch footballing powerhouse AFC Ajax, teams from the world’s biggest spending leagues monopolised the second round. As outlined by analysis from KPMG’s Football Benchmark, the Premier League was represented by four teams, with three clubs come from La Liga and the Bundesliga respectively, while Serie A and Ligue 1 both retained two clubs.

This followed a grimly predictable group phase, which had seen the two most expensive squads progress in all but one of the eight collections of four teams. The one team to buck that trend, Ajax, had last won Europe’s premier club competition in 1995, but those halcyon days have long since faded into memory, and Ajax had failed to progress beyond the group stage in 13 years. With the second youngest squad in the tournament, what now seems to be an awakening football giant had some shocks in store for the second round too.

Group Stage values

Despite an impressive Europa League run which saw the team reach the final two years ago, Ajax had not progressed in a Champions League knockout stage tie since the 1996-97 campaign. That all changed this time, as Erik ten Hag’s men overturned a first leg deficit to trounce Real Madrid 5-3 on aggregate. Having felt hard done by in a 2-1 defeat at the Johan Cruijff ArenA, the Amsterdam club cruised to a 4-1 victory at the Santiago Bernabéu, a result which saw the tournament’s fourth most expensive squad crash out to the third cheapest remaining team.

The supremely expensive team, which had won three Champions Leagues on the trot, had crashed out in spectacular style. For many footballing purists, the end of the seemingly invincible Galacticos would have been enough to restore some of their faith in the sport – but there would soon be more schadenfreude to revel in, as a succession of Europe’s most bank-breakingly costly teams would soon join Los Blancos in their exit.

The pick of the bunch was unquestionably Paris Saint-Germain, who forfeited a 2-0 first leg advantage to somehow crash out of the Champions League. The team, who are fast becoming known as the foremost bottlers in Europe, faced a grim dissection in the French press following a 3-1 defeat by Manchester United at Le Parc de Princes. While it would be over-egging it to paint United as ‘giant killers’, the Red Devils squad is worth markedly less than the club bankrolled by Qatari oil money. PSG hold two of the most expensive players of all time in French World Cup winner Kylian Mbappe and Brazilian playboy Neymar.

Second Round values

Elsewhere, the round’s cheapest squad proved further that money is not everything, as Porto overcame Roma (the Italian club has since parted ways with manager Eusebio Di Francesco in the wake of this humbling) – while Juventus battled back to beat Atlético Madrid. The most ‘balanced’ tie of the round, there was a squad value difference of only €22 million between the two squads, in favour of the Spanish giant. With that being said, €113 million of Juve’s price-tag came from the summer acquisition of Cristiano Ronaldo. Ronaldo’s tie-settling hat-trick went to show that money spent in the right place ultimately makes the difference.

Spending wisely

At the same time, there were also four teams which lived up to their large price-tags. Manchester City pummelled Schalke over the course of two legs, hammering the German team 7-0 in the second game. With the largest squad market value in the tournament, the Citizens showed that their spending had not merely been a frenzy provoked by having large amounts of money to throw about – a la PSG – and that every penny had in fact been used to craft one of the continent’s most well-balanced and dangerous teams, to ultimately contend for the title.

Tottenham Hotspur similarly brushed off Borussia Dortmund, while Liverpool eventually overcame Bayern Munich, to leave no German teams in the tournament. Meanwhile, Barcelona similarly did for the French contingent of the Champions League, bundling out Olympique Lyonnais 5-1.

Operating Revenues

Going forward, the humbled economic superpowers of European football will take solace from the fact that their huge operating revenues will allow them to buy up talent which has emerged in this year’s Champions League. With Real Madrid having re-installed Zinidine Zidane as Head Coach, the club has already committed itself to spending big in the summer, cashing in some €50 million of its €743 billion revenue stream from last year to sign Éder Militão from Porto – who has impressed in this year's Champions League – in the summer.

Whether the PSG project is financially sustainable in the long-term remains to be seen, meanwhile, but with a huge portion of commercial revenues including shirt-sales from the club’s array of superstars, it will likely also seek to bring in more big names in the summer. The club was reportedly in the running to sign Ajax star Frenkie de Jong, before Barcelona finally secured his services from the end of the season.

The likes of Ajax will meanwhile face an uncomfortable wait, as a range of its new crop of outstanding players inevitably attract the attentions of Europe’s top spenders. With the lowest operating revenues of any team left in Europe, the club will face an uphill struggle to hang on to the likes of teenage captain Matthijs de Ligt. However, it would not be the first time that the club has been plundered for its top talent, and what Ajax and clubs of its size can take forward is that with the right eye for lower-key recruitment, they can rebuild, and still challenge Europe’s elite.